Form 10-Q
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
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þ |
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Quarterly Period Ended June 30, 2010
Or
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o |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number 000-49839
Idenix Pharmaceuticals, Inc.
(Exact name of registrant as specified in its charter)
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Delaware
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45-0478605 |
(State or Other Jurisdiction of
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(IRS Employer Identification No.) |
Incorporation or Organization) |
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60 Hampshire Street |
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Cambridge, MA
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02139 |
(Address of Principal Executive Offices)
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(Zip Code) |
Registrants telephone number, including area code: (617) 995-9800
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 þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months
(or for such shorter period that the registrant was required to submit and post such files).
Yes o No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, a non-accelerated filer, or a smaller reporting company. See the definitions of large
accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the
Exchange Act. (Check one):
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Large accelerated filer: o
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Accelerated filer: þ
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Non-accelerated filer: o
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Smaller reporting company: o |
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(Do not check if a smaller reporting company) |
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Indicate by check mark whether the registrant is a shell company (as defined by
Rule 12b-2 of the Exchange Act). Yes o No þ
As of July 19, 2010, the number of shares of the registrants common stock, par value
$0.001 per share, outstanding was 72,909,441 shares.
IDENIX PHARMACEUTICALS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
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June 30, |
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December 31, |
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2010 |
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2009 |
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ASSETS
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Current assets: |
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Cash and cash equivalents |
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$ |
51,007 |
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$ |
46,519 |
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Restricted cash |
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411 |
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411 |
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Receivables from related party |
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910 |
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1,049 |
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Other receivables |
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1,282 |
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1,505 |
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Prepaid expenses and other current assets |
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2,156 |
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2,096 |
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Total current assets |
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55,766 |
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51,580 |
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Intangible asset, net |
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10,438 |
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11,069 |
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Property and equipment, net |
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7,963 |
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10,091 |
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Restricted cash |
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750 |
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750 |
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Marketable securities |
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1,584 |
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Other assets |
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2,255 |
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1,576 |
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Total assets |
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$ |
77,172 |
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$ |
76,650 |
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LIABILITIES AND STOCKHOLDERS DEFICIT
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Current liabilities: |
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Accounts payable |
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$ |
2,536 |
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$ |
1,941 |
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Accrued expenses |
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10,331 |
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8,779 |
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Deferred revenue |
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1,417 |
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1,025 |
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Deferred revenue, related party |
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3,042 |
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6,155 |
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Other current liabilities |
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315 |
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444 |
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Total current liabilities |
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17,641 |
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18,344 |
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Long-term obligations |
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12,208 |
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13,590 |
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Deferred revenue, net of current portion |
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24,466 |
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19,393 |
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Deferred revenue, related party, net of current portion |
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30,170 |
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30,776 |
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Total liabilities |
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84,485 |
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82,103 |
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Commitments and contingencies (Note 12) |
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Stockholders deficit: |
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Common stock, $0.001 par value; 125,000,000 shares authorized at June 30, 2010 and
December 31, 2009; 72,892,490 and 66,365,976 shares issued and outstanding at
June 30, 2010 and December 31, 2009, respectively |
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73 |
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66 |
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Additional paid-in capital |
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586,713 |
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555,692 |
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Accumulated other comprehensive income |
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551 |
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970 |
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Accumulated deficit |
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(594,650 |
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(562,181 |
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Total stockholders deficit |
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(7,313 |
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(5,453 |
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Total liabilities and stockholders deficit |
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$ |
77,172 |
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$ |
76,650 |
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The accompanying notes are an integral part of these condensed consolidated financial statements.
3
IDENIX PHARMACEUTICALS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
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Three Months Ended June 30, |
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2010 |
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2009 |
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Revenues: |
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Collaboration revenue related party |
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$ |
527 |
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$ |
2,182 |
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Other revenue |
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789 |
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267 |
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Total revenues |
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1,316 |
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2,449 |
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Operating expenses: |
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Cost of revenues |
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675 |
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492 |
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Research and development |
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12,149 |
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11,400 |
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General and administrative |
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5,091 |
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5,357 |
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Restructuring charges |
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1,506 |
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Total operating expenses |
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17,915 |
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18,755 |
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Loss from operations |
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(16,599 |
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(16,306 |
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Other income, net |
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347 |
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59 |
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Loss before income taxes |
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(16,252 |
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(16,247 |
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Income tax expense |
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(4 |
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(67 |
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Net loss |
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$ |
(16,256 |
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$ |
(16,314 |
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Basic and diluted net loss per common share |
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$ |
(0.23 |
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$ |
(0.28 |
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Shares used in computing basic and diluted net loss per common share |
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70,446 |
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59,077 |
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The accompanying notes are an integral part of these condensed consolidated financial statements.
4
IDENIX PHARMACEUTICALS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
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Six Months Ended June 30, |
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2010 |
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2009 |
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Revenues: |
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Collaboration revenue related party |
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$ |
2,943 |
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$ |
6,098 |
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Other revenue |
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1,056 |
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362 |
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Total revenues |
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3,999 |
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6,460 |
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Operating expenses: |
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Cost of revenues |
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1,234 |
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954 |
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Research and development |
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23,911 |
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22,250 |
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General and administrative |
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9,868 |
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11,373 |
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Restructuring charges |
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2,238 |
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1,506 |
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Total operating expenses |
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37,251 |
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36,083 |
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Loss from operations |
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(33,252 |
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(29,623 |
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Other income, net |
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788 |
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469 |
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Loss before income taxes |
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(32,464 |
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(29,154 |
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Income tax expense |
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(5 |
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(87 |
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Net loss |
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$ |
(32,469 |
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$ |
(29,241 |
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Basic and diluted net loss per common share |
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$ |
(0.47 |
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$ |
(0.50 |
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Shares used in computing basic and diluted net loss per common share |
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68,419 |
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58,014 |
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The accompanying notes are an integral part of these condensed consolidated financial statements.
5
IDENIX PHARMACEUTICALS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
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Six Months Ended June 30, |
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2010 |
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2009 |
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Cash flows from operating activities: |
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Net loss |
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$ |
(32,469 |
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$ |
(29,241 |
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Adjustments to reconcile net loss to net cash provided by (used in) operating activities: |
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Depreciation and amortization |
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2,648 |
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2,851 |
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Share-based compensation expense |
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1,938 |
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2,446 |
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Revenue adjustment for contingently issuable shares |
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1,773 |
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(1,362 |
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Other |
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122 |
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269 |
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Changes in operating assets and liabilities: |
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Receivables from related party |
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139 |
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51 |
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Other receivables |
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2,958 |
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Prepaid expenses and other current assets |
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(147 |
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(77 |
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Other assets |
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(874 |
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(1,503 |
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Accounts payable |
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603 |
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(1,221 |
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Accrued expenses and other current liabilities |
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1,982 |
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263 |
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Deferred revenue |
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5,465 |
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16,658 |
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Deferred revenue, related party |
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(2,825 |
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(3,077 |
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Other liabilities |
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(1,445 |
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(370 |
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Net cash used in operating activities |
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(23,090 |
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(11,355 |
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Cash flows from investing activities: |
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Purchases of property and equipment |
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(304 |
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(220 |
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Sales and maturities of marketable securities |
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1,476 |
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2,748 |
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Net cash provided by investing activities |
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1,172 |
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2,528 |
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Cash flows from financing activities: |
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Proceeds from exercise of common stock options |
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149 |
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97 |
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Proceeds from issuance of common stock to related party |
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8 |
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20 |
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Proceeds from issuance of common stock, net of offering costs |
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26,266 |
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17,000 |
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Net cash provided by financing activities |
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26,423 |
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17,117 |
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Effect of changes in exchange rates on cash and cash equivalents |
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(17 |
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329 |
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Net increase in cash and cash equivalents |
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4,488 |
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8,619 |
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Cash and cash equivalents at beginning of period |
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46,519 |
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41,509 |
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Cash and cash equivalents at end of period |
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$ |
51,007 |
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$ |
50,128 |
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Supplemental disclosure of cash flow information: |
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Change in value of shares of common stock contingently issuable or issued
to related party |
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$ |
2,667 |
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$ |
(2,401 |
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The accompanying notes are an integral part of these condensed consolidated financial statements.
6
IDENIX PHARMACEUTICALS, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BUSINESS OVERVIEW
Overview
Idenix Pharmaceuticals, Inc., which we reference together with our wholly owned subsidiaries
as Idenix, we, us or our, is a biopharmaceutical company engaged in the discovery and
development of drugs for the treatment of human viral diseases with operations in the United States
and Europe. Currently, our primary research and development focus is on the treatment of patients
with chronic hepatitis C virus, or HCV. Our drug development programs and the potential
commercialization of our drug candidates will require substantial cash to fund expenses that we
will incur in connection with preclinical studies and clinical trials, regulatory review,
manufacturing and sales and marketing efforts. We have incurred losses in each year since our
inception and at June 30, 2010 had an accumulated deficit of $594.7 million.
In September 2008, we filed a shelf registration statement with the Securities and Exchange
Commission, or SEC, for an indeterminate number of shares of common stock, up to an aggregate of
$100.0 million, for future issuance. Any financing requiring the issuance of additional shares of
capital stock must first be approved by Novartis Pharma AG, or Novartis, so long as Novartis
continues to own at least 19.4% of our voting stock. In May 2009, we received approval from
Novartis to issue capital shares pursuant to financing transactions under our existing shelf
registration statement so long as the issuance of shares did not reduce Novartis interest in
Idenix below 43%. Pursuant to this shelf registration, in August 2009 and in April 2010, we issued
approximately 7.3 million and approximately 6.5 million shares, respectively, of our common stock
pursuant to underwritten offerings and received $21.2 million and $26.3 million in net proceeds,
respectively. Novartis did not participate in either of these offerings and its ownership was
diluted from approximately 53% prior to the August 2009 offering to approximately 43% as of July
19, 2010.
We believe that our current cash and cash equivalents together with the expected royalty
payments associated with product sales of Tyzeka®/Sebivo® will be sufficient to satisfy our cash
needs into the middle of 2011. We may seek additional funding through a combination of public or
private financing, collaborative relationships and other arrangements in the future. If we do not
receive licensing or additional milestone payments, or additional funding through a public or
private financing, we have the ability and intent to manage expenditures to preserve our cash
resources and fund operations for at least the next 12 months. These actions would include
reductions in the number of our employees and delaying or canceling planned expenditures in our
research and development programs.
Basis of Presentation
The condensed consolidated financial statements reflect the operations of Idenix
Pharmaceuticals, Inc. and our wholly owned subsidiaries. All intercompany accounts and transactions
have been eliminated in consolidation.
The accompanying condensed consolidated financial statements are unaudited and have been
prepared by us in accordance with generally accepted accounting principles in the United States of
America, or GAAP, for interim reporting. Accordingly, these interim financial statements do not
include all the information and footnotes required by GAAP for complete financial statements and
should be read in conjunction with the audited consolidated financial statements for the year ended
December 31, 2009, which are included in our Annual Report on Form 10-K filed with the SEC on
March 9, 2010. The interim financial statements are unaudited, but in the opinion of management,
reflect all adjustments (including normal recurring accruals) necessary for a fair statement of the
financial position and results of operations for the interim periods presented. The year end
consolidated balance sheet data presented for comparative purposes was derived from audited
financial statements, but does not include all disclosures required by GAAP.
The results of operations for the interim periods are not necessarily indicative of the
results of operations to be expected for any future period or the fiscal year ending December 31,
2010.
Certain financial statement items have been reclassified to conform to the current period
presentation, in particular, the benefits recognized related to the refundable research and
development credits of our French subsidiary of $0.3 million and $0.8 million for the three and six
months ended June 30, 2009, respectively, have been reclassified from income tax expense to other
income, net to correct the classification in our condensed consolidated statements of operations.
There was no material impact to any of the periods presented.
7
IDENIX PHARMACEUTICALS, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
(UNAUDITED)
Recent Accounting Pronouncements
In October 2009, the Financial Accounting Standards Board, or FASB, issued Accounting Standard
Update, or ASU, No. 2009-13, Multiple-Deliverable Revenue Arrangements. This ASU eliminates the
requirement to establish the fair value of undelivered products and services and instead provides
for separate revenue recognition based upon managements estimate of the selling price for an
undelivered item when there is no other means to determine the fair value of that undelivered item.
This ASU also eliminates the use of the residual method and instead requires an entity to allocate
revenue using the relative selling price method. Additionally, the guidance expands disclosure
requirements with respect to multiple-deliverable revenue arrangements. This ASU is effective
prospectively for revenue arrangements entered into or materially modified in fiscal years
beginning on or after June 15, 2010. Although we are still evaluating the impact of this standard,
we do not expect its adoption to have a material impact on our financial position or the results of
our operations. This standard may impact us in the event we complete future transactions or modify
existing collaborative relationships.
In April 2010, the FASB issued ASU No. 2010-17, Revenue Recognition Milestone Method. This
ASU provides guidance on the criteria that should be met for determining whether the milestone
method of revenue recognition is appropriate. Under the milestone method of revenue recognition,
consideration that is contingent upon achievement of a milestone in its entirety can be recognized
as revenue in the period in which the milestone is achieved only if the milestone meets all
criteria to be considered substantive. This standard provides the criteria to be met for a
milestone to be considered substantive which includes that: a) performance consideration earned by
achieving the milestone be commensurate with either performance to achieve the milestone or the
enhancement of the value of the item delivered as a result of a specific outcome resulting from
performance to achieve the milestone; and b) relate to past performance and be reasonable relative
to all deliverables and payment terms in the arrangement. This standard is effective on a
prospective basis for milestones in fiscal years beginning on or after June 15, 2010. Although we
are still evaluating the impact of this standard, we do not expect its adoption to have a material
impact on our financial position or the results of our operations.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Revenue Recognition
Revenue is recognized in accordance with SEC Staff Accounting Bulletin No. 101, Revenue
Recognition in Financial Statements, or SAB No. 101, as amended by SEC Staff Accounting Bulletin
No. 104, Revenue Recognition, and for revenue arrangements entered into after June 30, 2003, in
accordance with the revenue recognition guidance of the FASB. We record revenue provided that there
is persuasive evidence that an arrangement exists, delivery has occurred or services have been
rendered, the price is fixed or determinable and collectability is reasonably assured.
Our revenues are generated primarily through collaborative research, development and/or
commercialization agreements. The terms of these agreements typically include payments to us for
non-refundable license fees, milestones, collaborative research and development funding and
royalties received from our collaboration partners.
Non-Refundable License Fee Payments
Where we have continuing performance obligations under the terms of a collaborative
arrangement, non-refundable license fees are recognized as revenue over the expected period as we
complete our performance obligations. When our level of effort is relatively constant over the
performance period or no other performance pattern is evident, the revenue is recognized on a
straight-line basis. The determination of the performance period involves judgment on the part of
management.
Where we have no continuing involvement or obligations under a collaborative arrangement, we
record non-refundable license fee revenue when we have a contractual right to receive the payment,
in accordance with the terms of the license agreement.
Milestone Payments
Revenues from milestones related to an arrangement under which we have continuing performance
obligations, if deemed substantive, are recognized as revenue upon achievement of the milestone.
Milestones are considered substantive if all of the following conditions are met: the milestone is
non-refundable; achievement of the milestone was not reasonably assured at the inception of the
arrangement; substantive effort is involved to achieve the milestone; and the amount of the
milestone appears reasonable in relation to the effort expended. If any of these conditions is not
met, the milestone payment is deferred and recognized as revenue over the period of our performance
obligations.
Where we have no continuing involvement or obligations under a collaborative arrangement, we
record milestones when we receive appropriate notification of achievement of the milestones by the
collaboration partner.
8
IDENIX PHARMACEUTICALS, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
(UNAUDITED)
Collaboration Revenue Related Party
We entered into a collaboration with Novartis relating to the worldwide development and
commercialization of our drug candidates in May 2003, which we refer to as the development and
commercialization agreement. Under this arrangement, we have received non-refundable license fees,
milestones, collaborative research and development funding and royalties. This arrangement has
several joint committees in which we and Novartis participate. We participate in these committees
as a means to govern or protect our interests. The committees span the period from early
development of a drug candidate through commercialization of any drug candidate licensed by
Novartis. As a result of applying the provisions of SAB No. 101, which was the applicable revenue
guidance at the time the collaboration was entered into, our revenue recognition policy attributes
revenue to the development period of the drug candidates licensed under the development and
commercialization agreement. We have not attributed revenue to our involvement in the committees
following the commercialization of the licensed products as we have determined that our
participation on the committees, as such participation relates to the commercialization of drug
candidates, is protective. Our determination is based in part on the fact that our expertise is,
and has been, the discovery and development of drugs for the treatment of human viral diseases.
Novartis, on the other hand, has the considerable commercialization expertise and infrastructure
necessary for the commercialization of such drug candidates. Accordingly, we believe our obligation
post commercialization is inconsequential.
We recognize non-refundable payments over the performance period of our continuing
obligations. This period is estimated based on current judgments related to the product development
timeline of our licensed drug candidates and is currently estimated to be through May 2021. This
policy is described more fully in Note 5.
Royalty revenue consists of revenue earned under our license agreement with Novartis for sales
of Tyzeka®/Sebivo®, which is recognized when reported from Novartis. Royalty revenue is equal to a
percentage of Tyzeka®/Sebivo® net sales, with such percentage increasing according to specified
tiers of net sales. The royalty percentage varies based on the specified territory and the
aggregate dollar amount of net sales.
Marketable Securities
We invest our excess cash balances in short-term and long-term marketable debt securities. We
classify our marketable securities with remaining final maturities of twelve months or less based
on the purchase date as current marketable securities, exclusive of those categorized as cash
equivalents. We classify our marketable securities with remaining final maturities greater than
twelve months as non-current marketable securities to the extent we do not expect to be required to
liquidate them before maturity. We classify all of our marketable debt securities as
available-for-sale. We report available-for-sale investments at fair value as of each balance sheet
date and include any unrealized gains and, to the extent deemed temporary, unrealized losses in
stockholders deficit. Realized gains and losses are determined using the specific identification
method and are included in other income, net in our condensed consolidated financial statements.
Investments are considered to be impaired when a decline in fair value below cost basis is
determined to be other-than-temporary. We evaluate whether a decline in fair value below cost basis
is other-than-temporary using available evidence regarding our investments. In the event that the
cost basis of a security significantly exceeds its fair value, we evaluate, among other factors,
the duration of the period that, and extent to which, the fair value is less than cost basis, the
financial health of and business outlook for the issuer, including industry and sector performance,
and operational and financing cash flow factors, overall market conditions and trends, our intent
to sell the investment and if it is more likely than not that we would be required to sell the
investment before its anticipated recovery. Once a decline in fair value is determined to be
other-than-temporary, a write-down is recorded in the condensed consolidated statement of
operations and a new cost basis in the security is established.
Fair Value Measurements
Our assets and liabilities that are measured at fair value on a recurring basis as of June 30,
2010 and December 31, 2009 are measured in accordance with FASB guidance. Fair values determined by
Level 1 inputs utilize observable data such as quoted prices in active markets. Fair values
determined by Level 2 inputs utilize data points other than quoted prices in active markets that
are observable either directly or indirectly. Fair values determined by Level 3 inputs utilize
unobservable data points in which there is little or no market data, which require the reporting
entity to develop its own assumptions.
9
DENIX PHARMACEUTICALS, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
(UNAUDITED)
Our marketable securities are generally valued using information provided by a pricing service
based on market observable information, or for money market investments at calculated net asset
values, and are therefore classified as Level 2. The pricing service used many observable market
inputs to determine value, including benchmark yields, benchmarking of like securities, sector
groupings and matrix pricing to prepare evaluations. In addition, model processes were used to
assess interest rate impact and develop prepayment scenarios. These models take into consideration
relevant credit information, perceived market movements, sector news and economic events. The
inputs into these models may include benchmark yields, reported trades, broker-dealer quotes,
issuer spreads and other relevant data. We validated the prices provided by our third-party pricing
services by understanding the models used, obtaining market values from other sources and analyzing
pricing data in certain instances.
