e10vk
UNITED
STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.
20549
Form 10-K
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(Mark One)
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the fiscal year ended
December 31, 2006
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or
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the transition period
from to
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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
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(State or Other Jurisdiction
of
Incorporation or Organization)
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(I.R.S. Employer
Identification No.)
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60 Hampshire Street,
Cambridge, Massachusetts
(Address of Principal
Executive Offices)
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02139
(Zip
Code)
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(617) 995-9800
(Registrants telephone
number, including area code)
Securities registered pursuant to Section 12(b) of the
Act:
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Common Stock, $.001 par
value
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The NASDAQ Stock Market
LLC
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(Title of class)
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(Name of exchange on which
registered)
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Securities registered pursuant to Section 12(g) of the
Act:
NONE
Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes o No þ
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or 15(d) of the
Act. Yes o No þ
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 if disclosure of delinquent filers
pursuant to Item 405 of
Regulation S-K
is not contained herein, and will not be contained, to the best
of registrants knowledge, in definitive proxy or
information statements incorporated by reference in
Part III of this
Form 10-K
or any amendment to the
Form 10-K. þ
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, or a non-accelerated
filer. See definition of accelerated filer and large
accelerated filer in
Rule 12b-2
of the Exchange Act. (Check one):
Large accelerated
filer o Accelerated
filer þ Non-accelerated
filer o
Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the Exchange
Act). Yes o No þ
The aggregate market value of the voting and non-voting common
stock held by non-affiliates of the registrant based on the last
reported sale price of the common stock on the NASDAQ Stock
Market on June 30, 2006, was approximately $207,000,000.
For this purpose, the registrant considers its directors and
officers and Novartis AG to be affiliates.
Number of shares outstanding of the registrants class of
common stock as of March 1, 2007: 56,153,393 shares.
DOCUMENTS
INCORPORATED BY REFERENCE
Portions of the Proxy Statement to be filed in connection with
the solicitation of proxies for the Annual Meeting of
Stockholders to be held on May 31, 2007 are incorporated by
reference into Part III of this Annual Report on
Form 10-K.
Idenix
Pharmaceuticals, Inc.
Form 10-K
TABLE OF
CONTENTS
2
Cautionary
Statement Regarding Forward-Looking Statements
This annual report on
Form 10-K
contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act, as amended,
concerning our business, operations and financial condition,
including statements with respect to the expected timing and
results of completion of phases of development of our product
candidates, the safety, efficacy and potential benefits of our
product candidates, expectations with respect to development and
commercialization of telbivudine and our other product
candidates, the timing and results of the submission, acceptance
and approval of regulatory filings, the scope of patent
protection with respect to these product candidates and
information with respect to the other plans and strategies for
our business. All statements other than statements of historical
facts included in this annual report on
Form 10-K
regarding our strategy, future operations, timetables for
development, regulatory approval and commercialization of
product candidates, financial position, costs, prospects, plans
and objectives of management are forward-looking statements.
When used in this annual report on
Form 10-K
the words expect, anticipate,
intend, may, plan,
believe, seek, estimate,
projects, will, would and
similar expressions or express or implied discussions regarding
potential new products or regarding future revenues from such
products, potential future expenditures or liabilities or by
discussions of strategy, plans or intentions are intended to
identify forward-looking statements, although not all
forward-looking statements contain these identifying words.
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 Risk
Factors, Managements Discussion and Analysis
of Financial Condition and Results of Operations and
elsewhere in this annual report on
Form 10-K.
In particular, managements expectations could be affected
by, among other things, uncertainties involved in the
development of new pharmaceutical products, including unexpected
clinical trial results; unexpected regulatory actions or delays
or government regulation generally; the companys ability
to obtain or maintain patent or other proprietary intellectual
property protection; competition in general; government,
industry and general public pricing pressures; and uncertainties
regarding necessary levels of expenditures in the future. There
can be no guarantee that development of any product candidates
described will succeed or that any new products will obtain
necessary regulatory approvals required for commercialization or
otherwise be brought to market. Similarly, there can be no
guarantee that we or one or more of our current or future
products, if any, will achieve any particular level of revenue.