We had one security classified as Level 3 as of December 31, 2009, which was an auction rate
security that did not actively trade. We determined the fair value of the security based on a
discounted cash flow model which incorporated a discount period, coupon rate, liquidity discount
and coupon history. We also considered in determining the fair value the rating of the security by
investment rating agencies and whether or not the security was backed by the United
States government. This auction rate security was sold as of June 30, 2010.
Share-Based Compensation
We recognize share-based compensation for employees and directors using a fair value based
method that results in expense being recognized in our condensed consolidated financial statements.
3. NET LOSS PER COMMON SHARE
Basic net loss per common share is computed by dividing the net loss available to common
stockholders by the weighted average number of common shares outstanding during the period. Diluted
net loss per common share is computed by dividing the net loss available to common stockholders by
the weighted average number of common shares and other potential common shares then outstanding.
Potential common shares consist of common shares issuable upon the assumed exercise of outstanding
stock options (using the treasury stock method), issuance of contingently issuable shares subject
to Novartis subscription rights (Note 5) and restricted stock awards.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, |
|
|
Six Months Ended June 30, |
|
|
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
|
|
(In Thousands, Except |
|
|
(In Thousands, Except |
|
|
|
per Share Data) |
|
|
per Share Data) |
|
Basic and diluted net loss per common share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
$ |
(16,256 |
) |
|
$ |
(16,314 |
) |
|
$ |
(32,469 |
) |
|
$ |
(29,241 |
) |
Basic and diluted weighted average number of
common shares outstanding |
|
|
70,446 |
|
|
|
59,077 |
|
|
|
68,419 |
|
|
|
58,014 |
|
Basic and diluted net loss per common share |
|
$ |
(0.23 |
) |
|
$ |
(0.28 |
) |
|
$ |
(0.47 |
) |
|
$ |
(0.50 |
) |
The following potential common shares were excluded from the calculation of diluted net
loss per common share because their effect was anti-dilutive:
|
|
|
|
|
|
|
|
|
|
|
Three and Six Months Ended |
|
|
|
June 30, |
|
|
|
2010 |
|
|
2009 |
|
|
|
(In Thousands) |
|
|
|
|
|
|
|
|
|
|
Options |
|
|
6,817 |
|
|
|
6,511 |
|
Contingently issuable shares to related party |
|
|
1,333 |
|
|
|
681 |
|
|
|
|
|
|
|
|
|
|
|
8,150 |
|
|
|
7,192 |
|
|
|
|
|
|
|
|
In addition to the contingently issuable shares to related party listed in the table
above, Novartis is entitled to additional shares under its stock purchase rights which would be
anti-dilutive based on our current stock price.
10
DENIX PHARMACEUTICALS, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
(UNAUDITED)
4. COMPREHENSIVE LOSS
For the three and six months ended June 30, 2010 and 2009, respectively, comprehensive loss
was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, |
|
|
Six Months Ended June 30, |
|
|
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
|
|
(In Thousands) |
|
|
(In Thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
$ |
(16,256 |
) |
|
$ |
(16,314 |
) |
|
$ |
(32,469 |
) |
|
$ |
(29,241 |
) |
Changes in other comprehensive loss: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustment |
|
|
(260 |
) |
|
|
553 |
|
|
|
(419 |
) |
|
|
135 |
|
Unrealized gain on marketable securities |
|
|
|
|
|
|
30 |
|
|
|
|
|
|
|
31 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive loss |
|
$ |
(16,516 |
) |
|
$ |
(15,731 |
) |
|
$ |
(32,888 |
) |
|
$ |
(29,075 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
5. NOVARTIS RELATIONSHIP
Overview
In May 2003, we entered into a collaboration with Novartis relating to the worldwide
development and commercialization of our drug candidates. In May 2003, Novartis also purchased
approximately 54% of our common stock. Since this date, Novartis has had the ability to exercise
control over our strategic direction, research and development activities and other material
business decisions. As of July 19, 2010, Novartis owned approximately 43% of our outstanding common
stock.
Pursuant to the development and commercialization agreement, we have granted Novartis the
option to license any of our development-stage drug candidates, so long as Novartis maintains at
least 40% ownership of our common stock. If Novartis exercises this option, financial terms will be
based upon certain contractual obligations and future negotiations. Novartis may exercise this
option generally after demonstration of activity and safety in a proof-of-concept clinical trial.
If Novartis licenses a drug candidate, it is obligated to fund a portion of the development
expenses that we incur in accordance with development plans agreed upon by us and Novartis. Under
the development and commercialization agreement, we have granted Novartis an exclusive worldwide
license to market and sell drug candidates that Novartis chooses to license from us. The
commercialization rights under the development and commercialization agreement also include our
right to co-promote or co-market all licensed products in the United States, United Kingdom,
France, Germany, Italy and Spain.
In September 2007, we entered into an amendment to the development and commercialization
agreement, which we refer to as the 2007 amendment. Pursuant to the 2007 amendment, we
transferred to Novartis our worldwide development, commercialization and manufacturing rights and
obligations, including ongoing related expenses pertaining to telbivudine (Tyzeka®/Sebivo®). We do
not expect to receive any additional regulatory milestone payments pertaining to telbivudine. In
October 2007, we began receiving royalty payments equal to a percentage of net sales of
Tyzeka®/Sebivo®, with such percentage increasing according to specified tiers of net sales. The
royalty percentage varies based on specified territories and the aggregate dollar amounts of net
sales. We recognized $0.9 million and $0.8 million as royalty revenue from Novartis sales of
Tyzeka®/Sebivo® during the three months ended June 30, 2010 and 2009, respectively. We recognized
$1.9 million and $1.6 million as royalty revenue from Novartis sales of Tyzeka®/Sebivo® during the
six months ended June 30, 2010 and 2009, respectively. The receivables from related party balances
of the $0.9 million and $1.0 million at June 30, 2010 and December 31, 2009, respectively,
consisted of royalties associated with product sales of Tyzeka®/Sebivo® from Novartis.
In October 2009, Novartis waived its right to license IDX184, a nucleotide prodrug for the
treatment of HCV. As a result, we retain the worldwide rights to develop, commercialize and license
IDX184. We are currently seeking a partner that will assist in the further development and
commercialization of this drug candidate.
To date, we have received $117.2 million of non-refundable payments from Novartis that have
been recorded as deferred revenue. We do not expect to receive any additional regulatory milestones
for telbivudine or any other drug candidate previously licensed to Novartis. The $117.2 million of
deferred payments are being recognized over the development period of the licensed drug candidates,
which represents the period of our continuing obligations. In the second quarter of 2010, we
adjusted the period over which we amortize the deferred payments to be through May 2021 based on
current judgments related to the product development timeline of our licensed drug candidates. We
review our assessment and judgment on a quarterly basis with respect to the expected duration of
the development period of our licensed drug candidates. When the estimated performance period
changes, we adjust the periodic revenue that is being recognized and record the remaining
unrecognized non-refundable payments over the remaining development period during which our
performance obligations are completed. Significant judgments and estimates are involved in
determining the estimated development period and different assumptions could yield materially
different results.
11
DENIX PHARMACEUTICALS, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
(UNAUDITED)
As mentioned above, in addition to the collaboration, in May 2003, Novartis purchased
approximately 54% of our outstanding common stock from our then existing stockholders. The
stockholders received $255.0 million in cash from Novartis with an additional aggregate amount of
up to $357.0 million contingently payable to these stockholders if we achieve predetermined
development milestones relating to specific HCV drug candidates.
Stockholders Agreement
In connection with Novartis purchase of stock from our stockholders, we, Novartis and
substantially all of our stockholders at that time entered into a stockholders agreement, which we
refer to as the stockholders agreement. The stockholders agreement was amended and restated in
2004 in connection with our initial public offering of our common stock. The stockholders
agreement provides, among other things, that we will use our reasonable best efforts to nominate
for election as a director at least two designees of Novartis for so long as Novartis and its
affiliates own at least 35% of our voting stock and that we will use our reasonable best efforts to
nominate for election as a director at least one designee of Novartis for so long as Novartis and
its affiliates own at least 19.4% of our voting stock. In June 2009, we elected a third
representative from Novartis to our Board of Directors. The election was not required by or subject
to the stockholders agreement and the re-election of the third representative is subject to annual
review by our Board of Directors. As long as Novartis and its affiliates continue to own at least
19.4% of our voting stock, Novartis will have approval rights over a number of corporate actions
that we may take, including the authorization or issuance of additional shares of capital stock and
significant acquisitions and dispositions.
Novartis Stock Purchase Rights
Under our stock purchase agreement with Novartis, which we refer to as the stock purchase
agreement, Novartis has the right to purchase, at par value of $0.001 per share, such number of
shares as is required to maintain its percentage ownership of our voting stock if we issue shares
of capital stock in connection with the acquisition or in-licensing of technology through the
issuance of up to 5% of our stock in any 24-month period. These purchase rights of Novartis remain
in effect until the earlier of: a) the date that Novartis and its affiliates own less than 19.4% of
our voting stock; or b) the date that Novartis becomes obligated to make the additional contingent
payments of $357.0 million to holders of our stock who sold shares to Novartis on May 8, 2003.
In addition to the right to purchase shares of our stock at par value as described above, if
we issue any shares of our capital stock, other than in certain situations, Novartis has the right
to purchase such number of shares required to maintain its percentage ownership of our voting stock
for the same consideration per share paid by others acquiring our stock. In September 2008, we
filed a shelf registration statement with the SEC for an indeterminate number of shares of common
stock, up to an aggregate of $100.0 million, for future issuance. Any financing requiring the
issuance of additional shares of capital stock must first be approved by Novartis so long as
Novartis continues to own at least 19.4% of our voting stock. In May 2009, we received approval
from Novartis to issue capital shares pursuant to a financing under our existing shelf registration
statement so long as the issuance of shares did not reduce Novartis interest in Idenix below 43%.
Pursuant to this shelf registration, in August 2009 and in April 2010, we issued approximately 7.3
million and approximately 6.5 million shares, respectively, of our common stock pursuant to
underwritten offerings and received $21.2 million and $26.3 million in net proceeds, respectively.
Novartis did not participate in either of these offerings and its ownership was diluted from
approximately 53% prior to the August 2009 offering to approximately 43% as of July 19, 2010.
In connection with the closing of our initial public offering in July 2004, Novartis
terminated a common stock subscription right with respect to approximately 1.4 million shares of
common stock issuable by us as a result of the exercise of stock options granted after May 8, 2003
pursuant to the 1998 equity incentive plan. In exchange for Novartis termination of such right, we
issued 1.1 million shares of common stock to Novartis for a purchase price of $0.001 per share. The
fair value of these shares was determined to be $15.4 million at the time of issuance. As a result
of the issuance of these shares, Novartis rights to purchase additional shares as a result of
future option grants and stock issuances under the 1998 equity incentive plan were terminated and
no additional adjustments to revenue and deferred revenue will be required. Prior to the
termination of the stock subscription rights under the 1998 equity incentive plan, as we granted
options that were subject to this stock subscription right, the fair value of our common stock that
would be issuable to Novartis, less par value, was recorded as an adjustment of the non-refundable
payments received from Novartis. We remain subject to potential revenue adjustments with respect to
grants of options and stock awards under our stock incentive plans other than the 1998 equity
incentive plan.
Upon the grant of options and stock awards under our stock incentive plans, with the exception
of the 1998 equity incentive plan, the fair value of our common stock that would be issuable to
Novartis, less the exercise price, if any is payable by the option or award holder, is recorded as
a reduction of the non-refundable payments associated with the Novartis collaboration. The amount
is attributed proportionately between cumulative revenue recognized through the current date and
the remaining amount of deferred revenue.
These amounts will be adjusted through the date that Novartis elects to purchase the shares to
maintain its percentage ownership based upon changes in the value of our common stock and in
Novartis percentage ownership.
12
DENIX PHARMACEUTICALS, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
(UNAUDITED)
As of June 30, 2010, the aggregate impact of Novartis stock subscription rights has reduced
the non-refundable payments by $18.1 million, which has been recorded as additional paid-in
capital. Of this amount, $5.1 million has been recorded as a reduction of deferred revenue with the
remaining amount of $13.0 million as a reduction of license fee revenue. For the six months
ended June 30, 2010, the impact of Novartis stock subscription rights has increased additional
paid-in capital by $2.7 million, reduced deferred revenue by $0.9 million and reduced license fee
revenue by $1.8 million.
Master Manufacturing and Supply Agreements
In May 2003, we entered into a master manufacturing and supply agreement with Novartis, which
we refer to as the manufacturing and supply agreement, under which Novartis may manufacture or
have manufactured the clinical supply of the active pharmaceutical ingredient, or API, for each
drug candidate licensed under the development and commercialization agreement and certain other
drug candidates. The cost of the clinical supply will be treated as a development expense,
allocated between us and Novartis in accordance with the manufacturing and supply agreement. We
have the ability to appoint Novartis or a third-party to manufacture the commercial supply of the
API based on a competitive bid process in which Novartis has the right to match the best
third-party bid. Pursuant to such competitive bid process, a joint manufacturing committee of
Novartis and Idenix selected Novartis as the primary manufacturer of telbivudine. Novartis will
perform the finishing and packaging of the API for telbivudine into the final form for sale.
Product Sales Arrangements
In connection with the drug candidates that Novartis licenses from us, with the exception of
Tyzeka®/Sebivo®, we have retained the right to co-promote or co-market all licensed products in the
United States, United Kingdom, France, Germany, Italy and Spain. In the United States, we would act
as the lead commercial party and record revenue from product sales and share equally the net
benefit from co-promotion from the date of product launch. In the United Kingdom, France, Germany,
Italy and Spain, Novartis would act as the lead commercial party, record revenue from product sales
and would share with us the net benefit from co-promotion and co-marketing. The net benefit is
defined as net product sales minus related cost of sales. The amount of the net benefit that would
be shared with us would start at 15% for the first 12-month period following the date of launch,
increasing to 30% for the second 12-month period following the date of launch and 50% thereafter.
In other countries, we would effectively sell products to Novartis for their further sale to
third-parties. Novartis would pay us for such products at a price that is determined under the
terms of our manufacturing and supply agreement with Novartis and we would receive a royalty
payment from Novartis on net product sales.
6. GLAXOSMITHKLINE COLLABORATION
In February 2009, we entered into a license agreement with GlaxoSmithKline, which we refer to
as the GSK license agreement. In October 2009, GlaxoSmithKline assigned the GSK license
agreement to ViiV Healthcare Company, an affiliate of GlaxoSmithKline, which we refer to
collectively with GlaxoSmithKline as GSK. Pursuant to this agreement, we granted GSK an exclusive
worldwide license to develop, manufacture and commercialize our non-nucleoside reverse
transcriptase inhibitor, or NNRTI, compounds, including IDX899 (GSK2248761), for the treatment of
human diseases, including human immunodeficiency virus type 1, or HIV, and/or acquired immune
deficiency syndrome, or AIDS. On May 20, 2010, the GSK license agreement was amended to adjust the
dollar amount of individual milestones, however, the total potential milestone payments that we may
receive were unchanged. Pursuant to the GSK license agreement, we could potentially receive up to
$416.5 million in milestone payments as well as double-digit tiered royalties on worldwide product
sales over the life of the agreement. The parties have agreed that if GSK, its affiliates or its
sublicensees desire to develop IDX899 for an indication other than HIV, or if GSK intends to
develop any other licensed compound for any indication, the parties will mutually agree on a
separate schedule of milestone and royalty payments prior to the start of development.
We also entered into a stock purchase agreement with GSK in February 2009, which we refer to
as the GSK stock purchase agreement. Under the GSK stock purchase agreement, GSK purchased
approximately 2.5 million shares of our common stock at an aggregate purchase price of
$17.0 million.
In March 2009, we received $34.0 million from GSK, which consisted of a $17.0 million license
fee payment under the GSK license agreement and $17.0 million under the GSK stock purchase
agreement. The GSK license agreement has performance obligations, including joint committee
participation and GSKs right to license other NNRTI compounds that we may develop in the future,
that we have assessed under the FASB guidance related to multiple element arrangements. We
concluded that this arrangement should be accounted for as a single unit of accounting. The $17.0
million license fee payment was recorded as deferred revenue and is being recognized as revenue
over the life of the agreement, which is estimated to be through September 2025.
13
DENIX PHARMACEUTICALS, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
(UNAUDITED)
In May 2010, pursuant to the GSK license agreement, as amended, we received a $6.5 million
milestone payment from GSK for the achievement of an operational preclinical milestone related to
the development of IDX899. We have accounted for this milestone
revenue under FASB guidance related to multiple element arrangements and determined the operational
preclinical milestone is not considered substantive. The $6.5 million milestone payment was
recorded as deferred revenue and is being recognized as revenue over the life of the agreement.
In the three months ended June 30, 2010 and 2009, we recognized $0.8 million and $0.3 million,
respectively, of collaboration revenue related to the license fee and milestone payments received
from GSK, which was classified as other revenue in our condensed consolidated statements of
operations. We also recognized $1.0 million and $0.3 million of collaboration revenue related to
these payments for the six months ended June 30, 2010 and 2009, respectively.
7. MARKETABLE SECURITIES AND FAIR VALUE MEASUREMENTS
We invest our cash in accounts held at large U.S. based financial institutions and consider
our investment portfolio as marketable securities available-for-sale. The fair values of
available-for-sale investments by type of security, contractual maturity and classification in our
condensed consolidated balance sheets were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2010 |
|
|
|
Amortized |
|
|
Gross Unrealized |
|
|
Gross Unrealized |
|
|
|
|
|
|
Cost |
|
|
Gains |
|
|
Losses |
|
|
Market Value |
|
|
|
(In Thousands) |
|
Type of security: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market funds |
|
$ |
35,711 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
35,711 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
35,711 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
35,711 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009 |
|
|
|
Amortized |
|
|
Gross Unrealized |
|
|
Gross Unrealized |
|
|
|
|
|
|
Cost |
|
|
Gains |
|
|
Losses |
|
|
Market Value |
|
|
|
(In Thousands) |
|
Type of security: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market funds |
|
$ |
40,806 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
40,806 |
|
Auction rate security |
|
|
1,584 |
|
|
|
|
|
|
|
|
|
|
|
1,584 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
42,390 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
42,390 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
December 31, |
|
|
|
2010 |
|
|
2009 |
|
|
|
(In Thousands) |
|
Contractual maturity: |
|
|
|
|
|
|
|
|
Maturing in one year or less |
|
$ |
35,711 |
|
|
$ |
40,806 |
|
Maturing after ten years |
|
|
|
|
|
|
1,584 |
|
|
|
|
|
|
|
|
|
|
$ |
35,711 |
|
|
$ |
42,390 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
December 31, |
|
|
|
2010 |
|
|
2009 |
|
|
|
(In Thousands) |
|
Classification in balance sheets: |
|
|
|
|
|
|
|
|
Cash equivalents |
|
$ |
35,711 |
|
|
$ |
40,806 |
|
Marketable securities, non-current |
|
|
|
|
|
|
1,584 |
|
|
|
|
|
|
|
|
|
|
$ |
35,711 |
|
|
$ |
42,390 |
|
|
|
|
|
|
|
|
14
DENIX PHARMACEUTICALS, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
(UNAUDITED)
The following table represents our assets measured at fair value on a recurring basis:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2010 |
|
|
|
Other |
|
|
|
|
|
|
|
|
|
Observable |
|
|
Unobservable |
|
|
|
|
|
|
Inputs |
|
|
Inputs |
|
|
|
|
|
|
(Level 2) |
|
|
(Level 3) |
|
|
Total |
|
|
|
(In Thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market funds |
|
$ |
35,711 |
|
|
$ |
|
|
|
$ |
35,711 |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
35,711 |
|
|
$ |
|
|
|
$ |
35,711 |
|
|
|
|
|
|
|
|
|
|
|
The following table represents our assets measured at fair value on a recurring basis:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009 |
|
|
|
Other |
|
|
|
|
|
|
|
|
|
Observable |
|
|
Unobservable |
|
|
|
|
|
|
Inputs |
|
|
Inputs |
|
|
|
|
|
|
(Level 2) |
|
|
(Level 3) |
|
|
Total |
|
|
|
(In Thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market funds |
|
$ |
40,806 |
|
|
$ |
|
|
|
$ |
40,806 |
|
Auction rate security |
|
|
|
|
|
|
1,584 |
|
|
|
1,584 |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
40,806 |
|
|
$ |
1,584 |
|
|
$ |
42,390 |
|
|
|
|
|
|
|
|
|
|
|
The following tables roll forward our assets whose fair value is determined on a
recurring basis using significant unobservable inputs (Level 3):
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
June 30, 2010 |
|
|
June 30, 2010 |
|
|
|
(In Thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balance |
|
$ |
1,418 |
|
|
$ |
1,584 |
|
Purchases, sales and settlements |
|
|
(1,276 |
) |
|
|
(1,476 |
) |
Total
realized net losses recognized in earnings |
|
|
(142 |
) |
|
|
(108 |
) |
|
|
|
|
|
|
|
Ending balance |
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three and Six Months Ended |
|
|
|
June
30, 2009 |
|
|
(In Thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balance |
|
$ |
1,710 |
|
Purchases, sales, and settlements |
|
|
|
|
Total unrealized losses recognized in earnings |
|
|
(126 |
) |
|
|
|
|
Ending balance |
|
$ |
1,584 |
|
|
|
|
|
At December 31, 2009, we held one investment in an auction rate security, which did not
actively trade and therefore was classified as Level 3. At December 31, 2009, we determined the
fair value of this security based on a cash flow model which incorporated a three-year discount
period, a 1.97% per annum coupon rate, a 0.519% per coupon payment discount rate (which integrated
a liquidity discount rate, 3-year swap forward rate and credit spread), as well as coupon history.
We also considered in determining the fair value that our holding in the auction rate security was
backed by the United States government and that the security was rated A3 at December 31, 2009.
During the quarter ended March 31, 2010, we sold a portion of this security at par value for
proceeds of $0.2 million and during the quarter ended June 30, 2010, we sold the remaining portion
of the security for $1.3 million and recognized a realized loss of $0.1 million.
15
DENIX PHARMACEUTICALS, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
(UNAUDITED)
Due to the distress in the financial markets over the past two years certain investments have
diminished liquidity and declined in value. To mitigate this risk,
beginning in 2008, we have shifted our investments to instruments that carry less potential exposure to market volatility and
liquidity pressures. As of June 30, 2010, all of our investments were in government agency and
treasury money market instruments.
8. INTANGIBLE ASSET, NET
Our intangible asset relates to a settlement agreement entered into by and among us along with
our chief executive officer in his individual capacity, the Universite Montpellier II, or the
University of Montpellier, Le Centre National de la Recherche Scientifique, or CNRS, the Board of
Trustees of the University of Alabama on behalf of the University of Alabama at Birmingham, or UAB,
the University of Alabama at Birmingham Research Foundation, or UABRF, and Emory University as
described more fully in Note 12. The settlement agreement, entered into in July 2008 and effective
as of June 1, 2008, included a full release of all claims, contractual or otherwise, by the
parties.
Pursuant to the settlement agreement, we paid UABRF (on behalf of UAB and Emory University) a
$4.0 million upfront payment and will make additional payments to UABRF equal to 20% of all royalty
payments received by us from Novartis based on worldwide sales of telbivudine, subject to minimum
payment obligations aggregating $11.0 million. We are amortizing $15.0 million related to this
settlement payment to UAB and related entities over the greater of straight-line or expected
economic consumption. Amortization expense pertaining to the asset was $0.3 million and $0.6
million for the three and six months ended June 30, 2010 and 2009, respectively, which was recorded
as cost of revenues. As of June 30, 2010 and 2009, accumulated amortization was $4.6 million and
$3.1 million, respectively. Amortization expense for this asset is anticipated to be $1.2 million
through June 30, 2011, $1.3 million per year through June 30, 2015 and $4.0 million through the
remaining term of the expected economic benefit of the asset.
9. ACCRUED EXPENSES
Accrued expenses consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
December 31, |
|
|
|
2010 |
|
|
2009 |
|
|
|
(In Thousands) |
|
|
|
|
|
|
|
|
|
|
Research and development contract costs |
|
$ |
2,960 |
|
|
$ |
1,342 |
|
Payroll and benefits |
|
|
2,824 |
|
|
|
3,930 |
|
Professional fees |
|
|
1,136 |
|
|
|
647 |
|
Short-term portion of accrued settlement payment |
|
|
1,070 |
|
|
|
710 |
|
Restructuring costs |
|
|
1,300 |
|
|
|
416 |
|
Other |
|
|
1,041 |
|
|
|
1,734 |
|
|
|
|
|
|
|
|
|
|
$ |
10,331 |
|
|
$ |
8,779 |
|
|
|
|
|
|
|
|
10. SHARE-BASED COMPENSATION
The following table shows share-based compensation expense as reflected in our condensed
consolidated statements of operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, |
|
|
Six Months Ended June 30, |
|
|
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
|
|
(In Thousands) |
|
|
(In Thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development |
|
$ |
314 |
|
|
$ |
408 |
|
|
$ |
634 |
|
|
$ |
847 |
|
General and administrative |
|
|
643 |
|
|
|
783 |
|
|
|
1,304 |
|
|
|
1,599 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total share-based compensation expense |
|
$ |
957 |
|
|
$ |
1,191 |
|
|
$ |
1,938 |
|
|
$ |
2,446 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16
DENIX PHARMACEUTICALS, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
(UNAUDITED)
The table below illustrates the fair value per share and Black-Scholes option pricing model
with the following assumptions used for grants issued:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, |
|
|
Six Months Ended June 30, |
|
|
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average fair value of options |
|
$ |
2.33 |
|
|
$ |
2.12 |
|
|
$ |
1.74 |
|
|
$ |
3.14 |
|
Risk-free interest rate |
|
|
2.20 |
% |
|
|
2.52 |
% |
|
|
2.37 |
% |
|
|
1.93 |
% |
Expected dividend yield |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected option term (in years) |
|
|
5.14 |
|
|
|
5.10 |
|
|
|
5.14 |
|
|
|
5.14 |
|
Expected volatility |
|
|
68.7 |
% |
|
|
71.5 |
% |
|
|
69.1 |
% |
|
|
70.2 |
% |
The expected option term and expected volatility were determined by examining the
expected option term and expected volatilities of similarly sized biotechnology companies as well
as expected term and expected volatility of our stock.
The following table summarizes option activity under the equity incentive plans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
Number of |
|
|
Average Exercise |
|
|
|
Shares |
|
|
Price per Share |
|
Options outstanding at December 31, 2009 |
|
|
5,559,727 |
|
|
$ |
7.72 |
|
Granted |
|
|
1,497,108 |
|
|
$ |
3.39 |
|
Cancelled |
|
|
(177,053 |
) |
|
$ |
6.64 |
|
Exercised |
|
|
(62,619 |
) |
|
$ |
2.38 |
|
|
|
|
|
|
|
|
|
Options outstanding at June 30, 2010 |
|
|
6,817,163 |
|
|
$ |
6.85 |
|
|
|
|
|
|
|
|
|
Options exercisable at June 30, 2010 |
|
|
4,036,566 |
|
|
$ |
8.61 |
|
We had an aggregate of $6.8 million of share-based compensation expense as of June 30,
2010 remaining to be amortized over a weighted average expected term of 2.68 years.
11. RESTRUCTURING CHARGE
During the first quarter of 2010, we initiated a plan to restructure our operations at our
research facility in Montpellier, France to reduce its workforce by approximately 17 positions in
connection with our ongoing cost saving initiatives. In the first quarter of 2010, we recorded
charges of $2.2 million for employee severance costs related to the restructuring of our
Montpellier facility together with charges related to an earlier reduction of our United States
workforce by 13 positions in January 2010. Of this amount, $1.2 million of the severance costs were
paid and the remaining balance of $1.0 million continued to be accrued as of June 30, 2010. We
expect that the $1.0 million of severance payments will be fully paid by September 2010. At June
30, 2010, $1.3 million was accrued which included $1.0 million related to the Montpellier
restructuring, $0.1 million related to contract termination costs for our facility in Montpellier,
France and $0.2 million related to the closing of our facility in Cagliari, Italy in 2009.
12. LEGAL COMMITMENTS AND CONTINGENCIES
Hepatitis C Drug Candidates
In connection with the resolution of matters relating to certain of our HCV drug candidates,
we entered into a settlement agreement in May 2004 with UAB which provides for a milestone payment
of $1.0 million to UAB upon receipt of regulatory approval in the United States to market and sell
certain HCV products invented or discovered by our chief executive officer during the period from
November 1, 1999 to November 1, 2000. This settlement agreement also provides that we will pay UAB
an amount equal to 0.5% of worldwide net sales of such HCV products with a minimum sales-based
payment equal to $12.0 million.
We have potential payment obligations under the license agreement with the Universita degli
Studi di Cagliari, or the University of Cagliari, pursuant to which we have the exclusive worldwide
right to make, use and sell certain HCV and HIV technologies. We made certain payments to the
University of Cagliari under these arrangements based on the $34.0 million payment we received from
GSK in 2009 under the GSK license transaction. We are also liable for certain payments to the
University of Cagliari if we receive license fees or milestone payments with respect to such
technology from Novartis, GSK or another collaborator.
17
DENIX PHARMACEUTICALS, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
(UNAUDITED)
Hepatitis B Product
Pursuant to the license agreement between us and UAB, we were granted an exclusive license to
the rights that UABRF, an affiliate of UAB, Emory University and CNRS have to a 1995 U.S. patent
application and progeny thereof and counterpart patent applications in Europe, Canada, Japan and
Australia that cover the use of certain synthetic nucleosides for the treatment of hepatitis B
virus, or HBV.
In July 2008, we entered into a settlement agreement with UAB, UABRF and Emory University
relating to our telbivudine technology. Pursuant to this settlement agreement, all contractual
disputes relating to patents covering the use of certain synthetic nucleosides for the treatment of
HBV and all litigation matters relating to patents and patent applications related to the use of
ß-L-2-deoxy-nucleosides for the treatment of HBV assigned to one or more of Idenix, CNRS and the
University of Montpellier and which cover the use of Tyzeka®/Sebivo® (telbivudine) for the
treatment of HBV have been resolved. UAB also agreed to abandon certain continuation patent
applications it filed in July 2005. Under the terms of the settlement agreement, we paid UABRF (on
behalf of UAB and Emory University) a $4.0 million upfront payment and will make additional
payments to UABRF equal to 20% of all royalty payments received by us from Novartis based on
worldwide sales of telbivudine, subject to minimum payment obligations aggregating $11.0 million.
Our payment obligations under the settlement agreement will expire in August 2019. The settlement
agreement was effective on June 1, 2008 and included mutual releases of all claims and covenants
not to sue among the parties. It also included a release from a third-party scientist who had
claimed to have inventorship rights in certain Idenix/CNRS/University of Montpellier patents.
In December 2001, we retained the services of Clariant (subsequently acquired by Archimica
Group), a provider of manufacturing services in the specialty chemicals industry, in the form of a
multi-project development and supply agreement. Under the terms of the agreement with Clariant, we
would, on an as needed basis, utilize the Clariant process development and manufacture services
in the development of certain of our drug candidates, including telbivudine. After reviewing
respective bids from both Novartis and Clariant, the joint Idenix and Novartis manufacturing
committee decided to proceed with Novartis as the primary manufacturer of telbivudine. In late
2007, we transferred full responsibility to Novartis for the development, commercialization and
manufacturing of telbivudine. As a result, in January 2008, we exercised our right under the
agreement with Clariant to terminate the agreement effective July 2008. In February 2008, Clariant
asserted that they should have been able to participate in the manufacturing process for
telbivudine as a non-primary supplier and as a result are due an unspecified amount. We do not
agree with Clariants assertion and therefore have not recorded a liability associated with this
potential contingent matter. Clariant has not initiated legal proceedings. If legal proceedings are
initiated, we intend to vigorously defend against such lawsuit.
Other Legal Contingency
We have been involved in a dispute with the City of Cambridge, Massachusetts and its License
Commission pertaining to the level of noise emitted from certain rooftop equipment at our research
facility located at 60 Hampshire Street in Cambridge. The License Commission has claimed that we
are in violation of the local noise ordinance pertaining to sound emissions, based on a complaint
from neighbors living adjacent to the property. We have contested this alleged violation before the
License Commission, as well as the Middlesex County, Massachusetts, Superior Court. In July 2010,
the License Committee granted us a special variance from the requirements of the local
noise ordinance for a period of one-year, effective as of July 1, 2010. We may, however, be
required to cease certain activities at the building if: a) the noise emitted from certain rooftop
equipment at our research facility exceeds the levels permitted by the special variance; b) if the
parties are unable to resolve this matter through negotiations and remedial action; or c) if our
legal challenge to the position of the City of Cambridge and the License Commission is
unsuccessful. In any such event, we could be required to relocate to another facility which could
interrupt some of our business activities and could be time consuming and costly.
Indemnification
We have agreed to indemnify Novartis and its affiliates against losses suffered as a result of
any breach of representations and warranties in the development and commercialization agreement and
the stock purchase agreement. Under the development and commercialization agreement and the stock
purchase agreement, we made numerous representations and warranties to Novartis regarding our HBV
and HCV drug candidates, including representations regarding our ownership of the inventions and
discoveries described above. If one or more of the representations or warranties were not true at
the time they were made to Novartis, we would be in breach of one or both of these agreements. In
the event of a breach by us, Novartis has the right to seek indemnification from us and, under
certain circumstances, us and our stockholders who sold shares to Novartis, which include many of
our directors and officers, for damages suffered by Novartis as a result of such breach. While it
is possible that we may be required to make payments pursuant to the indemnification obligations we
have under the development and commercialization agreement and stock purchase
agreement, we cannot reasonably estimate the amount of such payments or the likelihood that
such payments would be required.
18
DENIX PHARMACEUTICALS, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
(UNAUDITED)
Under the GSK license agreement and the GSK stock purchase agreement, we have agreed to
indemnify GSK and its affiliates against losses suffered as a result of our breach of
representations and warranties in these agreements. We made numerous representations and warranties
to GSK regarding our NNRTI program, including IDX899, as well as representations regarding our
ownership of inventions and discoveries. If one or more of these representations or warranties were
not true at the time we made them to GSK, we would be in breach of these agreements. In the event
of a breach by us, GSK has the right to seek indemnification from us for damages suffered as a
result of such breach. While it is possible that we may be required to make payments pursuant to
the indemnification obligations we have under these agreements, we cannot reasonably estimate the
amount of such payments or the likelihood that such payments would be required.
19
ITEM 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
This report contains forward-looking statements within the meaning of Section 21E of the
Securities Exchange Act of 1934, as amended. For this purpose, any statements contained herein
regarding our strategy, future operations, financial position, future revenues, projected costs and
expenses, prospects, plans and objectives of management, other than statements of historical facts,
are forward-looking statements. The words anticipate, believe, estimate, intend, may,
plan, will, would and similar expressions are intended to identify forward-looking
statements, although not all forward-looking statements contain these identifying words. Such
statements reflect our current views with respect to future events. Because these forward-looking
statements involve known and unknown risks and uncertainties, actual results, performance or
achievements could differ materially from those expressed or implied by these forward-looking
statements for a number of important reasons, including those discussed under Critical Accounting
Policies and Estimates, Risk Factors, Managements Discussion and Analysis of Financial
Condition and Results of Operations and elsewhere in this Quarterly Report on Form 10-Q. We cannot
guarantee any future results, levels of activity, performance or achievements. Should one or more
of these risks or uncertainties materialize, or should underlying assumptions prove incorrect,
actual results may vary materially from those described in this Form 10-Q as anticipated, believed,
estimated or expected. The forward-looking statements contained in this Quarterly Report on Form
10-Q represent our estimates as of the date of this Quarterly Report on Form 10-Q (unless another
date is indicated) and should not be relied upon as representing our expectations as of any other
date. While we may elect to update these forward-looking statements, we specifically disclaim any
obligation to do so.
Overview
Idenix Pharmaceuticals, Inc., which we reference together with our wholly owned subsidiaries
as Idenix, we, us or our, is a biopharmaceutical company engaged in the discovery and
development of drugs for the treatment of human viral diseases with operations in the United States
and Europe. Currently, our primary research and development focus is on the treatment of patients
with chronic hepatitis C virus, or HCV. Our HCV discovery program is focused on multiple classes of
drugs, which include nucleoside/nucleotide polymerase inhibitors, non-nucleoside polymerase
inhibitors, protease inhibitors and NS5A inhibitors. Our strategic goal is to develop all oral
combinations of direct-acting antiviral drug candidates that should eliminate the need for
interferon and/or ribavirin as the current treatment for HCV. Our objective is to develop low dose,
once- or twice-daily agents with broad genotypic activity that have low potential for drug-drug
interaction and are designed for use in multiple combination regimens. We will seek to build a
combination development strategy, both internally and with partners, to advance the future of HCV
treatments.
In addition to our strategy of developing drugs for the treatment of HCV, we have also
developed products and drug candidates for the treatment of hepatitis B virus, or HBV, human
immunodeficiency virus type 1, or HIV, and acquired immune deficiency syndrome, or AIDS. We
successfully developed and received worldwide marketing approval for telbivudine (Tyzeka®/Sebivo®),
a drug for the treatment of HBV that we licensed to Novartis Pharma AG, or Novartis. In 2007, we
began receiving royalties from Novartis based on a percentage of net sales of Tyzeka®/Sebivo®. We
also discovered and developed, through proof-of-concept clinical testing IDX899, a drug candidate
from the class of compounds known as non-nucleoside reverse transcriptase inhibitors, or NNRTIs,
for the treatment of HIV/AIDS. We licensed our NNRTI compounds, including IDX899, to
GlaxoSmithKline, or GSK, in February 2009.
20
The following table summarizes key information regarding our pipeline of HCV drug candidates
as well as Tyzeka®/Sebivo® and IDX899:
|
|
|
|
|
Indication |
|
Product/Drug Candidates/Programs |
|
Description |
|
|
|
|
|
HCV
|
|
Nucleotide Polymerase Inhibitor
(IDX184)
|
|
In July 2009, we
successfully
completed the
proof-of-concept
clinical trial of
IDX184 in
treatment-naïve HCV
genotype 1-infected
patients. In
October 2009, we
initiated a 14-day
dose-ranging phase
IIa clinical trial
evaluating IDX184
in combination with
pegylated
interferon and
ribavirin in
treatment-naïve HCV
genotype 1-infected
patients, which was
fully enrolled in
July 2010. We have
also initiated
three-month
toxicology studies
to support longer
duration clinical
trials. |
|
|
|
|
|
|
|
Protease Inhibitor
(IDX320)
|
|
In the first
quarter of 2010, we
completed a
double-blind,
placebo-controlled
phase I clinical
study evaluating
single and multiple
ascending doses
of IDX320 in
healthy volunteers.
Based on the safety
and pharmacokinetic
data from the phase
I clinical study,
we initiated a
three-day
proof-of-concept
clinical trial in
treatment-naïve HCV
genotype 1-infected
patients in the
second quarter of
2010. |
|
|
|
|
|
|
|
Combination Studies
(IDX184 and IDX320)
|
|
In July 2010, we
conducted a
two-week phase I
drug-drug
interaction study
of IDX320 and
IDX184 in healthy
volunteers.