You should read these forward-looking statements carefully
because they discuss our expectations regarding our future
performance, future operating results or future financial
condition, or state other forward-looking
information. You should be aware that the occurrence of any of
the events described under Risk Factors and
elsewhere in this Annual Report on
Form 10-K
could substantially harm our business, results of operations and
financial condition and that upon the occurrence of any of these
events, the price of our common stock could decline.
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-K
as anticipated, believed, estimated or expected. The
forward-looking statements contained in this annual report on
Form 10-K
represent our expectations as of the date of this annual report
on
Form 10-K
and should not be relied upon as representing our expectations
as of any other date. Subsequent events and developments will
cause our expectations to change. However, while we may elect to
update these forward-looking statements, we specifically
disclaim any obligation to do so, even if our expectations
change.
3
PART I
The
Company
Idenix Pharmaceuticals, Inc. (together with its consolidated
subsidiaries, the Company) is a biopharmaceutical
company engaged in the discovery, development and
commercialization of drugs for the treatment of human viral and
other infectious diseases with operations in the United States
and Europe. Our current focus is on diseases caused by hepatitis
B virus, or HBV, hepatitis C virus, or HCV, and human
immunodeficiency virus, or HIV.
2006
Developments
In October 2006, we received approval from the U.S. Food
and Drug Administration, or FDA, to market our first product,
Tyzeka®,
or telbivudine, for the treatment of patients with chronic
hepatitis B in the United States. In territories outside the
United States, where regulatory approval has been obtained,
telbivudine will be marketed as
Sebivo®.
To date,
Sebivo®
has been approved in more than 10 countries including
Switzerland, China, South Korea, and Canada.
In anticipation of the approval of
Tyzeka®
in the United States, during 2006 we established a
U.S. sales force. We commenced selling
Tyzeka®
in the United States during the fourth quarter of 2006. We, with
Novartis Pharma AG, or Novartis, have begun
pre-commercialization activities in the European markets in
which we expect to co-promote or co-market
Sebivo®
with Novartis, if marketing authorization is received.
In March 2006, Novartis exercised its option to license
valopicitabine, our lead HCV product candidate. As a result, we
received a $25 million license payment from Novartis and
Novartis is providing ongoing development funding for
valopicitabine. Also in March 2006, after dialogue with the FDA,
we reduced the daily dosing levels in two phase IIb trials
for valopicitabine from 800 mg/day to 200 mg/day or 400mg/day.
We made this modification after observing that patients
receiving the 800 mg/day dose of valopicitabine experienced a
higher proportion of the reported moderate or severe
gastrointestinal side effects compared to observations at the
200 to 400 mg/day dosing level. In preliminary data from these
trials, the lower dose demonstrated comparable antiviral
activity, at 12 and 24 weeks, with better tolerability. In
the fourth quarter of 2006, we initiated an additional
phase I/II clinical trial of valopicitabine.
In June 2006, we entered into a commercial manufacturing
agreement with Novartis whereby Novartis will manufacture the
commercial supply of
Tyzeka®
that is intended for sale in the United States. We also entered
into a packaging agreement with an affiliate of Novartis.
In the fourth quarter of 2006, we filed an exploratory
investigational new drug application, or exploratory IND, for
two lead product candidates in our HIV program. We plan to file
a traditional IND for one of these candidates and intend to
advance this product candidate into a phase I/II clinical
trial during 2007.
During the fourth quarter of 2006, we also entered into a two
year research collaboration agreement with Metabasis
Therapeutics, Inc., or Metabasis, for the purpose of applying
Metabasis proprietary liver-targeted technology to certain
of our compounds to develop second-generation nucleoside analog
product candidates for the treatment of HCV.