Assuming favorable
results from this
study and the
IDX320
proof-of-concept
clinical trial, we
plan to discuss
with regulatory
agencies the
initiation of a
clinical trial
evaluating IDX320
and IDX184 in
HCV-infected
patients in the
second half of
2010. |
|
|
|
|
|
|
|
Non-Nucleoside Polymerase Inhibitor
(IDX375)
|
|
In November 2009,
we initiated a
single ascending
dose phase I
clinical study in
healthy volunteers
with a choline salt
form of IDX375,
which exhibited
favorable safety
and
pharmacokinetics
properties. In the
second quarter of
2010, we continued
the phase I
clinical study
evaluating single and multiple
doses of the free
acid form of IDX375
in healthy
volunteers. We
expect that these
studies in healthy
volunteers will be
followed by a
three-day
proof-of-concept
clinical trial in
treatment-naïve
genotype 1-infected
patients in the
second half of
2010. The active
pharmaceutical
ingredient as a
free acid allows
improved
manufacturing
processes and
long-term stability
of the drug
product, providing
diverse formulation
options. |
|
|
|
|
|
|
|
NS5A Inhibitor
|
|
We plan to submit
an investigational
new drug
application, or
IND, or a clinical
trial application,
or CTA, in 2011,
assuming positive
results from
IND-enabling
preclinical studies
of a clinical
candidate selected
from our NS5A
inhibitor discovery
program. |
|
|
|
|
|
HBV
|
|
Tyzeka®/Sebivo®
(telbivudine)
(L- nucleoside)
|
|
Novartis has
worldwide
development,
commercialization
and manufacturing
rights and
obligations related
to telbivudine
(Tyzeka®/Sebivo®).
We receive royalty
payments equal to a
percentage of net
sales of
Tyzeka®/Sebivo®. |
|
|
|
|
|
HIV
|
|
Non-Nucleoside
Reverse Transcriptase Inhibitor
(IDX899 or GSK2248761)
|
|
In 2008, we successfully completed
a proof-of-concept clinical trial
of IDX899 in treatment-naïve
HIV-infected patients. In February
2009, we granted GSK an exclusive
worldwide license to develop,
manufacture and commercialize
IDX899. IDX899 has progressed
through long-term chronic
toxicology studies and drug-drug
interaction studies in healthy
volunteers. GSK anticipates a phase
IIb clinical development program to
begin in 2010. |
21
All of our drug candidates are currently in preclinical or clinical development. To
commercialize any of our drug candidates, we will be required to obtain marketing authorization
approvals after successfully completing preclinical studies and clinical trials of such drug
candidates. Our current estimates for additional research and development expenses are subject to
risks and uncertainties associated with research, development, clinical trials and the U.S. Food
and Drug Administration, or FDA, and foreign regulatory review and approval processes. The time and
cost to complete development of our drug candidates may vary significantly and depends upon a
number of factors, including the requirements mandated by the FDA and other regulatory agencies,
the success of our clinical trials, the availability of financial resources, and our
collaborations, particularly with Novartis and its participation in the manufacturing and clinical
development of our drug candidates.
Novartis has the option to license our development-stage drug candidates after demonstration
of activity and safety in a proof-of-concept clinical trial pursuant to our development, license
and commercialization agreement with Novartis, which we refer to as the development and
commercialization agreement. If Novartis licenses any of our drug candidates, Novartis is
obligated to fund a portion of development expenses that we incur in accordance with development
plans agreed upon by us and Novartis. In October 2009, Novartis waived its option to license
IDX184. As a result, we retain the worldwide rights to develop, manufacture, commercialize and
license IDX184. We are currently seeking a partner who will assist in the further development and
commercialization of this drug candidate. Novartis continues to have the right to license other
drug candidates from our pipeline, including IDX375 and IDX320, after a proof-of-concept clinical
trial has been completed.
In February 2009, we entered into a license agreement with GSK that was amended in May 2010,
which we refer to as the GSK license agreement. Pursuant to the GSK license agreement, GSK is
solely responsible for the worldwide development, manufacture and commercialization of our NNRTI
compounds, including IDX899, for the treatment of human diseases, including HIV/AIDS. Subject to
certain conditions, GSK is also responsible for the prosecution of our patents licensed to GSK
under the GSK license agreement. We do not expect to incur any additional development costs related
to our NNRTI program, including IDX899.
We have incurred significant losses since our inception in May 1998 and at June 30, 2010, we
had an accumulated deficit of $594.7 million. We expect such losses to continue in the foreseeable
future. Historically, we have generated losses principally from costs associated with research and
development activities, including clinical trial costs, and general and administrative activities.
As a result of planned expenditures for future discovery and development activities, we expect to
incur additional operating losses for the foreseeable future. We believe that our current cash and
cash equivalents together with expected royalty payments associated with product sales of
Tyzeka®/Sebivo® will be sufficient to satisfy our cash needs into the middle of 2011.
22
Results of Operations
Comparison of Three Months Ended June 30, 2010 and 2009
Revenues
Revenues for the three months ended June 30, 2010 and 2009 were as follows:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, |
|
|
|
2010 |
|
|
2009 |
|
|
|
(In Thousands) |
|
Collaboration revenue related party: |
|
|
|
|
|
|
|
|
License fee revenue |
|
$ |
(383 |
) |
|
$ |
1,338 |
|
Royalty revenue |
|
|
910 |
|
|
|
833 |
|
Reimbursement of research and development costs |
|
|
|
|
|
|
11 |
|
|
|
|
|
|
|
|
|
|
|
527 |
|
|
|
2,182 |
|
|
|
|
|
|
|
|
|
|
Other revenue: |
|
|
|
|
|
|
|
|
Collabration revenue |
|
|
779 |
|
|
|
256 |
|
Government grants |
|
|
10 |
|
|
|
11 |
|
|
|
|
|
|
|
|
Total revenues |
|
$ |
1,316 |
|
|
$ |
2,449 |
|
|
|
|
|
|
|
|
Collaboration revenue related party consists of revenues associated with our
collaboration with Novartis for the worldwide development and commercialization of our drug
candidates. Collaboration revenue related party is comprised of the following:
|
|
|
license and other fees received from Novartis for the
license of our HBV and HCV drug candidates, net of
changes for Novartis stock subscription rights, which
are being recognized over the development period of our
licensed drug candidates; |
|
|
|
|
royalty payments associated with product sales of Tyzeka®/Sebivo® made by Novartis; and |
|
|
|
|
reimbursement by Novartis for expenses we incur in connection with
the development and registration of our licensed products and drug
candidates, net of certain qualifying costs incurred by Novartis. |
Collaboration revenue related party was $0.5 million in the three months ended June 30,
2010 as compared to $2.2 million in the same period in 2009. The $1.7 million decrease was
primarily due to lower license fee revenue recognized related to the impact of Novartis stock
subscription rights.
In the three months ended June 30, 2010 and 2009, we also recognized $0.8 million and $0.3
million, respectively, of collaboration revenue related to the GSK license agreement. The increase
of $0.5 million was due to the recognition of additional revenue related to the $6.5 million
milestone payment received in May 2010.
Cost of Revenues
Cost of revenues was $0.7 million in the three months ended June 30, 2010 which was
substantially unchanged as compared to the same period in 2009.
Research and Development Expenses
Research and development expenses were $12.1 million in the three months ended June 30, 2010
as compared to $11.4 million in the same period in 2009. The increase of $0.7 million was primarily
due to $1.4 million in higher expenses associated with our phase IIa clinical trial of IDX184. This
amount was offset by $0.4 million in lower salaries, personnel related costs and consulting fees,
mainly related to reduced headcount.
General and Administrative Expenses
General and administrative expenses were $5.1 million in the three months ended June 30, 2010
as compared to $5.4 million in the same period in 2009. The decrease of $0.3 million was primarily
due to lower salaries and personnel related costs, mainly related to reduced headcount.
Other Income, Net
Other income, net was $0.3 million in the three months ended June 30, 2010 which was
substantially unchanged as compared to
the same period in 2009.
23
Comparison of Six Months Ended June 30, 2010 and 2009
Revenues
Revenues for the six months ended June 30, 2010 and 2009 were as follows:
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, |
|
|
|
2010 |
|
|
2009 |
|
|
|
(In Thousands) |
|
Collaboration revenue related party: |
|
|
|
|
|
|
|
|
License fee revenue |
|
$ |
1,052 |
|
|
$ |
4,440 |
|
Royalty revenue |
|
|
1,891 |
|
|
|
1,613 |
|
Reimbursement of research and development costs |
|
|
|
|
|
|
45 |
|
|
|
|
|
|
|
|
|
|
|
2,943 |
|
|
|
6,098 |
|
|
|
|
|
|
|
|
|
|
Other revenue: |
|
|
|
|
|
|
|
|
Collabration revenue |
|
|
1,035 |
|
|
|
342 |
|
Government grants |
|
|
21 |
|
|
|
20 |
|
|
|
|
|
|
|
|
Total revenues |
|
$ |
3,999 |
|
|
$ |
6,460 |
|
|
|
|
|
|
|
|
Collaboration revenue related party was $2.9 million in the six months ended June 30,
2010 as compared to $6.1 million in the same period in 2009. The majority of the $3.2 million
decrease was due to lower license fee revenue recognized of $3.4 million related to the impact of
Novartis stock subscription rights offset by a $0.3 million increase in royalty revenue associated
with product sales of Tyzeka®/Sebivo®.
In the six months ended June 30, 2010 and 2009, we also recognized $1.0 million and $0.3
million, respectively, of collaboration revenue under the GSK license agreement. The increase of
$0.7 million was due to the recognition of additional revenue related to the $6.5 million milestone
payment received in May 2010.
Cost of Revenues
Cost of revenues was $1.2 million in the six months ended June 30, 2010 which was
substantially unchanged as compared to the same period in 2009.
Research and Development Expenses
Research and development expenses were $23.9 million in the six months ended June 30, 2010 as
compared to $22.3 million in the same period in 2009. The increase of $1.6 million was primarily
due to $3.9 million in higher expenses associated with our HCV programs, specifically the phase IIa
clinical trial of IDX184 and the phase I and proof-of-concept clinical studies of IDX320. These
costs were offset by $1.3 million of lower salaries, personnel related costs and consulting fees,
mainly due to reduced headcount. Also lab operating costs decreased $0.4 million as compared to
2009.
We expect our research and development expenses for 2010 to be higher than 2009 due to
additional expenses related to the advancement of our HCV drug candidates in 2010, including a
phase IIa clinical trial of IDX184. We will continue to devote substantial resources to our
research and development activities, expand our research pipeline and engage in future development
activities as we continue to advance our drug candidates and explore collaborations with other
entities that we believe will create shareholder value.
General and Administrative Expenses
General and administrative expenses were $9.9 million in the six months ended June 30, 2010 as
compared to $11.4 million in the same period in 2009. The decrease of $1.5 million was primarily
due to lower salaries, personnel related costs and consulting fees, mainly related to reduced
headcount.
We expect general and administrative expenses for 2010 to be lower as compared to 2009 due to
reduced personnel related costs and ongoing cost reduction initiatives.
Restructuring Charges
During the first quarter of 2010, we initiated a plan to restructure our operations at our
research facility in Montpellier, France to reduce its workforce by approximately 17 positions in
connection with our ongoing cost saving initiatives. In the first quarter of 2010, we recorded
charges of $2.2 million for employee severance costs related to the restructuring of our
Montpellier facility together with
charges related to an earlier reduction of our United States workforce by 13 positions in
January 2010. Of this amount, $1.2 million of the severance costs were paid and the remaining
balance of $1.0 million continued to be accrued as of June 30, 2010. We expect that the $1.0
million of severance payments will be fully paid by September 2010. We expect the restructurings to
result in annualized savings of approximately $3.0 million to $4.0 million.
24
Other Income, Net
Other income, net was $0.8 million in the six months ended June 30, 2010 which was
substantially unchanged as compared to the same period in 2009.
Liquidity and Capital Resources
Since our inception in 1998, we have financed our operations with proceeds obtained in
connection with license and development arrangements and equity financings. The proceeds include:
|
|
|
license, milestone, royalty and other payments from Novartis; |
|
|
|
|
license, milestone and stock purchase payments from GSK; |
|
|
|
|
reimbursements from Novartis for costs we have incurred subsequent
to May 8, 2003 in connection with the development of
Tyzeka®/Sebivo®, valtorcitabine and valopicitabine; |
|
|
|
|
sales of Tyzeka® in the United States through September 30, 2007; |
|
|
|
|
net proceeds from Sumitomo Pharmaceuticals Corporation, or Sumitomo, for reimbursement of development costs; |
|
|
|
|
net proceeds from private placements of our convertible preferred stock; |
|
|
|
|
net proceeds from public or underwritten offerings in July 2004, October 2005, August 2009 and April 2010; |
|
|
|
|
net proceeds from private placements of our common stock concurrent with our 2004 and 2005 public offerings; and |
|
|
|
|
proceeds from the exercise of stock options granted pursuant to our equity compensation plans. |
In September 2008, we filed a shelf registration statement with the Securities and
Exchange Commission, or SEC, for an indeterminate number of shares of common stock, up to an
aggregate of $100.0 million, for future issuance. Any financing requiring the issuance of
additional shares of capital stock must first be approved by Novartis so long as Novartis continues
to own at least 19.4% of our voting stock. In May 2009, we received approval from Novartis to issue
capital shares pursuant to financing transactions under our existing shelf registration statement
so long as the issuance of shares did not reduce Novartis interest in Idenix below 43%. Pursuant
to this shelf registration, in August 2009 and in April 2010, we issued approximately 7.3 million
and approximately 6.5 million shares, respectively, of our common stock pursuant to underwritten
offerings and received $21.2 million and $26.3 million in net proceeds, respectively. Novartis did
not participate in either of these offerings and its ownership was diluted from approximately 53%
prior to the August 2009 offering to approximately 43% as of July 19, 2010.
We believe that our current cash and cash equivalents together with the expected
royalty payments associated with product sales of Tyzeka®/Sebivo® will be sufficient to satisfy our
cash needs into the middle of 2011. We may seek additional funding through a combination of public
or private financing, collaborative relationships and other arrangements in the future. If we do
not receive licensing or additional milestone payments, or additional funding through a public or
private financing, we have the ability and intent to manage expenditures to preserve our cash
resources and fund operations for at least the next 12 months. These actions would include
reductions in the number of our employees and delaying or canceling planned expenditures in our
research and development programs.
We had total cash, cash equivalents and marketable securities of $51.0 million and
$48.1 million as of June 30, 2010 and December 31, 2009, respectively. As of June 30, 2010, we had
$51.0 million in cash and cash equivalents. As of December 31, 2009, we had $46.5 million in cash
and cash equivalents and $1.6 million in non-current marketable securities. Our investment policy
seeks to manage these assets to achieve our goals of preserving principal and maintaining adequate
liquidity. Due to the distress in the financial markets over the past two years certain investments
have diminished liquidity and declined in value. To mitigate this
risk, beginning in 2008, we have shifted our investments to instruments that carry less exposure to market volatility and liquidity
pressures. As of June 30, 2010, all of our investments were in government agency and treasury money
market instruments.
Net cash used in operating activities was $23.1 million and $11.4 million in the six months
ended June 30, 2010 and 2009,
respectively. The $11.7 million net change in operating cash activities was primarily due to
the receipt of payments from GSK pursuant to the GSK license agreement. In 2009, we received a
$17.0 million license fee payment from GSK as compared to a $6.5 million milestone payment received
in 2010.
25
Net cash provided by investing activities was $1.2 million and $2.5 million in the six months
ended June 30, 2010 and 2009, respectively. The $1.3 million decrease was primarily due to lower
net proceeds from sales and maturities of our marketable securities.
Net cash provided by financing activities was $26.4 million and $17.1 million in the six
months ended June 30, 2010 and 2009, respectively. In April 2010, we issued approximately 6.5
million shares of our common stock pursuant to an underwritten offering and received $26.3 million
in proceeds. In March 2009, we received $17.0 million in proceeds related to the issuance of stock
to GSK pursuant to the stock purchase agreement entered into with GSK.
Contractual Obligations and Commitments
Set forth below is a description of our contractual obligations as of June 30, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Period |
|
|
|
|
|
|
|
Less Than |
|
|
|
|
|
|
|
|
|
|
After 5 |
|
Contractual Obligations |
|
Total |
|
|
1 Year |
|
|
1-3 Years |
|
|
4-5 Years |
|
|
Years |
|
|
|
(In Thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating leases |
|
$ |
10,594 |
|
|
$ |
3,123 |
|
|
$ |
4,980 |
|
|
$ |
1,751 |
|
|
$ |
740 |
|
Settlement payments and other agreements |
|
|
1,689 |
|
|
|
1,463 |
|
|
|
226 |
|
|
|
|
|
|
|
|
|
Long-term obligations |
|
|
8,832 |
|
|
|
|
|
|
|
|
|
|
|
1,610 |
|
|
|
7,222 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total contractual obligations |
|
$ |
21,115 |
|
|
$ |
4,586 |
|
|
$ |
5,206 |
|
|
$ |
3,361 |
|
|
$ |
7,962 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Certain amounts included in the table above related to a settlement agreement we entered
into in July 2008 with the University of Alabama at Birmingham, or UAB, the University of Alabama
at Birmingham Research Foundation, or UABRF, an affiliate of UAB, and Emory University relating
to our telbivudine technology. Pursuant to this settlement agreement, all contractual disputes
relating to patents covering the use of certain synthetic nucleosides for the treatment of HBV and
all litigation matters relating to patents and patent applications related to the use of
ß-L-2-deoxy-nucleosides for the treatment of HBV assigned to one or more of Idenix, Le Centre
National de la Recherche Scientifique, or CNRS, and the Universite Montpellier II, or the
University of Montpellier, and which cover the use of Tyzeka®/Sebivo® (telbivudine) for the
treatment of HBV have been resolved. Under the terms of the settlement agreement, we paid UABRF (on
behalf of UAB and Emory University) a $4.0 million upfront payment and will make additional
payments to UABRF equal to 20% of all royalty payments received by us from Novartis based on
worldwide sales of telbivudine, subject to minimum payment obligations aggregating $11.0 million.
Our payment obligations under the settlement agreement will expire on August 2019. The settlement
agreement was effective on June 1, 2008 and included mutual releases of all claims and covenants
not to sue among the parties. It also included a release from a third-party scientist who had
claimed to have inventorship rights in certain Idenix/CNRS/University of Montpellier patents.
As of June 30, 2010, we had $2.6 million of long-term liabilities recorded and certain
potential payment obligations relating to our HBV and HCV product and drug candidates that are
described below. These obligations are excluded from the contractual obligations table above as we
cannot make a reliable estimate of the period in which the cash payments may be made.
In connection with certain of our operating leases, we have two letters of credit with a
commercial bank totaling $1.2 million which expire at varying dates through December 31, 2013.
Pursuant to the license agreement between us and UAB, we were granted an exclusive license to
the rights that UABRF, Emory University and CNRS have to a 1995 U.S. patent application and progeny
thereof and counterpart patent applications in Europe, Canada, Japan and Australia that cover the
use of certain synthetic nucleosides for the treatment of HBV.
Additionally, in connection with the resolution of matters relating to certain of our HCV drug
candidates, in May 2004, we entered into a settlement agreement with UAB which provides for a
milestone payment of $1.0 million to UAB upon receipt of regulatory approval in the United States
to market and sell certain HCV products invented or discovered by our chief executive officer
during the period from November 1, 1999 to November 1, 2000. This settlement agreement also
provides that we will pay UAB an amount equal to 0.5% of worldwide net sales of such HCV products
with a minimum sales-based payment equal to $12.0 million.
We have potential payment obligations under the GSK license transaction with the Universita
degli Studi di Cagliari, or the University of Cagliari, pursuant to which we have the exclusive
worldwide right to make, use and sell certain HCV and HIV technologies. We made certain payments to
the University of Cagliari under these arrangements based on the $34.0 million payment we received
from GSK in 2009 under the GSK license transaction. We are also liable for certain payments to the
University of Cagliari if we receive license fees or milestone payments with respect to such
technology from Novartis, GSK or another collaborator.
26
In March 2003, we entered into a final settlement agreement with Sumitomo, under which the
rights to develop and commercialize telbivudine in Japan, China, South Korea and Taiwan previously
granted to Sumitomo were returned to us. This settlement agreement provides for a $5.0 million
milestone payment to Sumitomo if and when the first commercial sale of telbivudine occurs in Japan.
As part of the development and commercialization agreement, Novartis will reimburse us for any such
payment made to Sumitomo.
In December 2001, we retained the services of Clariant (subsequently acquired by Archimica
Group), a provider of manufacturing services in the specialty chemicals industry, in the form of a
multiproject development and supply agreement. Under the terms of the agreement with Clariant, we
would, on an as needed basis, utilize the Clariant process development and manufacture services
in the development of certain of our drug candidates, including telbivudine. After reviewing
respective bids from both Novartis and Clariant, the joint manufacturing committee decided to
proceed with Novartis as the primary manufacturer of telbivudine. In late 2007, we transferred full
responsibility to Novartis for the development, commercialization and manufacturing of telbivudine.
As a result, in January 2008, we exercised our right under the agreement with Clariant to terminate
effective July 2008. In February 2008, Clariant asserted that they should have been able to
participate in the manufacturing process for telbivudine as a non-primary supplier and as a result
are due an unspecified amount. We do not agree with Clariants assertion and therefore have not
recorded a liability associated with this potential contingent matter. Clariant has not initiated
legal proceedings. If legal proceedings are initiated, we intend to vigorously defend against such
lawsuit.
Off-Balance Sheet Arrangements
We currently have no off-balance sheet arrangements.
Critical Accounting Policies and Estimates
Our discussion and analysis of our financial condition and results of operations are based on
our financial statements, which have been prepared in accordance with generally accepted accounting
principles in the United States of America. The preparation of the financial statements requires us
to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues
and expenses. On an ongoing basis, we evaluate our estimates and judgments, including those related
to revenue recognition, valuation of marketable securities, accrued expenses and share-based
compensation. 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 value of assets and liabilities that are not readily apparent from
other sources. Actual results may differ from these estimates under different assumptions or
conditions.
Our significant accounting policies are more fully described in Note 2 to our consolidated
financial statements included in our Annual Report on Form 10-K for the year ended December 31,
2009.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Interest Rate Risk
Changes in interest rates may impact our financial position, operating results or cash flows.
The primary objective of our investment activities is to preserve capital while maintaining
liquidity until it is required to fund operations. To minimize risk, we maintain our operating cash
in commercial bank accounts. We invest our cash in high quality financial instruments, primarily
government agency and treasury money market instruments. Due to the conservative nature of these
instruments, we do not believe that we have a material exposure to interest rate risk.
Foreign Currency Exchange Rate Risk
Our foreign currency transactions include agreements denominated, wholly or partly, in foreign
currencies, European subsidiaries that are denominated in foreign currencies and royalties earned
based on worldwide product sales of Sebivo® by Novartis. As a result of these foreign currency
transactions, our financial position, results of operations and cash flows can be affected by
market fluctuations in foreign currency exchange rates. We have not entered into any derivative
financial instruments to reduce the risk of fluctuations in currency exchange rates.
Item 4. Controls and Procedures
Disclosure Controls and Procedures
We have conducted an evaluation under the supervision and with the participation of our
management, including our chief executive officer and chief financial officer (our principal
executive officer and principal financial officer, respectively), regarding the effectiveness of
our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the
Securities Exchange
Act of 1934, as amended, or the Exchange Act) as of the end of the period covered by this
report. Based on such evaluation, our chief executive officer and chief financial officer concluded
that, as of June 30, 2010, our disclosure controls and procedures are effective.
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Changes in Internal Control over Financial Reporting
There was no change in our internal control over financial reporting (as defined in Rules
13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the quarter ended June 30,
2010 that has materially affected, or is reasonably likely to materially affect, our internal
control over financial reporting.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
See Part I, Item 3 of our Annual Report on Form 10-K for the year ended December 31, 2009 and
Note 12 of this quarterly report for discussions of our legal proceedings.
Item 1A. Risk Factors
Our business faces many risks. The risks described below may not be the only risks we face.
Additional risks we do not yet know of or which we currently believe are immaterial may also impair
our business operations. If any of the events or circumstances described in the following risks
actually occurs, our business, financial condition or results of operations could suffer and the
trading price of our common stock could decline. The following risks should be considered, together
with all of the other information in our Annual Report on Form 10-K for the year ended December 31,
2009, our Quarterly Report on Form 10-Q for the period ended March 31, 2010 and in this Quarterly
report on Form 10-Q before deciding to invest in our securities.
Factors Related to Our Business
We have a limited operating history and have incurred a cumulative loss since inception. If we do
not generate significant revenues, we will not be profitable.
We have incurred significant losses since our inception in May 1998. Telbivudine
(Tyzeka®/Sebivo®), our only product to reach commercialization, is marketed by Novartis, and we
receive royalty revenue associated with sales of this product. We have generated limited revenue
from the sales of Tyzeka®/Sebivo® to date. Due to our limited Tyzeka®/Sebivo® sales history, there
is risk in determining the potential future revenue associated with potential sales of this product
or any other product that reaches commercialization. We will not be able to generate additional
revenues from other product sales until we successfully complete clinical development and receive
regulatory approval for one of our other drug candidates, and we or a collaboration partner
successfully introduce such product commercially. We expect to incur annual operating losses over
the next several years as we continue to expand our drug discovery and development efforts. We also
expect that the net loss we will incur will fluctuate from quarter to quarter and such fluctuations
may be substantial. To generate product revenue, regulatory approval for products we successfully
develop must be obtained and we and/or one of our existing or future collaboration partners must
effectively manufacture, market and sell such products. Even if we successfully commercialize drug
candidates that receive regulatory approval, we may not be able to realize revenues at a level that
would allow us to achieve or sustain profitability. Accordingly, we may never generate significant
revenue and, even if we do generate significant revenue, we may never achieve profitability.
We will need additional capital to fund our operations, including the development, manufacture and
potential commercialization of our drug candidates. If we do not have or cannot raise additional
capital when needed, we will be unable to develop and ultimately commercialize our drug candidates
successfully.
Our cash and cash equivalents balance was $51.0 million at June 30, 2010. We believe that in
addition to this balance, the anticipated royalty payments associated with product sales of
Tyzeka®/Sebivo® will be sufficient to satisfy our cash needs into the middle of 2011. Our drug
development programs and the potential commercialization of our drug candidates will require
substantial cash to fund expenses that we will incur in connection with preclinical studies and
clinical trials, regulatory review and future manufacturing and sales and marketing efforts.
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Our need for additional funding will depend in part on whether:
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with respect to IDX899, GSK is able to continue
clinical development of this drug candidate such that
we receive certain clinical development milestone
payments within the next 24 months; |
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with respect to our other drug candidates, Novartis exercises its
option to license any such drug candidates, and we receive related
license fees, milestone payments and development expense
reimbursement payments from Novartis; with respect to any of our
drug candidates not licensed by Novartis, we receive related
license fees, milestone payments and development expense
reimbursement payments from third-parties; |
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with respect to Tyzeka®/Sebivo®, whether the level of royalty payments received from Novartis is significant; and |
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the terms of a development and commercialization agreement, if
any, that we enter into with respect to our compound IDX184 for
the treatment of HCV. We are currently seeking a partner who will
assist in the further development and commercialization of this
compound. |
In addition, although Novartis has agreed to pay for certain development expenses
incurred under development plans it approves for products and drug candidates that it has licensed
from us, Novartis has the right to terminate its license and the related funding obligations with
respect to any such product or drug candidate by providing us with six months written notice.
Furthermore, GSK has the right to terminate the GSK license agreement by providing us with 90 days
written notice.
Our future capital needs will also depend generally on many other factors, including:
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the amount of revenue that we may be able to realize
from commercialization and sale of drug candidates, if
any, which are approved by regulatory authorities; |
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the scope and results of our preclinical studies and clinical trials; |
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the progress of our current preclinical and clinical development programs for HCV; |
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the cost of obtaining, maintaining and defending patents on our drug candidates and our processes; |
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the cost, timing and outcome of regulatory reviews; |
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the commercial potential of our drug candidates; |
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the rate of technological advances in our markets; |
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the cost of acquiring or in-licensing new discovery compounds, technologies, drug candidates or other business assets; |
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the magnitude of our general and administrative expenses; |
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any costs related to litigation in which we may be involved or related to any claims made against us; |
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any costs we may incur under current and future licensing arrangements; and |
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the costs of commercializing and launching other products, if any,
which are successfully developed and approved for commercial sale
by regulatory authorities. |
We expect that we will incur significant costs to complete the clinical trials and other
studies required to enable us to submit regulatory applications with the FDA, and/or the European
Medicines Agency, or EMEA, for our drug candidates as we continue development of each of these drug
candidates. The time and cost to complete clinical development of these drug candidates may vary as
a result of a number of factors.
We may seek additional capital through a combination of public and private equity offerings,
debt financings and collaborative, strategic alliance and licensing arrangements. Such additional
financing may not be available when we need it or may not be available on terms that are favorable
to us. Moreover, any financing requiring the issuance of additional shares of capital stock must
first be approved by Novartis so long as Novartis continues to own at least 19.4% of our voting
stock. In May 2009, we received approval from Novartis to issue additional shares pursuant to a
financing under our existing shelf registration so long as the issuance of additional shares did
not reduce Novartis interest in Idenix below 43%. As of July 19, 2010, Novartis owned
approximately 43% of our outstanding common stock.
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If we raise additional capital through the sale of our common stock, existing stockholders,
other than Novartis, which has the right to maintain a certain level of ownership, will experience
dilution of their current level of ownership of our common stock and the
terms of the financing may adversely affect the holdings or rights of our stockholders. If we
are unable to obtain adequate financing on a timely basis, we could be required to delay, reduce or
eliminate one or more of our drug development programs or to enter into new collaborative,
strategic alliances or licensing arrangements that may not be favorable to us. More generally, if
we are unable to obtain adequate funding, we may be required to scale back, suspend or terminate
our business operations.
Our research and development efforts may not result in additional drug candidates being discovered
on anticipated timelines, which could limit our ability to generate revenues.
Some of our research and development programs are at preclinical stages. Additional drug
candidates that we may develop or acquire will require significant research, development,
preclinical studies and clinical trials, regulatory approval and commitment of resources before any
commercialization may occur. We cannot predict whether our research will lead to the discovery of
any additional drug candidates that could generate revenues for us.
Our failure to successfully acquire or develop and market additional drug candidates or approved
drugs would impair our ability to grow.
As part of our strategy, we intend to establish a franchise in the HCV market by developing
multiple drug candidates for this therapeutic indication. The success of this strategy depends upon
the development and commercialization of additional drug candidates that we successfully discover,
license or otherwise acquire.
Drug candidates we discover, license or acquire will require additional and likely substantial
development, including extensive clinical testing and approval by the FDA and applicable foreign
regulatory authorities. All drug candidates are prone to the risks of failure which are inherent in
pharmaceutical drug development, including the possibility that the drug candidate will not be
shown to be sufficiently safe and effective for approval by regulatory authorities.
Proposing, negotiating and implementing acquisition or in-license of drug candidates may be a
lengthy and complex process. Other companies, including those with substantially greater financial,
marketing and sales resources, may compete with us for the acquisition of drug candidates. We may
not be able to acquire the rights to additional drug candidates on terms that we find acceptable.
Our investments are subject to general credit, liquidity, market and interest rate risks, which may
be exacerbated by the volatility in the United States credit markets.
As of June 30, 2010, our cash and cash equivalents were invested in government agency and
treasury money market instruments. Our investment policy seeks to manage these assets to achieve
our goals of preserving principal and maintaining adequate liquidity. The distress in the financial
markets over the past two years has caused previously held investments to diminish liquidity and
decline in value. To mitigate this risk, beginning in 2008, we have
shifted our investments to
instruments that carry less exposure to market volatility and liquidity pressures. Should our
investments cease paying or reduce the amount of interest paid to us, our interest income would
suffer. In addition, general credit, liquidity, market and interest risks associated with our
investment portfolio may have an adverse effect on our financial condition.
The commercial markets which we intend to enter are subject to intense competition. If we are
unable to compete effectively, our drug candidates may be rendered noncompetitive or obsolete.
We are engaged in segments of the pharmaceutical industry that are highly competitive and
rapidly changing. Many large pharmaceutical and biotechnology companies, academic institutions,
governmental agencies and other public and private research organizations are commercializing or
pursuing the development of products that target viral diseases, including the same diseases we are
targeting.
We face intense competition from existing products and we expect to face increasing
competition as new products enter the market and advanced technologies become available. For the
treatment of HBV, we are aware of six other drug products, specifically, lamivudine, entecavir,
adefovir dipivoxil, tenofovir, pegylated interferon and interferon alpha, which are approved by the
FDA and commercially available in the United States or in foreign jurisdictions. Five of these
products have preceded Tyzeka®/Sebivo® into the marketplace and have gained acceptance with
physicians and patients. For the treatment of HCV, the current standard of care is pegylated
interferon in combination with ribavirin, a nucleoside analog. Currently, there are approximately
25 antiviral therapies approved for commercial sale in the United States for the treatment of HIV.
We believe that a significant number of drug candidates that are currently under development
may become available in the future for the treatment of HBV, HCV and HIV. Our competitors products
may be more effective, have fewer side effects, have lower costs or be better marketed and sold
than any of our products. Additionally, products that our competitors successfully develop for the
treatment of HCV and HIV may be marketed prior to any HCV or HIV product we or our collaboration
partners successfully develop. Many of our competitors have:
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significantly greater financial, technical and human
resources than we have and may be better equipped to
discover, develop, manufacture and commercialize
products; |
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more extensive experience in conducting preclinical studies and
clinical trials, obtaining regulatory approvals and manufacturing
and marketing pharmaceutical products; |
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products that have been approved or drug candidates that are in late-stage development; and |
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collaborative arrangements in our target markets with leading companies and research institutions. |
Novartis and GSK have the right to market and sell products that compete with the drug
candidates and products that we license to them and any competition by Novartis or GSK could have a
material adverse effect on our business.
Competitive products may render our products obsolete or noncompetitive before we can recover
the expenses of developing and commercializing our drug candidates. Furthermore, the development of
new treatment methods and/or the widespread adoption or increased utilization of vaccines for the
diseases we are targeting could render our drug candidates noncompetitive, obsolete or
uneconomical.
With respect to Tyzeka®/Sebivo® and other products, if any, we may successfully develop and
obtain approval to commercialize, we will face competition based on the safety and effectiveness of
our products, the timing and scope of regulatory approvals, the availability and cost of supply,
marketing and sales capabilities, reimbursement coverage, price, patent position and other factors.
Our competitors may develop or commercialize more effective or more affordable products or obtain
more effective patent protection than we do. Accordingly, our competitors may commercialize
products more rapidly or effectively than we do, which could adversely affect our competitive
position and business.
Biotechnology and related pharmaceutical technologies have undergone and continue to be
subject to rapid and significant change. Our future will depend in large part on our ability to
maintain a competitive position with respect to these technologies.
If we are not able to attract and retain key management and scientific personnel and advisors, we
may not successfully develop our drug candidates or achieve our other business objectives.
The growth of our business and our success depends in large part on our ability to attract and
retain key management and research and development personnel. Our key personnel include our senior
officers, many of whom have very specialized scientific, medical or operational knowledge. The loss
of the service of any of the key members of our senior management team may significantly delay or
prevent our discovery of additional drug candidates, the development of our drug candidates and
achievement of our other business objectives. Our ability to attract and retain qualified
personnel, consultants and advisors is critical to our success.
We face intense competition for qualified individuals from numerous pharmaceutical and
biotechnology companies, academic institutions, governmental entities and other research
institutions. We may be unable to attract and retain these individuals and our failure to do so
would have an adverse effect on our business.
Our business has a substantial risk of product liability claims. If we are unable to obtain or
maintain appropriate levels of insurance, a product liability claim against us could adversely
affect our business.
Our business exposes us to significant potential product liability risks that are inherent in
the development, manufacturing and marketing of human therapeutic products. Product liability
claims could result in a recall of products or a change in the therapeutic indications for which
such products may be used. In addition, product liability claims may distract our management and
key personnel from our core business, require us to spend significant time and money in litigation
or to pay significant damages, which could prevent or interfere with commercialization efforts and
could adversely affect our business. Claims of this nature would also adversely affect our
reputation, which could damage our position in the marketplace.
For Tyzeka®/Sebivo®, product liability claims could be made against us based on the use of our
product prior to October 1, 2007, at which time we transferred to Novartis our worldwide
development, commercialization and manufacturing rights and obligations related to Tyzeka®/Sebivo®
in exchange for royalty payments equal to a percentage of net sales. For Tyzeka®/Sebivo® and our
drug candidates, product liability claims could be made against us based on the use of our drug
candidates in clinical trials. We have obtained product liability insurance for Tyzeka®/Sebivo® and
maintain clinical trial insurance for our drug candidates in development. Such insurance may not
provide adequate coverage against potential liabilities. In addition, clinical trial and product
liability insurance is becoming increasingly expensive. As a result, we may be unable to maintain
or increase current amounts of product liability and clinical trial insurance coverage, obtain
product liability insurance for other products, if any, that we seek to
commercialize, obtain additional clinical trial insurance or obtain sufficient insurance at a
reasonable cost. If we are unable to obtain or maintain sufficient insurance coverage on reasonable
terms or to otherwise protect against potential product liability claims, we may be unable to
commercialize our products or conduct the clinical trials necessary to develop our drug candidates.
A successful product liability claim brought against us in excess of our insurance coverage may
require us to pay substantial amounts in damages. This could adversely affect our cash position and
results of operations.
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Our insurance policies are expensive and protect us only from some business risks, which will leave
us exposed to significant, uninsured liabilities.
We do not carry insurance for all categories of risk that our business may encounter. We
currently maintain general liability, property, workers compensation, products liability,
directors and officers and employment practices insurance policies. We do not know, however, if
we will be able to maintain existing insurance with adequate levels of coverage. Any significant
uninsured liability may require us to pay substantial amounts, which would adversely affect our
cash position and results of operations.
If the estimates we make, and the assumptions on which we rely, in preparing our financial
statements prove inaccurate, our actual results may vary from those reflected in our projections
and accruals.
Our financial statements have been prepared in accordance with generally accepted accounting
principles in the United States of America. The preparation of these financial statements requires
us to make estimates and judgments that affect the reported amounts of our assets, liabilities,
revenues and expenses, the amounts of charges accrued by us and related disclosure of contingent
assets and liabilities. We base our estimates on historical experience and on various other
assumptions that we believe to be reasonable under the circumstances. There can be no assurance,
however, that our estimates, or the assumptions underlying them, will not change.
One of these estimates is our estimate of the development period over which we amortize
non-refundable payments from Novartis, which we review on a quarterly basis. In the second quarter
of 2010, we adjusted the period over which we amortize the deferred payments to be through May 2021
based on current judgments related to the product development timeline of our licensed drug
candidates. When the estimated development period changes, we adjust periodic revenue that is being
recognized and record the remaining unrecognized non-refundable payments over the remaining
development period during which our performance obligations are completed. Significant judgments
and estimates are involved in determining the estimated development period and different
assumptions could yield materially different financial results. This, in turn, could adversely
affect our stock price.
If we fail to design and maintain an effective system of internal controls, we may not be able to
accurately report our financial results or prevent fraud. As a result, current and potential
stockholders could lose confidence in our financial reporting, which could harm our business and
the trading price of our common stock.
As directed by Section 404 of the Sarbanes-Oxley Act of 2002, the SEC adopted rules requiring
public companies to include a report in Annual Reports on Form 10-K that contains an assessment by
management of the effectiveness of the companys internal controls over financial reporting. In
addition, the companys registered independent public accounting firm must attest to the
effectiveness of our internal controls over financial reporting.
We have completed an assessment and will continue to review in the future our internal
controls over financial reporting in an effort to ensure compliance with the Section 404
requirements. The manner by which companies implement, maintain and enhance these requirements
including internal control reforms, if any, to comply with Section 404, and how registered
independent public accounting firms apply these requirements and test companies internal controls,
is subject to change and will evolve over time. As a result, notwithstanding our efforts, it is
possible that either our management or our registered independent public accounting firm may in the
future determine that our internal controls over financial reporting are not effective.