Overview
We believe that large market opportunities exist for new
treatments for HBV, HCV and HIV. Chronic hepatitis B, an
inflammatory liver disease associated with HBV infection, is a
leading cause of liver disease globally. It is estimated that
over 350 million people worldwide are chronically infected
with HBV. Chronic hepatitis C is an inflammatory liver
disease associated with HCV infection. The World Health
Organization has estimated that approximately 170 million
people worldwide are chronically infected with HCV, including
over 2.7 million people in the United States. The World
Health Organization has estimated that approximately
40 million people worldwide are chronically infected with
HIV, including more than 1 million people in the United
States.
4
In May 2003, we entered into a collaboration with Novartis,
relating to the worldwide development and commercialization of
our product candidates. Simultaneously, Novartis purchased
approximately 54% of our outstanding capital stock from our
stockholders for $255 million in cash, with an aggregate
amount of up to $357 million contingently payable to these
stockholders if we achieve predetermined development milestones
relating to an HCV product candidate. Including shares acquired
in 2005 from its affiliate, Novartis BioVentures Ltd., and
shares acquired as a result of the exercise of its stock
subscription rights, Novartis currently owns approximately 56%
of our outstanding common stock. Novartis BioVentures Ltd. was
an existing stockholder in May 2003 at the time of the Novartis
stock purchase.
As part of the development and commercialization agreement
between us and Novartis, Novartis has an option to license any
of our development-stage product candidates, generally before
such product candidates enter phase III clinical testing.
To date, Novartis has exercised that option for
Tyzeka®/Sebivo®
and valtorcitabine, our HBV product and product candidate, and
valopicitabine, our lead HCV product candidate.
In May 2003, Novartis paid us a license fee of $75 million
for
Tyzeka®/Sebivo®
and valtorcitabine, is providing ongoing development funding for
Tyzeka®/Sebivo®
and valtorcitabine and will make additional milestone payments,
which could total up to $35 million upon the achievement of
specific regulatory approvals. We achieved one of these
milestones in February 2007 with the regulatory approval of
Sebivo®
in China for which we expect to receive $10 million from
Novartis. Additional commercialization milestone payments will
be paid to us by Novartis if we achieve predetermined HBV
product sales levels.
In March 2006, Novartis exercised its option to license
valopicitabine, our lead HCV product candidate. As a result, we
received a $25 million license payment from Novartis and
Novartis is providing ongoing clinical development funding for
valopicitabine. Novartis will pay us up to $500 million in
additional license fees and regulatory milestone payments for
valopicitabine as follows: $45 million in license fees upon
the advancement of valopicitabine into phase III clinical
trials in treatment-naïve and treatment-refractory patients
in the United States and $455 million in milestone payments
upon achievement of regulatory filings and marketing
authorization approvals of valopicitabine in the United States,
Europe and Japan. In addition, if valopicitabine is successfully
developed, Novartis will pay us additional commercialization
milestone payments based upon achievement of predetermined sales
levels. We also received a $25 million milestone payment in
June 2004 from Novartis based upon results from our phase I
clinical trial of valopicitabine.
In accordance with arrangements between us and Novartis, we will
co-promote and co-market with Novartis in the United States,
United Kingdom, Germany, Italy, France and Spain,
Tyzeka®/Sebivo®
and any other products, including valopicitabine, that Novartis
licenses from us that are successfully developed and approved
for commercial use. Novartis has the exclusive right to promote
and market these products in the rest of the world. During 2006,
we built a sales force in the United States and commenced
selling
Tyzeka®
in the United States in the fourth quarter of 2006. As of
December 31, 2006, we had 20 sales representatives in the
United States. We, with Novartis, have begun
pre-commercialization activities in the European markets in
which we expect to co-promote or co-market
Sebivo®
with Novartis, including building our own sales force and
enhancing our marketing capabilities to support the commercial
launch of
Sebivo®,
if approved.
We have incurred significant losses since our inception in May
1998. We expect that our operating expenses will continue to
increase over the next several years as we expand our drug
discovery, development and commercialization efforts.
We maintain a web site with the address www.idenix.com. We are
not including the information contained on our web site as part
of, or incorporating by reference into, this Annual Report on
Form 10-K.