A determination that our internal controls over financial reporting are ineffective could
result in an adverse reaction in the financial marketplace due to a loss of investor confidence in
the reliability of our financial statements, which ultimately could negatively impact the market
price of our stock, increase the volatility of our stock price and adversely affect our ability to
raise additional funding.
Our business is subject to international economic, political and other risks that could negatively
affect our results of operations or financial position.
Our business is subject to risks associated with doing business internationally, including:
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changes in a specific countrys or regions political or economic conditions, including Western Europe, in particular; |
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potential negative consequences from changes in tax laws affecting our ability to repatriate profits; |
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difficulty in staffing and managing widespread operations; |
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unfavorable labor regulations applicable to our European or other international operations; |
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changes in foreign currency exchange rates; and |
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the need to ensure compliance with the numerous regulatory and
legal requirements applicable to our business in each of these
jurisdictions and to maintain an effective compliance program to
ensure compliance. |
Our operating results are impacted by the health of the North American, European and Asian
economies. Our business and financial performance may be adversely affected by current and future
economic conditions that cause a decline in business and consumer spending, including a reduction
in the availability of credit, rising interest rates, financial market volatility and recession.
We may be required to relocate one of our principal research facilities, which could interrupt our
business activities and result in significant expense.
We have been involved in a dispute with the City of Cambridge, Massachusetts and its License
Commission pertaining to the level of noise emitted from certain rooftop equipment at our research
facility located at 60 Hampshire Street in Cambridge. The License Commission has claimed that we
are in violation of the local noise ordinance pertaining to sound emissions, based on a complaint
from neighbors living adjacent to the property. We have contested this alleged violation before the
License Commission, as well as the Middlesex County, Massachusetts, Superior Court. In July 2010,
the License Committee granted us a special variance from the requirements of the local
noise ordinance for a period of one-year, effective as of July 1, 2010. We may, however, be
required to cease certain activities at the building if: a) the noise emitted from certain rooftop
equipment at our research facility exceeds the levels permitted by the special variance; b) if the
parties are unable to resolve this matter through negotiations and remedial action; or c) if our
legal challenge to the position of the City of Cambridge and the License Commission is
unsuccessful. In any such event, we could be required to relocate to another facility which could
interrupt some of our business activities and could be time consuming and costly.
Factors Related to Development, Clinical Testing and Regulatory Approval of Our Drug Candidates
All of our drug candidates are in development. Our drug candidates remain subject to clinical
testing and regulatory approval. If we are unable to develop our drug candidates, we will not be
successful.
To date, we have limited experience marketing, distributing and selling any products. The
success of our business depends primarily upon Novartis ability to commercialize Tyzeka®/Sebivo®,
GSKs ability to successfully develop and commercialize our NNRTI compounds, including IDX899, and
our ability, or that of any future collaboration partner, to successfully commercialize other
products we may successfully develop. We received approval from the FDA in the fourth quarter of
2006 to market and sell Tyzeka® for the treatment of HBV in the United States. In April 2007,
Sebivo® was approved in the European Union for the treatment of patients with HBV. Effective
October 1, 2007, we transferred to Novartis our worldwide development, commercialization and
manufacturing rights and obligations related to telbivudine (Tyzeka®/Sebivo®) in exchange for
royalty payments equal to a percentage of net sales. The royalty percentage varies based on the
specified territory and the aggregate dollar amount of net sales. In February 2009, we entered into
the GSK license agreement whereby GSK is solely responsible for the worldwide development,
manufacture and commercialization of our NNRTI compounds, including IDX899, for the treatment of
human diseases, including HIV/AIDS. If GSK is unable to successfully develop IDX899 or any other
compound licensed to it, we will not receive additional milestone or royalty payments from GSK.
Our other drug candidates are in various earlier stages of development. All of our drug
candidates require regulatory review and approval prior to commercialization. Approval by
regulatory authorities requires, among other things, that our drug candidates satisfy rigorous
standards of safety, including efficacy and assessments of the toxicity and carcinogenicity of the
drug candidates we are developing. To satisfy these standards, we must engage in expensive and
lengthy testing. Notwithstanding the efforts to satisfy these regulatory standards, our drug
candidates may not:
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offer therapeutic or other improvements over existing drugs; |
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be proven safe and effective in clinical trials; |
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meet applicable regulatory standards; |
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be capable of being produced in commercial quantities at acceptable costs; or |
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be successfully commercialized. |
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Commercial availability of our drug candidates is dependent upon successful clinical
development and receipt of requisite regulatory approvals. Clinical data often are susceptible to
varying interpretations. Many companies that have believed that their drug candidates performed
satisfactorily in clinical trials in terms of both safety and efficacy have nonetheless failed to
obtain approval for such drug candidates. Furthermore, the FDA and other regulatory authorities may
request additional information including data from additional clinical trials, which may delay
significantly any approval and these regulatory agencies ultimately may not grant marketing
approval for any of our drug candidates. For example, in July 2007, we announced that the FDA had
placed on clinical hold in the United States our development program of valopicitabine for the
treatment of HCV based on the overall risk/benefit profile observed in clinical testing. We
subsequently discontinued the development of valopicitabine.
If our clinical trials are not successful, we will not obtain regulatory approval for the
commercial sale of our drug candidates.
To obtain regulatory approval for the commercial sale of our drug candidates, we will be
required to demonstrate through preclinical studies and clinical trials that our drug candidates
are safe and effective. Preclinical studies and clinical trials are lengthy and expensive and the
historical rate of failure for drug candidates is high. The results from preclinical studies of a
drug candidate may not predict the results that will be obtained in human clinical trials.
We, the FDA or other applicable regulatory authorities may prohibit the initiation or suspend
clinical trials of a drug candidate at any time if we or they believe the persons participating in
such clinical trials are being exposed to unacceptable health risks or for other reasons. The
observation of adverse side effects in a clinical trial may result in the FDA or foreign regulatory
authorities refusing to approve a particular drug candidate for any or all indications of use.
Additionally, adverse or inconclusive clinical trial results concerning any of our drug candidates
could require us to conduct additional clinical trials, result in increased costs, significantly
delay the submission of applications seeking marketing approval for such drug candidates, result in
a narrower indication than was originally sought or result in a decision to discontinue development
of such drug candidates. Even if we successfully complete our clinical trials with respect to our
drug candidates, we may not receive regulatory approval for such candidate.
Clinical trials require sufficient patient enrollment, which is a function of many factors,
including the size of the patient population, the nature of the protocol, the proximity of patients
to clinical sites, the availability of effective treatments for the relevant disease, the
eligibility criteria for the clinical trial and other clinical trials evaluating other
investigational agents for the same or similar uses, which may compete with us for patient
enrollment. Delays in patient enrollment can result in increased costs and longer development
times.
We cannot predict whether we will encounter problems with any of our completed, ongoing or
planned clinical trials that will cause us or regulatory authorities to delay or suspend our
clinical trials, delay or suspend patient enrollment into our clinical trials or delay the analysis
of data from our completed or ongoing clinical trials. Delays in the development of our drug
candidates would delay our ability to seek and potentially obtain regulatory approvals, increase
expenses associated with clinical development and likely increase the volatility of the price of
our common stock. Any of the following could suspend, terminate or delay the completion of our
ongoing, or the initiation of our planned, clinical trials:
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discussions with the FDA or comparable foreign authorities regarding the scope or design of our clinical trials; |
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delays in obtaining, or the inability to obtain, required
approvals from, or suspensions or termination by, institutional
review boards or other governing entities at clinical sites
selected for participation in our clinical trials; |
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delays in enrolling participants into clinical trials; |
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lower than anticipated retention of participants in clinical trials; |
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insufficient supply or deficient quality of drug candidate materials or other materials necessary to conduct our clinical trials; |
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serious or unexpected drug-related side effects experienced by participants in our clinical trials; or |
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negative results of clinical trials. |
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If the results of our ongoing or planned clinical trials for our drug candidates are not
available when we expect or if we encounter any delay in the analysis of data from our preclinical
studies and clinical trials:
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we may be unable to commence human clinical trials of any drug candidates; |
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GSK may be unable to continue human clinical trials of IDX899 or commence human clinical trials of any other licensed compound; |
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Novartis may choose not to license our drug candidates and we may
not be able to enter into other collaborative arrangements for any
of our other drug candidates; or |
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we may not have the financial resources to continue the research and development of our drug candidates. |
If our drug candidates fail to obtain United States and/or foreign regulatory approval, we and
our partners will be unable to commercialize our drug candidates.
Each of our drug candidates is subject to extensive governmental regulations relating to
development, clinical trials, manufacturing and commercialization. Rigorous preclinical studies and
clinical trials and an extensive regulatory approval process are required in the United States and
in many foreign jurisdictions prior to the commercial sale of any drug candidates. Before any drug
candidate can be approved for sale, we, or GSK, in the case of an NNRTI, including IDX899, or other
collaboration partner, must demonstrate that it can be manufactured in accordance with the FDAs
current good manufacturing practices, or cGMP, requirements. In addition, facilities where the
principal commercial supply of a product is to be manufactured must pass FDA inspection prior to
approval. Satisfaction of these and other regulatory requirements is costly, time consuming,
uncertain and subject to unanticipated delays. It is possible that none of the drug candidates we
are currently developing, or have licensed to GSK to develop, will obtain the appropriate
regulatory approvals necessary to permit commercial distribution.
The time required for FDA review and other approvals is uncertain and typically takes a number
of years, depending upon the complexity of the drug candidate. Analysis of data obtained from
preclinical studies and clinical trials is subject to confirmation and interpretation by regulatory
authorities, which could delay, limit or prevent regulatory approval. We or one of our partners may
also encounter unanticipated delays or increased costs due to government regulation from future
legislation or administrative action, changes in FDA policy during the period of product
development, clinical trials and FDA regulatory review.
Any delay in obtaining or failure to obtain required approvals could materially adversely
affect our ability or that of a partner to generate revenues from a particular drug candidate.
Furthermore, any regulatory approval to market a product may be subject to limitations on the
indicated uses for which we or a partner may market the product. These restrictions may limit the
size of the market for the product. Additionally, drug candidates we or our partners successfully
develop could be subject to post market surveillance and testing.
We are also subject to numerous foreign regulatory requirements governing the conduct of
clinical trials, and we, with our partners, are subject to numerous foreign regulatory requirements
relating to manufacturing and marketing authorization, pricing and third-party reimbursement. The
foreign regulatory approval processes include all of the risks associated with FDA approval
described above as well as risks attributable to the satisfaction of local regulations in foreign
jurisdictions. Approval by any one regulatory authority does not assure approval by regulatory
authorities in other jurisdictions. Many foreign regulatory authorities, including those in the
European Union and in China, have different approval procedures than those required by the FDA and
may impose additional testing requirements for our drug candidates. Any failure or delay in
obtaining such marketing authorizations for our drug candidates would have a material adverse
effect on our business.
Our products will be subject to ongoing regulatory review even after approval to market such
products is obtained. If we or our partners fail to comply with applicable United States and
foreign regulations, we or our partners could lose approvals that we or our partners have been
granted and our business would be seriously harmed.
Even after approval, any drug product we or our collaboration partners successfully develop
will remain subject to continuing regulatory review, including the review of clinical results,
which are reported after our product becomes commercially available. The marketing claims we or our
collaboration partners are permitted to make in labeling or advertising regarding our marketed
drugs in the United States will be limited to those specified in any FDA approval, and in other
markets such as the European Union, to the corresponding regulatory approvals. Any manufacturer we
or our collaboration partners use to make approved products will be subject to periodic review and
inspection by the FDA or other similar regulatory authorities in the European Union and other
jurisdictions. We and our collaboration partners are required to report any serious and unexpected
adverse experiences and certain quality problems with our products and make other periodic reports
to the FDA or other similar regulatory authorities in the European Union and other jurisdictions.
The subsequent discovery of previously unknown problems with the drug, manufacturer or facility may
result in restrictions on the drug manufacturer or facility, including withdrawal of the drug from
the market. We do not have, and currently do not intend to develop, the ability to manufacture
material at commercial scale or for our clinical trials. Our reliance on third-party manufacturers
entails risks to which we would not be subject if we manufactured products ourselves, including
reliance on such manufacturers for regulatory compliance. Certain changes to an approved product,
including the way it is manufactured or promoted, often require prior approval from regulatory
authorities before the modified product may be marketed.
35
If we or our collaboration partners fail to comply with applicable continuing regulatory
requirements, we or our collaboration partners may be subject to civil penalties, suspension or
withdrawal of any regulatory approval obtained, product recalls and seizures, injunctions,
operating restrictions and criminal prosecutions and penalties.
If we or our partners fail to comply with ongoing regulatory requirements after receipt of approval
to commercialize a product, we or our partners may be subject to significant sanctions imposed by
the FDA, EMEA or other United States and foreign regulatory authorities.
The research, testing, manufacturing and marketing of drug candidates and products are subject
to extensive regulation by numerous regulatory authorities in the United States and other
countries. Failure to comply with these requirements may subject a company to administrative or
judicially imposed sanctions. These enforcement actions may include, without limitation:
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warning letters and other regulatory authority communications
objecting to matters such as promotional materials and requiring
corrective action such as revised communications to healthcare
practitioners; |
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product seizure or detention; |
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total or partial suspension of manufacturing; and |
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FDA refusal to review or approve pending new drug applications or
supplements to new drug applications for previously approved
products and/or similar rejections of marketing applications or
supplements by foreign regulatory authorities. |
The imposition of one or more of these sanctions on us or one of our partners could have a
material adverse effect on our business.
If we do not comply with laws regulating the protection of the environment and health and human
safety, our business could be adversely affected.
Our research and development activities involve the controlled use of hazardous materials,
chemicals and various radioactive compounds. Although we believe that our safety procedures for
handling and disposing of these materials comply with the standards prescribed by state and federal
laws and regulations, the risk of accidental contamination or injury from these materials cannot be
eliminated. If an accident occurs, we could be held liable for resulting damages, which could be
substantial. We are also subject to numerous environmental, health and workplace safety laws and
regulations, including those governing laboratory procedures, exposure to blood-borne pathogens and
the handling of biohazardous materials. Although we maintain workers compensation insurance to
cover us for costs we may incur due to injuries to our employees resulting from the use of these
materials and environmental liability insurance to cover us for costs associated with environmental
or toxic tort claims that may be asserted against us, this insurance may not provide adequate
coverage against all potential liabilities. Additional federal, state, foreign and local laws and
regulations affecting our operations may be adopted in the future. We may incur substantial costs
to comply with these laws or regulations. Additionally, we may incur substantial fines or penalties
if we violate any of these laws or regulations.
Growing availability of specialty pharmaceuticals may lead to increased focus of cost containment.
Specialty pharmaceuticals refer to medicines that treat rare or life-threatening conditions
that have smaller patient populations, such as certain types of cancer, multiple sclerosis, HBV,
HCV and HIV. The growing availability and use of innovative specialty pharmaceuticals, combined
with their relative higher cost as compared to other types of pharmaceutical products, is beginning
to generate significant payer interest in developing cost containments strategies targeted to this
sector. While the impact on our payers efforts to control access and pricing of specialty
pharmaceuticals has been limited to date, our portfolio of specialty products, combined with the
increasing use of health technology assessment in markets around the world and the deteriorating
finances of governments, may lead to a more significant adverse business impact in the future.
36
Factors Related to Our Relationship with Novartis
Novartis has substantial control over us and could delay or prevent a change in corporate control.
As of July 19, 2010, Novartis owned approximately 43% of our outstanding common stock. For so
long as Novartis owns 19.4% of our voting stock, Novartis has the ability to delay or prevent a
change in control of Idenix that may be favored by other stockholders and otherwise exercise
substantial control over all corporate actions requiring stockholder approval including:
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the election of our directors; |
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any amendment of our restated certificate of incorporation or amended and restated by-laws; |
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the approval of mergers and other significant corporate transactions, including a sale of substantially all of our assets; or |
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the defeat of any non-negotiated takeover attempt that might otherwise benefit our other stockholders. |
Novartis has the right to exercise control over certain corporate actions, strategic direction, our
research and development focus and other material decisions that may not otherwise require
stockholder approval as long as it holds at least 19.4% of our voting stock.
As long as Novartis and its affiliates own at least 19.4% of our voting stock, which we define
below, we cannot take certain actions without the consent of Novartis. These actions include:
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the authorization or issuance of additional shares of our capital stock or the capital
stock of our subsidiaries, except for a limited number of specified issuances; |
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any change or modification to the structure of our board of directors or a similar
governing body of any of our subsidiaries; |
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any amendment or modification to any of our organizational documents or those of our subsidiaries; |
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the adoption of a three-year strategic plan; |
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the adoption of an annual operating plan and budget, if there is no approved strategic plan; |
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any decision that would result in a variance of total annual expenditures, capital or expense, in excess of 20% from
the approved three-year strategic plan; |
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any decision that would result in a variance in excess of the greater of $10.0 million or 20% of our profit or loss
target in the strategic plan or annual operating plan; |
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the acquisition of stock or assets of another entity that exceeds 10% of our
consolidated net revenue, net income or net assets; |
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the sale, lease, license or other disposition of any assets or business which exceeds 10% of our net revenue, net income or net assets; |
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the incurrence of any indebtedness by us or our subsidiaries for borrowed money in excess of $2.0 million; |
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any material change in the nature of our business or that of any of our subsidiaries; |
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any change in control of Idenix or any subsidiary; and |
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any dissolution or liquidation of Idenix or any subsidiary, or the commencement by us or any subsidiary of any action under applicable bankruptcy, insolvency, reorganization or liquidation laws. |
Pursuant to the amended and restated stockholders agreement, which we refer to as the
stockholders agreement, dated July 27, 2004, among us, Novartis and certain of our stockholders,
we are obligated to use our reasonable best efforts to nominate for election as directors at least
two designees of Novartis for so long as Novartis and its affiliates own at least 35% of our voting
stock and at least one designee of Novartis for so long as Novartis and its affiliates own at least
19.4% of our voting stock. In June 2009, we elected a third representative from Novartis to our
board of directors. This election was not required by or subject to the stockholders agreement.
37
Under the stockholders agreement, voting stock means our outstanding securities entitled to
vote in the election of directors, but does not include securities issued in connection with our
acquisition of all of the capital stock, or all or substantially all of the assets of another
entity, and shares of common stock issued upon exercise of stock options or stock awards pursuant
to compensation and equity incentive plans. Notwithstanding the foregoing, voting stock includes up
to approximately 1.4 million shares that were reserved as of May 8, 2003 for issuance under our
1998 equity incentive plan.
In January 2009, we amended the development and commercialization agreement to provide that
Novartis retains the exclusive option to obtain rights to drug candidates developed by us, or in
some cases licensed to us, so long as Novartis maintains ownership of 40% of our common stock,
rather than ownership of 51% of our common stock, as was the requirement prior to the execution of
this amendment.
Additionally, in January 2009, we amended an agreement with Novartis providing that so long as
Novartis and its affiliates own at least 40% of our common stock, Novartis consent is required for
the selection and appointment of our chief financial officer. Prior to the modification of this
letter amendment, the ownership requirement was 51%. If in Novartis reasonable judgment our chief
financial officer is not satisfactorily performing his or her duties, we are required to terminate
his or her employment.
Furthermore, under the terms of the stock purchase agreement, which we refer to as the stock
purchase agreement, dated as of March 21, 2003, among us, Novartis and substantially all of our
then existing stockholders, Novartis is required to make future contingent payments of up to $357.0
million to these stockholders if we achieve predetermined development milestones with respect to
specific HCV drug candidates. As a result, in making determinations as to our annual operating plan
and budget for the development of our drug candidates, the interests of Novartis may be different
than the interests of our other stockholders and Novartis could exercise its approval rights in a
manner that may not be in the best interests of all of our stockholders.
We currently depend on Novartis for a significant portion of our revenues, for the continuing
commercialization of Tyzeka®/Sebivo® and for support in the development of drug candidates Novartis
will license from us. If our development and commercialization agreement with Novartis terminates,
our business, in particular, the development of our drug candidates and the commercialization of
any products that we successfully develop could be harmed.
In May 2003, we received a $75.0 million license fee from Novartis in connection with the
license of our then HBV drug candidates, telbivudine and valtorcitabine. In April 2007, we received
a $10.0 million milestone payment for regulatory approval of Sebivo® in China and in June 2007, we
received an additional $10.0 million milestone payment for regulatory approval of Sebivo® in the
European Union. Pursuant to the development and commercialization agreement, as amended, Novartis
also acquired options to license valopicitabine and additional drug candidates from us. In March
2006, Novartis exercised its option and acquired a license to valopicitabine. As a result, we
received a $25.0 million license fee and the right to receive up to an additional $45.0 million in
license fee payments upon advancement of a specified HCV drug candidate into phase III clinical
trials. Assuming we successfully develop and commercialize our drug candidates licensed by
Novartis, under the terms of the development and commercialization agreement, we are entitled to
receive reimbursement of expenses we incur in connection with the development of these drug
candidates and additional milestone payments from Novartis. Additionally, if any of the drug
candidates we have licensed to Novartis are approved for commercialization, we anticipate receiving
proceeds in connection with the sales of such products. If Novartis exercises the option to license
other drug candidates that we discover, or in some cases, acquire, we are entitled to receive
license fees and milestone payments as well as reimbursement of expenses we incur in the
development of such drug candidates in accordance with development plans mutually agreed with
Novartis.
Under the existing terms of the development and commercialization agreement, we have the right
to co-promote and co-market with Novartis in the United States, United Kingdom, Germany, Italy,
France and Spain any products licensed by Novartis, excluding Tyzeka®/Sebivo®. For Tyzeka®/Sebivo®,
we acted as the lead commercial party in the United States. Effective on October 1, 2007, we
transferred to Novartis our worldwide development, commercialization and manufacturing rights and
obligations related to telbivudine (Tyzeka®/Sebivo®). We receive royalty payments equal to a
percentage of net sales of Tyzeka®/Sebivo®, with such percentage increasing according to specified
tiers of net sales. The royalty percentage varies based on the specified territory and the
aggregate dollar amount of net sales.
Novartis may terminate the development and commercialization agreement in any country or with
respect to any product or drug candidate licensed under the development and commercialization
agreement for any reason with six months written notice. If the development and commercialization
agreement is terminated in whole or in part and we are unable to enter similar arrangements with
other collaborators or partners, our business would be materially adversely affected.
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Novartis has the option to license from us drug candidates we discover or, in some cases, acquire.
If Novartis does not exercise its option or disputes the adequacy of the notice provided by us
pertaining to the drug candidate, or after we provide notice, delays its decision to exercise such
option with respect to a drug candidate, our development, manufacture and/or commercialization of
such drug candidate may be substantially delayed or limited.
Our drug development programs and potential commercialization of our drug candidates will
require substantial additional funding. In addition to its license of Tyzeka®/Sebivo®,
valtorcitabine and valopicitabine, Novartis has the option under the development and
commercialization agreement to license our other drug candidates.
Furthermore, under the development and commercialization agreement, we must provide Novartis
with notice and a data package as part of Novartis consideration to license a drug candidate from
us. This notice includes information regarding the efficacy, safety and such other related material
information from the final data set for the relevant clinical trial for the drug candidate, as well
as a proposed development plan and proposed licensing terms. The development and commercialization
agreement is not specific as to the exact content of the information required in such notice. If
Novartis disputes the adequacy of the notice or data package, Novartis may argue that it is
entitled to additional information or data, which would likely lead to a delay in its review of our
drug candidate. Potential disputes over the adequacy of the notice and data package we provide
Novartis may cause delays in our development programs in order to resolve any disputes with
Novartis over the adequacy of such material. This could require substantial financial resources and
could take a significant amount of time to complete.
If Novartis elects not to exercise such option, we may be required to seek other collaboration
arrangements to provide funds necessary to enable us to develop such drug candidates. In October
2009, Novartis waived its option to license IDX184. As a result, we retain the worldwide rights to
develop, manufacture, commercialize and license IDX184. We are currently seeking a partner who will
assist in the further development and commercialization of this drug candidate. If we are not
successful in our efforts to enter into a collaboration arrangement with respect to a drug
candidate not licensed by Novartis, we may not have sufficient funds to develop such drug candidate
internally. As a result, our business would be adversely affected. In addition, the negotiation of
a collaborative agreement is time consuming and could, even if successful, delay the development,
manufacture and/or commercialization of a drug candidate and the terms of the collaboration
agreements may not be favorable to us.
If we breach any of the numerous representations and warranties we made to Novartis under the
development and commercialization agreement or the stock purchase agreement, Novartis has the right
to seek indemnification from us for damages it suffers as a result of such breach. These amounts
could be substantial.
We have agreed to indemnify Novartis and its affiliates against losses suffered as a result of
our breach of representations and warranties in the development and commercialization agreement and
the stock purchase agreement. Under the development and commercialization agreement and stock
purchase agreement, we made numerous representations and warranties to Novartis regarding our HCV
and HBV drug candidates, including representations regarding our ownership of and licensed rights
to the inventions and discoveries relating to such drug candidates. If one or more of our
representations or warranties were subsequently determined not to be true at the time we made them
to Novartis, we would be in breach of these agreements. In the event of a breach by us, Novartis
has the right to seek indemnification from us and, under certain circumstances, us and our
stockholders who sold shares to Novartis, which include many of our directors and officers, for
damages suffered by Novartis as a result of such breach. The amounts for which we could become
liable to Novartis could be substantial.
In May 2004, we entered into a settlement agreement with UAB, relating to our ownership of our
chief executive officers inventorship interest in certain of our patents and patent applications,
including patent applications covering our HCV drug candidates. Under the terms of the settlement
agreement, we agreed to make payments to UAB, including an initial payment made in 2004 in the
amount of $2.0 million, as well as regulatory milestone payments and payments relating to net sales
of certain products. Novartis may seek to recover from us and, under certain circumstances, us and
our stockholders who sold shares to Novartis, which include many of our officers and directors, the
losses it suffers as a result of any breach of the representations and warranties we made relating
to our HCV drug candidates and may assert that such losses include the settlement payments.
In July 2008, we, our chief executive officer, in his individual capacity, the University of
Montpellier and CNRS entered into a settlement agreement with UAB, UABRF, and Emory University.
Pursuant to this settlement agreement, all contractual disputes relating to patents covering the
use of certain synthetic nucleosides for the treatment of HBV and all litigation matters relating
to patents and patent applications related to the use of ß-L-2-deoxy-nucleosides for the treatment
of HBV assigned to one or more of Idenix, CNRS, and the University of Montpellier and which cover
the use of telbivudine (Tyzeka®/Sebivo®) for the treatment of HBV have been resolved. Under the
terms of the settlement, we paid UABRF (on behalf of UAB and Emory University) a $4.0 million
upfront payment and will make additional payments to UABRF equal to 20% of all royalty payments
received by us from Novartis based on worldwide sales of telbivudine, subject to minimum payment
obligations aggregating $11.0 million. Novartis may seek to recover from us and, under certain
circumstances, us and those of our officers, directors and other stockholders who sold shares to
Novartis, such losses and other losses it suffers as a result of any breach of the representations
and warranties we made relating to our HBV drug candidates and may assert that such losses include
the settlement payments.
39
If we materially breach our obligations or covenants arising under the development and
commercialization agreement with Novartis, we may lose our rights to develop or commercialize our
drug candidates.
We have significant obligations to Novartis under the development and commercialization
agreement. The obligations to which we are subject include the responsibility for developing and,
in some countries, co-promoting or co-marketing the products licensed to Novartis in accordance
with plans and budgets subject to Novartis approval. The covenants and agreements we made when
entering into the development and commercialization agreement include covenants relating to
payments of our required portion of development expenses under the development and
commercialization agreement, compliance with certain third-party license agreements, the conduct of
our clinical studies and activities relating to the commercialization of any products that we
successfully develop. If we materially breach this agreement and are unable within an agreed time
period to cure such breach, the agreement may be terminated and we may be required to grant
Novartis an exclusive license to develop, manufacture and/or sell such products. Although such a
license would be subject to payment of a royalty by Novartis to be negotiated in good faith, we and
Novartis have stipulated that no such payments would permit the breaching party to receive more
than 90% of the net benefit it was entitled to receive before the agreement was terminated.
Accordingly, if we materially breach our obligations under the development and commercialization
agreement, we may lose our rights to develop our drug candidates or commercialize our successfully
developed products and may receive lower payments from Novartis than we had anticipated.
If we issue capital stock, in certain situations, Novartis will be able to purchase shares at par
value to maintain its percentage ownership in Idenix and, if that occurs, this could cause
dilution. In addition, Novartis has the right, under specified circumstances, to purchase a pro
rata portion of other shares that we may issue.
Under the terms of the stockholders agreement, Novartis has the right to purchase at par
value of $0.001 per share, such number of shares required to maintain its percentage ownership of
our voting stock if we issue shares of capital stock in connection with the acquisition or
in-licensing of technology through the issuance of up to 5% of our stock in any 24-month period. If
Novartis elects to maintain its percentage ownership of our voting stock under the rights described
above, Novartis will be buying such shares at a price, that is substantially below market value,
which would cause dilution. This right of Novartis will remain in effect until the earlier of:
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the date that Novartis and its affiliates own less than 19.4% of our voting stock; or |
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the date that Novartis becomes obligated under the stock purchase agreement to make the additional future contingent
payments of $357.0 million to our stockholders who sold shares to Novartis in May 2003. |
In addition to the right to purchase shares of our common stock at par value as described
above, Novartis has the right, subject to limited exceptions noted below, to purchase a pro rata
portion of shares of capital stock that we issue. The price that Novartis pays for these securities
would be the price that we offer such securities to third-parties, including the price paid by
persons who acquire shares of our capital stock pursuant to awards granted under stock compensation
or equity incentive plans. Novartis right to purchase a pro rata portion does not include:
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securities issuable in connection with any stock split, reverse stock split, stock dividend or recapitalization that we
undertake that affects all holders of our common stock proportionately; |
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shares that Novartis has the right to purchase at par value, as described above; |
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shares of common stock issuable upon exercise of stock options and other awards pursuant to our 1998 equity incentive
plan; and |
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securities issuable in connection with our acquisition of all the capital stock or all or substantially all of the
assets of another entity. |
Novartis right to purchase shares includes a right to purchase securities that are
convertible into, or exchangeable for, our common stock, provided that Novartis right to purchase
stock in connection with options or other convertible securities issued to any of our directors,
officers, employees or consultants pursuant to any stock compensation or equity incentive plan will
not be triggered until the underlying equity security has been issued to the director, officer,
employee or consultant. Novartis has waived its right to purchase additional shares of our common
stock as a result of the shares of common stock we issued to GSK. Additionally, Novartis did not
purchase shares of our common stock pursuant to our underwritten offerings in August 2009 and in
April 2010 and Novartis ownership was subsequently diluted from approximately 53% prior to the
August 2009 offering to approximately 43% as of July 19, 2010.
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If Novartis terminates or fails to perform its obligations under the development and
commercialization agreement, we may not be able to successfully commercialize our drug candidates
licensed to Novartis and the development and commercialization of our other drug candidates could
be delayed, curtailed or terminated.
Under the amended development and commercialization agreement, Novartis is solely responsible
for the worldwide development, commercialization and manufacturing rights to telbivudine. We expect
to co-promote or co-market with Novartis other products, if any, that Novartis has licensed or will
license from us which are successfully developed and approved for commercialization. As a result,
we will depend upon the success of the efforts of Novartis to manufacture, market and sell
Tyzeka®/Sebivo® and our other products, if any, that we successfully develop and license to
Novartis. However, we have limited control over the resources that Novartis may devote to such
manufacturing and commercialization efforts and, if Novartis does not devote sufficient time and
resources to such efforts, we may not realize the commercial or financial benefits we anticipate,
and our results of operations may be adversely affected.
In addition, Novartis has the right to terminate the development and commercialization
agreement with respect to any product, drug candidate or country with six months written notice to
us. If Novartis were to breach or terminate this agreement with us, the development or
commercialization of the affected drug candidate or product could be delayed, curtailed or
terminated because we may not have sufficient resources or capabilities, financial or otherwise, to
continue development and commercialization of the drug candidate, and we may not be successful in
entering into a collaboration with another third-party.
Novartis has the right to market and sell products that compete with the drug candidates and
products that we license to it and any competition by Novartis could have a material adverse effect
on our business.
Novartis may market, sell, promote or license competitive products. Novartis has significantly
greater financial, technical and human resources than we have and is better equipped to discover,
develop, manufacture and commercialize products. In addition, Novartis has more extensive
experience in preclinical studies and clinical trials, obtaining regulatory approvals and
manufacturing and marketing pharmaceutical products. In the event that Novartis competes with us,
our business could be materially and adversely affected.
Factors Related to Our Dependence on Third-Parties
If we seek to enter into collaboration agreements for any drug candidates other than those licensed
to Novartis and GSK and we are not successful in establishing such collaborations, we may not be
able to continue development of those drug candidates.
Our drug development programs and product commercialization efforts will require substantial
additional cash to fund expenses to be incurred in connection with these activities. While we have
entered into the development and commercialization agreement with Novartis in May 2003 and the GSK
license agreement in February 2009, we may seek to enter into additional collaboration agreements
with other pharmaceutical companies to fund all or part of the costs of drug development and
commercialization of drug candidates that Novartis does not license. We are currently seeking a
partner who will assist in the further development and commercialization of our compound IDX184 for
the treatment of HCV. We may not be able to enter into collaboration agreements and the terms of
any such collaboration agreements may not be favorable to us. If we are not successful in our
efforts to enter into a collaboration arrangement with respect to a drug candidate, we may not have
sufficient funds to develop such drug candidate or any other drug candidate internally.
If we do not have sufficient funds to develop our drug candidates, we will not be able to
bring these drug candidates to market and generate revenue. As a result, our business will be
adversely affected. In addition, the inability to enter into collaboration agreements could delay
or preclude the development, manufacture and/or commercialization of a drug candidate and could
have a material adverse effect on our financial condition and results of operations because:
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we may be required to expend our own funds to advance the drug candidate to commercialization; |
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revenue from product sales could be delayed; or |
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we may elect not to develop or commercialize the drug candidate. |
Our license agreement with GSK is important to our business. The royalties and other payments we
could receive under our license agreement with GSK could be delayed, reduced or terminated if GSK
terminates or fails to perform its obligations under its agreement with us or if GSK is
unsuccessful in its sales efforts.
In February 2009, we entered into the GSK license agreement under which we granted GSK an
exclusive worldwide license to develop, manufacture and commercialize our NNRTI compounds,
including IDX899, for the treatment of human diseases, including HIV/AIDS. Our potential revenues
under this license agreement will consist primarily of development and sales milestones and royalty
payments based on worldwide annual net sales, if any, of an NNRTI compound, including IDX899, by
GSK, its affiliates and sublicensees. Payments and royalties under this agreement will depend
solely on GSKs efforts, including development and sales efforts and enforcement of patents, which
we cannot control. If GSK does not devote sufficient time and resources to its license agreement
with us or focuses its efforts in countries where we do not hold patents, we may not receive any
such milestone or royalty payment and our results of operations may be adversely affected.
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If GSK were to breach or terminate its agreement with us or fail to perform its obligations to
us in a timely manner, the royalties and other payments we could receive under the GSK license
agreement could decrease or cease. Any delay or termination of this type could have a material
adverse effect on our financial condition and results of operations because we may lose technology
rights and milestone or royalty payments from GSK and/or revenues from product sales, if any, could
be delayed, reduced or terminated.
Our collaborations with outside scientists may be subject to restriction and change.
We work with chemists and biologists at academic and other institutions that assist us in our
research and development efforts. Many of our drug candidates were discovered with the research and
development assistance of these chemists and biologists. Many of the scientists who have
contributed to the discovery and development of our drug candidates are not our employees and may
have other commitments that would limit their future availability to us. Although our scientific
advisors and collaborators generally agree not to do competing work, if a conflict of interest
between their work for us and their work for another entity arises, we may lose their services.
We have depended on third-party manufacturers to manufacture products for us. If in the future we
manufacture any of our products, we will be required to incur significant costs and devote
significant efforts to establish these capabilities.
We have relied upon third-parties to produce material for preclinical and clinical studies and
may continue to do so in the future. Although we believe that we will not have any material supply
issues, we cannot be certain that we will be able to obtain long-term supply arrangements of those
materials on acceptable terms. We also expect to rely on third-parties to produce materials
required for clinical trials and for the commercial production of certain of our products if we
succeed in obtaining necessary regulatory approvals. If we are unable to arrange for third-party
manufacturing, or to do so on commercially reasonable terms, we may not be able to complete
development of our products or market them.
Reliance on third-party manufacturers entails risks to which we would not be subject if we
manufactured products ourselves, including reliance on the third-party for regulatory compliance
and quality assurance, the possibility of breach by the third-party of agreements related to supply
because of factors beyond our control and the possibility of termination or nonrenewal of the
agreement by the third-party, based on its own business priorities, at a time that is costly or
damaging to us.
In addition, the FDA and other regulatory authorities require that our products be
manufactured according to cGMP regulations. Any failure by us or our third-party manufacturers to
comply with cGMPs and/or our failure to scale up our manufacturing processes could lead to a delay
in, or failure to obtain, regulatory approval. In addition, such failure could be the basis for
action by the FDA to withdraw approvals for drug candidates previously granted to us and for other
regulatory action.
Factors Related to Patents and Licenses
If we are unable to adequately protect our patents and licenses related to our drug candidates, or
if we infringe the rights of others, it may not be possible to successfully commercialize products
that we develop.
Our success will depend in part on our ability to obtain and maintain patent protection both
in the United States and in other countries for any products we successfully develop. The patents
and patent applications in our patent portfolio are either owned by us, exclusively licensed to us,
or co-owned by us and others and exclusively licensed to us. Our ability to protect any products we
successfully develop from unauthorized or infringing use by third-parties depends substantially on
our ability to obtain and maintain valid and enforceable patents. Due to evolving legal standards
relating to the patentability, validity and enforceability of patents covering pharmaceutical
inventions and the scope of claims made under these patents, our ability to obtain and enforce
patents is uncertain and involves complex legal and factual questions. Accordingly, rights under
any issued patents may not provide us with sufficient protection for any products we successfully
develop or provide sufficient protection to afford us a commercial advantage against our
competitors or their competitive products or processes. In addition, we cannot guarantee that any
patents will be issued from any pending or future patent applications owned by or licensed to us.
Even if patents have been issued or will be issued, we cannot guarantee that the claims of these
patents are, or will be, valid or enforceable, or provide us with any significant protection
against competitive products or otherwise be commercially valuable to us.
We may not have identified all patents, published applications or published literature that
may affect our business, either by blocking our ability to commercialize our drug candidates, by
preventing the patentability of our drug candidates by us, our licensors or co-owners, or by
covering the same or similar technologies that may invalidate our patents, limiting the scope of
our future patent claims or adversely affect our ability to market our drug candidates. For
example, patent applications in the United States are maintained in confidence for up to 18 months
after their filing. In some cases, however, patent applications remain confidential in the U.S.
Patent and Trademark Office, which we refer to as the U.S. Patent Office, for the entire time
prior to issuance of a U.S. patent. Patent applications filed in countries outside the United
States are not typically published until at least 18 months from their first filing date.