We make available free of charge on or through our web site our
annual report on
Form 10-K,
quarterly reports on
Form 10-Q,
current reports on
Form 8-K
and all amendments to those reports as soon as practicable after
such material is electronically filed with or furnished to the
Securities and Exchange Commission, or SEC. In addition, copies
of our reports filed electronically with the SEC may be accessed
on the SECs web site at www.sec.gov. The public may
also read and copy any materials filed with the SEC at the
SECs Public Reference Room at 100 F Street, NE,
Washington, DC 20549. Information on the operation of the
Public Reference Room may be obtained by calling the SEC at
5
1-800-SEC-0330.
We intend to disclose on our web site any amendments to, or
waivers from, our code of business conduct and ethics that are
required to be disclosed pursuant to rules and regulations
promulgated by the SEC.
We are a Delaware corporation. Our principal offices are located
at 60 Hampshire Street, Cambridge, Massachusetts 02139. The
telephone number of our principal executive offices is
617-995-9800.
Our registered trademarks or service marks include: Idenix,
Tyzeka and Sebivo. All other trademarks, service marks, or
tradenames referenced in this Annual Report on
Form 10-K
are the property of their respective owners.
Products
and Product Candidates
We believe that
Tyzeka®/Sebivo®
and valtorcitabine, our product and product candidate,
respectively, for the treatment of HBV, valopicitabine, our
product candidate for the treatment of HCV, and IDX-899, our
product candidate for the treatment of HIV, may have one or more
therapeutic features that we believe will afford competitive
advantages over currently approved therapies. Such therapeutic
features may include efficacy, safety, resistance profile or
convenience of dosing. Each of
Tyzeka®/Sebivo®
and the product candidates that we are developing are selective
and specific, are being developed for once a day oral
administration, and we believe may be used in combination with
other therapeutic agents to improve clinical benefits.
Hepatitis
B
Telbivudine
(Tyzeka®
in the United States and
Sebivo®
in the rest of the world)
Phase III
Clinical Trials and NDA
On October 25, 2006, the FDA approved
Tyzeka®
for the treatment of patients with chronic hepatitis B in the
United States. In addition,
Sebivo®
has been approved in more than 10 countries outside the United
States, including Switzerland, China, South Korea and Canada for
the treatment of patients with chronic hepatitis B. Regulatory
applications have been submitted in a number of regions,
including the European Union and Taiwan, for marketing approval
of
Sebivo®
for the treatment of patients with chronic hepatitis B. In
February 2007, the European Medicines Agencys, or EMEA,
Committee for Medicinal Products for Human Use recommended
Sebivo®
for approval. A final decision is expected from the European
Commission during the second quarter of 2007.
The regulatory filings for telbivudine were based on one-year
data from a two-year international phase III clinical trial
that we refer to as the GLOBE study. The final two-year results
from the GLOBE study are expected to provide additional
information intended for supplemental product labeling regarding
the effects of longer-term treatment with telbivudine. In an
effort to broaden our label to include patients with liver
failure, or decompensated liver disease, we have an ongoing
phase III clinical trial in HBV infected patients with
decompensated liver disease. Upon completion of this
phase III clinical trial, we plan to submit to the FDA a
supplemental NDA, including the final results of this clinical
trial.
Phase IIIb/IV
Clinical Trials
We are also presently conducting several clinical trials to help
further establish the product profile of
Tyzeka®/Sebivo®.
We refer to these studies as phase IIIb or phase IV
trials. These trials are designed to provide us with additional
information regarding the antiviral effects and clinical benefit
of
Tyzeka®/Sebivo®
compared to currently available treatments for HBV, as well as
to assess the potential benefit of combining
Tyzeka®/Sebivo®
with adefovir dipivoxil, as well as tenofivir.
Valtorcitabine
While we anticipate that
Tyzeka®/Sebivo®
will successfully treat a majority of patients with chronic
hepatitis B, treatment with more than one therapeutic agent may
be required to successfully treat a subset of the HBV patient
population. For patients who do not experience optimal early
antiviral effects with single-agent therapy, we are developing a
second HBV product candidate, valtorcitabine, which we believe
may be effective in combination therapy with telbivudine.
Currently, we are evaluating the combination of valtorcitabine
with telbivudine in a phase IIb clinical trial. This
phase IIb clinical trial is fully enrolled with
130 patients who have more than 100,000,000 copies/ml of
HBV and who have not been previously treated for chronic HBV
infection. This trial is
6
designed to further evaluate the safety of the combination
treatment and determine whether the combination of
valtorcitabine with telbivudine results in greater suppression
of virus levels in the blood serum than that which is achieved
with treatment with telbivudine alone. The primary endpoint of
this study is antiviral activity at 52 weeks of treatment.
This data is expected to be available in 2007, at which point
we, with Novartis, will determine whether or not to advance this
combination into phase III development. In order to advance
the program into phase III development, we believe that the
combination of telbivudine and valtorcitabine will need to
demonstrate more profound viral suppression as measured by
polymerase chain reaction, or PCR, negativity, and decreased
emergence of resistance than demonstrated by telbivudine alone.
Hepatitis
C
Our HCV program is focused on the development of products that
we believe will be competitive by offering significant
improvements when combined with or compared to currently
approved therapies with regard to safety, efficacy, resistance
or convenience of dosing. Our efforts are focused on the
discovery of product candidates that we expect will be active
against various strains of HCV, including the genotype 1 strain
of HCV, which is responsible for more than 70% of HCV infections
in the United States and Japan and almost 65% of HCV infections
in Europe.
Our lead HCV product candidate, valopicitabine, is a nucleoside
analog that we are developing in combination with pegylated
interferon and, potentially, ribavirin for patients chronically
infected with the genotype 1 strain of HCV. Currently, we are
evaluating valopicitabine in two phase IIb clinical trials,
one in treatment-refractory patients and one in
treatment-naïve patients. We refer to patients who have
been previously treated but failed to adequately respond to
interferon-based therapies as treatment-refractory patients and
we refer to patients not previously treated for HCV infection as
treatment-naïve patients. In March 2006, due to higher
proportion of gastrointestinal side effects for patients
receiving the 800 mg/day dosing level in these trials, we
reduced the dose of valopicitabine in these phase IIb
trials from 800 mg/day to either 200 mg/day or
400 mg/day. Both the phase IIb trials in
treatment-naïve and treatment-refractory patients are
ongoing. Preliminary data from the treatment-naïve trial
suggests that the 200 mg/day dose in combination with
pegylated interferon, has comparable antiviral activity, at 12
and 24 weeks, with better tolerability than the
800 mg/day dose, in combination with pegylated interferon.
In the fourth quarter of 2006, we initiated an additional
phase I/II clinical trial of valopicitabine, referred to as
a drug/drug interaction study, to assess the pharmacokinetics
and pharmacodynamics of valopicitabine when administered in
combination with pegylated interferon and ribavirin in
treatment-naïve patients. This
12-week
drug/drug interaction study is assessing the 200 mg/day
dose of valopicitabine and was completely enrolled with
117 patients in the first quarter of 2007. We believe that
treatment-refractory patients will require at least two new
agents added to the
standard-of-care
to achieve meaningfully better outcomes. We are exploring
strategic alternatives to advance the clinical development of
valopicitabine in this very
difficult-to-treat
patient population.
In order to advance valopicitabine into phase III
development, we believe that we need to continue to characterize
the long-term safety and efficacy of valopicitabine through the
data generated from the ongoing phase IIb clinical trial in
treatment-naïve patients, as well as the final
12-week data
generated from the ongoing drug/drug interaction study. Once we
have the final data from the drug/drug interaction study, we
expect to submit it to the FDA and request a meeting to discuss
further studies to advance the clinical development of
valopicitabine.
We have a comprehensive HCV discovery program that is focused on
discovering compounds that are complementary to valopicitabine.