Similarly, publication of discoveries in the scientific or patent literature often lags behind
actual discoveries. Therefore, we cannot be certain that we or our licensors or co-owners were the
first to invent, or the first to file, patent applications on our product or drug candidates or for
their uses. In the event that a third-party has also filed a U.S. patent application covering our
product or drug candidates or a similar invention, we may have to participate in an adversarial
proceeding, known as an interference, declared by the U.S. Patent Office to determine priority of
invention in the United States. The costs of these proceedings could be substantial and it is
possible that our efforts could be unsuccessful, potentially resulting in a loss of our U.S. patent
position. The laws of some foreign jurisdictions do not protect intellectual property rights to the
same extent as in the United States and many companies have encountered significant difficulties in
protecting and defending such rights in foreign jurisdictions. If we encounter such difficulties in
protecting, or are otherwise precluded from effectively protecting, our intellectual property
rights in foreign jurisdictions, our business prospects could be substantially harmed.
42
Since our HBV product, telbivudine, was a known compound before the filing of our patent
applications covering the use of this drug candidate to treat HBV, we cannot obtain patent
protection on telbivudine itself. As a result, we have obtained and maintain patents granted on the
method of using telbivudine as a medical therapy for the treatment of HBV.
In July 2008, we entered into a settlement agreement with UAB, UABRF and Emory University
relating to our telbivudine technology. Pursuant to this settlement agreement, all contractual
disputes relating to patents covering the use of certain synthetic nucleosides for the treatment of
HBV and all litigation matters relating to patents and patent applications related to the use of
ß-L-2-deoxy-nucleosides for the treatment of HBV assigned to one or more of Idenix, CNRS and the
University of Montpellier and which cover the use of telbivudine (Tyzeka®/Sebivo®) for the
treatment of HBV have been resolved. UAB also agreed to abandon certain continuation patent
applications it filed in July 2005. Under the terms of the settlement, we paid UABRF (on behalf of
UAB and Emory University) a $4.0 million upfront payment and will make additional payments to UABRF
equal to 20% of all royalty payments received by us from Novartis based on worldwide sales of
telbivudine, subject to minimum payment obligations in the aggregate of $11.0 million.
In accordance with our patent strategy, we are attempting to obtain patent protection for our
HCV nucleoside/nucleotide polymerase inhibitor drug candidate, IDX184. We have filed U.S. and
foreign patent applications related to IDX184 itself, as well as to methods of treating HCV with
IDX184. Further, we are prosecuting U.S. and foreign patent applications, and have been granted
U.S. and foreign patents, claiming methods of treating HCV with nucleoside polymerase inhibitors
including compounds that relate to IDX184.
We are aware that a number of other companies have filed patent applications attempting to
cover broad classes of compounds and their use to treat HCV, or infection by any member of the
Flaviviridae virus family to which HCV belongs. These classes of compounds might relate to
nucleoside polymerase inhibitors associated with IDX184. The companies include Merck & Co., Inc.
together with Isis Pharmaceuticals, Inc., Ribapharm, Inc., a wholly-owned subsidiary of Valeant
Pharmaceuticals International, Genelabs Technologies, Inc., Pharmasset, Inc. and Biota, Inc. (a
subsidiary of Biota Holdings Ltd.). A foreign country may grant patent rights covering our drug
candidates to one or more other companies. If that occurs, we may need to challenge the third-party
patent rights, and if we do not challenge or are not successful, we will need to obtain a license
that might not be available on commercially reasonable terms or at all. The U.S. Patent Office may
grant patent rights covering our drug candidates to one or more other companies. If that occurs, we
may need to challenge the third-party patent rights, and if we do not or are not successful, we
will need to obtain a license that might not be available at all or on commercially reasonable
terms.
In accordance with our patent strategy, we are attempting to obtain, and in some jurisdictions
have obtained, patent protection for our HIV drug candidate IDX899, which we licensed to GSK in
2009. We have filed and are prosecuting U.S. and foreign patent applications directed to IDX899
itself, as well as methods of treating HIV with IDX899.
A number of companies have filed patent applications and have obtained patents covering
general methods for the treatment of HBV, HCV and HIV that could materially affect the ability to
develop and commercialize Tyzeka®/Sebivo® and other drug candidates we may develop in the future.
For example, we are aware that Apath, LLC has obtained broad patents covering HCV proteins, nucleic
acids, diagnostics and drug screens. If we need to use these patented materials or methods to
develop any of our HCV drug candidates and the materials or methods fall outside certain safe
harbors in the laws governing patent infringement, we will need to buy these products from a
licensee of the company authorized to sell such products or we will require a license from one or
more companies, which may not be available to us on commercially reasonable terms or at all. This
could materially affect or preclude our ability to develop and sell our HCV drug candidates.
If we find that any drug candidates we are developing should be used in combination with a
product covered by a patent held by another company or institution, and that a labeling instruction
is required in product packaging recommending that combination, we could be accused of, or held
liable for, infringement or inducement of infringement of the third-party patents covering the
product recommended for co-administration with our product. In that case, we may be required to
obtain a license from the other company or institution to provide the required or desired package
labeling, which may not be available on commercially reasonable terms or at all.
Litigation and disputes related to intellectual property matters occur frequently in the
biopharmaceutical industry. Litigation regarding patents, patent applications and other proprietary
rights may be expensive and time consuming. If we are unsuccessful in litigation concerning patents
or patent applications owned or co-owned by us or licensed to us, we may not be able to protect our
products from competition or we may be precluded from selling our products. If we are involved in
such litigation, it could cause delays in bringing drug candidates to market and harm our ability
to operate. Such litigation could take place in the United States in a federal court or in the U.S.
Patent Office. The litigation could also take place in a foreign country, in either the courts or
the patent office of that country.
43
Our success will depend in part on our ability to uphold and enforce patents or patent
applications owned or co-owned by us or licensed to us, which cover products we successfully
develop. Proceedings involving our patents or patent applications could result in adverse decisions
regarding:
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ownership of patents and patent applications; |
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the patentability of our inventions relating to our products and drug candidates; and/or |
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the enforceability, validity or scope of protection offered by our patents relating to our products and drug candidates. |
Even if we are successful in these proceedings, we may incur substantial costs and divert
managements time and attention in pursuing these proceedings, which could have a material adverse
effect on us.
In May 2004, we and our chief executive officer entered into a settlement agreement with UAB
resolving a dispute regarding ownership of inventions and discoveries made by our chief executive
officer during the period from November 1999 to November 2002, at which time our chief executive
officer was on sabbatical and then unpaid leave from his position at UAB. The patent applications
we filed with respect to such inventions and discoveries include the patent applications covering
valopicitabine and IDX184.
Under the terms of the settlement agreement, we agreed to make a $2.0 million initial payment
to UAB, as well as other contingent payments based upon the commercial launch of other HCV products
discovered or invented by our chief executive officer during his sabbatical and unpaid leave. In
addition, UAB and UABRF have each agreed that neither of them has any right, title or ownership
interest in these inventions and discoveries. Under the development and commercialization agreement
and stock purchase agreement, we made numerous representations and warranties to Novartis regarding
our HCV program, including representations regarding our ownership of the inventions and
discoveries. If one or more of our representations or warranties were subsequently determined not
to be true at the time we made them to Novartis, we would be in breach of these agreements. In the
event of a breach by us, Novartis has the right to seek indemnification from us and, under certain
circumstances, us and our stockholders who sold shares to Novartis, which include many of our
directors and officers, for damages suffered by Novartis as a result of such breach. The amounts
for which we could be liable to Novartis could be substantial.
Our success will also depend in part on our ability to avoid infringement of the patent rights
of others. If it is determined that we do infringe a patent right of another, we may be required to
seek a license (which may not be available on commercially reasonable terms or at all), defend an
infringement action or challenge the validity of the patents in court. Patent litigation is costly
and time consuming. We may not have sufficient resources to bring these actions to a successful
conclusion. In addition, if we are not successful in infringement litigation and we do not license
or develop non-infringing technology, we may:
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incur substantial monetary damages; |
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encounter significant delays in bringing our drug candidates to market; and/or |
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be precluded from participating in the manufacture, use or sale of our drug candidates or methods of treatment
requiring licenses. |
Confidentiality agreements with employees and others may not adequately prevent disclosure of trade
secrets and other proprietary information.
To protect our proprietary technology and processes, we also rely in part on confidentiality
agreements with our corporate collaborators, employees, consultants, outside scientific
collaborators and sponsored researchers and other advisors. These agreements may not effectively
prevent disclosure of confidential information and may not provide an adequate remedy in the event
of unauthorized disclosure of confidential information. In addition, others may independently
discover our trade secrets and confidential information and in such cases we could not assert any
trade secret rights against such parties. Costly and time consuming litigation could be necessary
to enforce and determine the scope of our proprietary rights and failure to obtain or maintain
trade secret protection could adversely affect our competitive business position.
44
If any of our agreements that grant us the exclusive right to make, use and sell our drug
candidates are terminated, we and/or our collaboration partners may be unable to develop or
commercialize our drug candidates.
We, together with Novartis, entered into an amended and restated agreement with CNRS and the
University of Montpellier, co-owners of the patents and patent applications covering
Tyzeka®/Sebivo® and valtorcitabine. This agreement covers both the cooperative research program and
the terms of our exclusive right to exploit the results of the cooperative research, including
Tyzeka®/Sebivo® and valtorcitabine. The cooperative research program with CNRS and the University
of Montpellier ended in December 2006 although many of the terms remain in effect for the duration
of the patent life of the affected products. We, together with Novartis, and in 2009 with GSK, have
also entered into two agreements with the University of Cagliari, the co-owner of the patents and
patent applications covering some of our HCV drug candidates and certain HIV drug candidates. One
agreement with the University of Cagliari covers our cooperative research program and the other
agreement is an exclusive license to develop and sell jointly created drug candidates. Under the
amended and restated agreement with CNRS and the University of Montpellier and the license
agreement, as amended, with the University of Cagliari, we obtained from our co-owners the
exclusive right to exploit these drug candidates. Subject to certain rights afforded to Novartis
and to GSK as they relate to the license agreement with the University of Cagliari, these
agreements can be terminated by either party in circumstances such as the occurrence of an uncured
breach by the non-terminating party. The termination of our rights, including patent rights, under
the agreement with CNRS and the University of Montpellier or the license agreement, as amended,
with the University of Cagliari would have a material adverse effect on our business and could
prevent us from developing a drug candidate or selling a product. In addition, these agreements
provide that we pay the costs of patent prosecution, maintenance and enforcement. These costs could
be substantial. Our inability or failure to pay these costs could result in the termination of the
agreements or certain rights under them.
Under our amended and restated agreement with CNRS and the University of Montpellier and our
license agreement, as amended, with the University of Cagliari, we and Novartis have the right to
exploit and license our co-owned drug candidates. Under our license agreement, as amended, with the
University of Cagliari, we and GSK have the right to exploit and license our co-owned drug
candidates. However, our agreements with CNRS and the University of Montpellier and with the
University of Cagliari are currently governed by, and will be interpreted and enforced under,
French and Italian law, respectively, which are different in substantial respects from United
States law and which may be unfavorable to us in material respects. Under French law, co-owners of
intellectual property cannot exploit, assign or license their individual rights without the
permission of the co-owners. Similarly, under Italian law, co-owners of intellectual property
cannot exploit or license their individual rights without the permission of the co-owners.
Accordingly, if our agreements with the University of Cagliari terminate based on a breach, we may
not be able to exploit, license or otherwise convey to Novartis, GSK or other third-parties our
rights in our products or drug candidates for a desired commercial purpose without the consent of
the co-owner, which could materially affect our business and prevent us from developing our drug
candidates and selling our products.
Under United States law, a co-owner has the right to prevent the other co-owner from suing
infringers by refusing to join voluntarily in a suit to enforce a patent. Our amended and restated
agreement with CNRS and the University of Montpellier and our license agreement, as amended, with
the University of Cagliari provide that such parties will cooperate to enforce our jointly owned
patents on our products or drug candidates. If these agreements terminate or the parties
cooperation is not given or is withdrawn, or they refuse to join in litigation that requires their
participation, we may not be able to enforce these patent rights or protect our markets.
Factors Related to Our Common Stock
Our common stock may have a volatile trading price and low trading volume.
The market price of our common stock could be subject to significant fluctuations. Some of the
factors that may cause the market price of our common stock to fluctuate include:
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realization of license fees and achievement of milestones under our development and commercialization agreement with
Novartis; |
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realization of license fees and achievement of preclinical and clinical milestones and sales thresholds under the GSK
license agreement; |
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reductions in proceeds associated with Novartis right to maintain its percentage ownership of our voting stock when we
issue shares at a price below fair market value; |
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adverse developments regarding the safety and efficacy of Tyzeka®/Sebivo® or our other drug candidates; |
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the results of ongoing and planned clinical trials of our drug candidates; |
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developments in the market with respect to competing products or more generally the treatment of HBV, HCV or HIV; |
45
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the results of preclinical studies and planned clinical trials of our other discovery-stage programs; |
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future sales of, and the trading volume in, our common stock; |
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the timing and success of the launch of products, if any, we successfully develop; |
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future royalty payments received by us associated with sales of Tyzeka®/Sebivo®; |
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the entry into key agreements, including those related to the acquisition or in-licensing of new programs, or the
termination of key agreements; |
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the results and timing of regulatory reviews relating to the approval of our drug candidates; |
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the initiation of, material developments in or conclusion of litigation to enforce or defend any of our intellectual
property rights; |
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the initiation of, material developments in or conclusion of litigation to defend products liability claims; |
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the failure of any of our drug candidates, if approved, to achieve commercial success; |
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the results of clinical trials conducted by others on drugs that would compete with our drug candidates; |
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issues in manufacturing our drug candidates or any approved products; |
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the loss of key employees; |
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adverse publicity related to our company, our products or product candidates; |
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changes in estimates or recommendations by securities analysts who cover our common stock; |
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future financings through the issuance of equity or debt securities or otherwise; |
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changes in the structure of health care payment systems; |
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our cash position and period-to-period fluctuations in our financial results; |
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general and industry-specific economic conditions; and |
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the decision by Novartis to license a drug candidate that has completed a proof-of-concept clinical trial. |
Moreover, the stock markets in general have experienced substantial volatility that has often
been unrelated to the operating performance of individual companies. These broad market
fluctuations may also adversely affect the trading price of our common stock.
We do not anticipate paying cash dividends, so you must rely on stock price appreciation for any
return on your investment.
We anticipate retaining any future earnings for reinvestment in our research and development
programs. Therefore, we do not anticipate paying cash dividends in the future. As a result, only
appreciation of the price of our common stock will provide a return to stockholders. Investors
seeking cash dividends should not invest in our common stock.
Sales of additional shares of our common stock could result in dilution to existing stockholders
and cause the price of our common stock to decline.
Sales of substantial amounts of our common stock in the public market or the availability of
such shares for sale, could adversely affect the price of our common stock. In addition, the
issuance of common stock upon exercise of outstanding options could be dilutive and may cause the
market price for a share of our common stock to decline. As of July 19, 2010, we had 72,909,441
shares of common stock issued and outstanding, together with outstanding options to purchase
approximately 6,661,559 shares of common stock with a weighted average exercise price of $6.78 per
share.
46
Novartis and other holders of shares of common stock have rights, subject to certain
conditions, to require us to file registration statements covering their shares or to include their
shares in registration statements that we may file for ourselves or other stockholders.
An investment in our common stock may decline in value as a result of announcements of business
developments by us or our competitors.
The market price of our common stock is subject to substantial volatility as a result of
announcements by us or other companies in our industry. As a result, purchasers of our common stock
may not be able to sell their shares of common stock at or above the price at which they purchased
such stock. Announcements which may subject the price of our common stock to substantial volatility
include:
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our collaboration with Novartis; |
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our collaboration with GSK; |
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the results of our clinical trials pertaining to any of our drug candidates; |
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the results of discovery, preclinical studies and clinical trials by us or our competitors; |
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the acquisition of technologies, drug candidates or products by us or our competitors; |
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the development of new technologies, drug candidates or products by us or our competitors; |
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regulatory actions with respect to our drug candidates or products or those of our competitors, including those
relating to clinical trials, marketing authorizations, pricing and reimbursement; |
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the timing and success of launches of any product we successfully develop; |
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future royalty payments received by us associated with sales of Tyzeka®/Sebivo®; |
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the market acceptance of any products we successfully develop; |
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significant changes to our existing business model; |
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the initiation of, material developments in or conclusion of litigation to enforce or defend any of our intellectual
property rights; and |
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significant acquisitions, strategic partnerships, joint ventures or capital commitments by us or our competitors. |
In addition, if we fail to reach an important research, development or commercialization
milestone or result by a publicly expected deadline, even if by only a small margin, there could be
a significant impact on the market price of our common stock. Additionally, as we approach the
announcement of important clinical data or other significant information and as we announce such
results and information, we expect the price of our common stock to be particularly volatile and
negative results would have a substantial negative impact on the price of our common stock.
We could be subject to class action litigation due to stock price volatility, which, if it occurs,
will distract our management and could result in substantial costs or large judgments against us.
The stock market frequently experiences extreme price and volume fluctuations. In addition,
the market prices of securities of companies in the biotechnology and pharmaceutical industry have
been extremely volatile and have experienced fluctuations that have often been unrelated or
disproportionate to the operating performance of these companies. These fluctuations could
adversely affect the market price of our common stock. In the past, securities class action
litigation has often been brought against companies following periods of volatility in the market
prices of their securities. Due to the volatility in our stock price, we may be the target of
similar litigation in the future.
Securities litigation could result in substantial costs and divert our managements attention
and resources, which could cause serious harm to our business, operating results and financial
condition.
47
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
(a) Unregistered Sales of Equity Securities
We issued and sold the following shares of our common stock during the quarterly period ending
June 30, 2010.
On June 8, 2010, we issued and sold 1,351 shares of our common stock to Novartis Pharma AG
pursuant to the terms of our stockholders agreement at a per share price of $2.41, resulting in
aggregate proceeds to us of $3,256.00.
The issuance and sale of common stock described above were made in reliance upon exemptions
from the registration provisions of the Securities Act of 1933, or the Securities Act, set forth in
Section 4(2) thereof (and Regulation D) relative to sales by an issuer not involving any public
offering, to the extent an exemption from such registration was required.
No underwriters were involved in the issuance and/or sale of the foregoing securities. All of
the foregoing securities are deemed restricted securities for purposes of the Securities Act. All
certificates representing the issued shares of common stock described above included appropriate
legends setting forth that the securities have not been registered and the applicable restrictions
on transfer.
Item 3. Defaults Upon Senior Securities
None.
Item 4. [Removed and Reserved]
Item 5. Other Information
None.
Item 6. Exhibits
See Exhibit Index on the page immediately preceding the exhibits for a list of the exhibits
filed as a part of this Quarterly Report, which Exhibit Index is incorporated herein by reference.
48
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.
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Date: July 27, 2010 |
By: |
/s/ JEAN-PIERRE SOMMADOSSI
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Jean-Pierre Sommadossi |
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Chairman and Chief Executive Officer
(Principal Executive Officer) |
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Date: July 27, 2010 |
By: |
/s/ RONALD C. RENAUD, JR.
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Ronald C. Renaud, Jr. |
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Chief Financial Officer
(Principal Financial Officer) |
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49
EXHIBIT INDEX
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Exhibit |
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No. |
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Description |
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10.1 |
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2005 Stock Incentive Plan, as amended |
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10.2 |
+ |
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First Amendment of License Agreement, dated May 20, 2010, between ViiV Healthcare Company and the Registrant |
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10.3 |
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Fourth Amendment to Lease, dated June 29, 2010, between RB Kendall Fee, LLC and the Registrant |
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31.1 |
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Certification of Chief Executive Officer pursuant to Rule 13a-14(a)/Rule 15d-14(a) of the Securities
Exchange Act of 1934, as amended. |
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31.2 |
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Certification of Chief Financial Officer pursuant to Rule 13a-14(a)/Rule 15d-14(a) of the Securities
Exchange Act of 1934, as amended. |
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32.1 |
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Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section
906 of the Sarbanes-Oxley Act of 2002. |
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32.2 |
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Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section
906 of the Sarbanes-Oxley Act of 2002. |
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+ |
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Confidential treatment requested as to certain portions, which have been separately filed with
the Securities and Exchange Commission. |
50