Our discovery efforts are focused on small molecule anti-HCV
compounds from each of the three classes: nucleoside type viral
polymerase inhibitors, non-nucleoside viral polymerase
inhibitors and protease inhibitors. Our most advanced program is
a second generation nucleoside-type polymerase inhibitor HCV
product candidate, which we hope to advance to an
investigational new drug application, or IND, in late 2007. We
believe that successful development of two or more HCV product
candidates that may be used as part of a multiple-drug
combination therapy would enable us to establish a franchise in
this therapeutic area by offering treatments to a broad HCV
population, including those patients that cannot be treated with
interferon-based therapies or those for whom drug-related
adverse side effects and inconvenient dosing regimens of
existing therapies reduce compliance.
7
HIV
In addition to our HBV and HCV product, product candidates and
discovery program, we are also engaged in efforts to develop
therapeutics for the treatment of HIV from the class of
compounds known as non-nucleoside reverse transcriptase
inhibitors, or NNRTIs. This class of drug is being evaluated for
once-a-day
oral administration. We have identified two lead candidates in
this program and filed an exploratory investigational new drug
application, or exploratory IND, in the United States in the
fourth quarter of 2006. This exploratory IND evaluation is
intended to enable us to gain human pharmacokinetic insights
through a microdosing study in healthy volunteers. The
microdosing study is now complete and based on the overall
profile of the product candidates, we have selected IDX-899 as
our product candidate to advance in clinical development. We
plan to file a traditional IND for IDX-899 and advance this
product candidate into a phase I/II clinical trial in the
second half of 2007, while keeping the other candidate in our
pre-clinical pipeline as a backup.
Antiviral
Research
We have successfully advanced four product candidates into
clinical trials based on our understanding of virology and
chemistry in HBV, HCV and HIV. Our scientists have a highly
developed set of skills in compound generation, target
selection, screening and lead optimization and pharmacology and
preclinical development. We are utilizing these skills and
capabilities in our discovery and development of antiviral
product candidates.
Our Scientists. Our scientists are engaged in
drug discovery and preclinical drug development in laboratory
facilities located in Cambridge, Massachusetts, Montpellier,
France and Cagliari, Italy. Our scientists have expertise in the
areas of chemistry, molecular virology and pharmacology, and
have substantial experience in applying this expertise to the
discovery and development of nucleoside and non-nucleoside
compounds which target the viral polymerase enzyme and the viral
replication cycle. Pursuant to an arrangement we have entered
into with the University of Cagliari in Italy, our scientists in
Italy occupy premises at the University of Cagliari where they
have access to well-equipped laboratories and other resources
required to conduct antiviral research activities. The work of
our staff scientists is supplemented by research and development
activities of independent third-party biologists specialized in
antiviral drug research activities located principally in
Cagliari, Italy. Pursuant to the arrangements we and Novartis
have with the University of Cagliari, we and Novartis have
rights to access certain results of the work of these groups of
independent scientists. For a further description of these
arrangements, see Collaborations.
Focused Compound Library. Our focused compound
library contains a diverse set of structures, which have been
synthesized for the principal purpose of targeting and
inhibiting viral replication. These structures consist of
various nucleosides, nucleoside analogs, selected
non-nucleosides and other small molecule compounds. In addition
to our focused library, we have engaged with other entities to
obtain rights to libraries comprised of a significant number of
compounds that may have utility targeting and inhibiting viral
replication.
Target Selection. We focus on viral diseases
representing large and growing market opportunities with
significant unmet medical needs. Our selection of a particular
therapeutic target within those viral diseases takes into
consideration the experience and expertise of our scientific
management team and the potential that our nucleoside,
nucleoside analog and non-nucleoside libraries and those
libraries to which we have access could yield a small molecule
lead. The final selection is based on the probability of being
able to generate robust medicinal chemistry structure-activity
relationships analysis to assist lead optimization and secure
relevant intellectual property rights.
Screening and Lead Optimization. We believe
that our efficiency in selecting a lead chemical structure from
our focused library and the libraries which we access
distinguishes us from our competitors. Our ability to discover
multiple compounds with antiviral activity enhances early
progress toward lead optimization.
Pharmacology and Preclinical Development. Once
we have identified lead compounds, they are tested using
in vitro and in vivo pharmacology studies and
in vivo animal models of antiviral efficacy. Using
in vitro studies, our scientists are able to
ascertain the relevance of intracellular activation, metabolism
and protein binding. The in vivo pharmacokinetic studies
identify the percentage of oral bioavailability and whole body
metabolism of the compound. The animal models provide data on
the efficacy of the compound and firmly establish a proof of
concept in a biologically relevant system.
8
Research
and Development Expenses
Research and development expenses for the years ended
December 31, 2006, 2005 and 2004, were $96.1 million,
$86.6 million, and $80.0 million, respectively, and
represented 63%, 72%, and 77%, respectively, of our total
operating expenses.
Collaborations
Relationship
with Novartis
Overview
On May 8, 2003, we entered into a collaboration with
Novartis which included the following agreements and
transactions:
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the development agreement, under which we will collaborate with
Novartis to develop, manufacture and commercialize our lead HBV
product candidates and, our HCV and other product candidates;
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the supply agreement, under which Novartis will manufacture for
us the active pharmaceutical ingredient, or API, for the
clinical development supply and potentially the API for the
commercial supply of product candidates it has licensed from us
and will perform the finishing and packaging of licensed
products for commercial sale;
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the stockholders agreement, which was subsequently amended
and restated in July 2004 in connection with the closing of our
initial public offering; and
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the stock purchase transaction, under which Novartis purchased
approximately 54% of our outstanding capital stock from our then
existing stockholders for $255 million in cash, with an
additional aggregate amount of up to $357 million
contingently payable to these stockholders if we achieve
predetermined milestones with respect to the development of an
HCV product candidate.
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In each of July 2004 and October 2005, in connection with our
public offerings, Novartis purchased from us additional shares
of our common stock to maintain its equity interest following
each offering. Specifically, Novartis purchased from us
5,400,000 shares of our common stock for an aggregate
purchase price of $75.6 million in connection with our July
2004 initial public offering and 3,939,131 shares of common
stock in exchange for an aggregate purchase price of
$81.2 million in connection with our October 2005 public
offering. Additionally, in connection with the consummation of
our initial public offering, we sold to Novartis
1,100,000 shares of common stock for a purchase price of
$.001 per share in exchange for the termination of certain
stock subscription rights held by Novartis. Currently, Novartis
owns approximately 56% of our outstanding common stock.
Development,
License and Commercialization Agreement
Designation
of Products
As part of the development and commercialization agreement
between us and Novartis, Novartis has an option to license any
of our development-stage product candidates before such product
candidates enter phase III clinical testing. To date,
Novartis has exercised that option for
Tyzeka®/Sebivo®
and valtorcitabine, our product and product candidate for the
treatment of HBV, and valopicitabine, our lead product candidate
for the treatment of HCV. Novartis paid us a license fee of
$75 million in May 2003 for
Tyzeka®/Sebivo®
and valtorcitabine, is providing development funding and has
agreed to make milestone payments which could total up to
$35 million upon achievement of regulatory approvals for
Sebivo®
and valtorcitabine in Europe and China, as well as additional
milestone payments based upon achievement of predetermined sales
levels. We achieved one of these regulatory milestones in
February 2007 with the approval of
Sebivo®
in China for which we expect to receive $10 million from
Novartis. In addition, Novartis has the exclusive option to
obtain rights to:
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a replacement HCV product candidate, if valopicitabine
subsequently does not obtain regulatory approval in the United
States; and
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other product candidates developed by us, or in some cases
licensed to us, so long as Novartis maintains ownership of 51%
of our voting stock and for a specified period of time
thereafter.
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9
The terms of these options, including license fees, milestone
payments and payments in reimbursement of development expenses,
vary according to the disease which the product candidate
treats, the stage of development of the product candidate, the
present value of future cash flows of the product candidate
relative to those previously estimated for
Tyzeka®/Sebivo®,
valtorcitabine and valopicitabine, and Novartis ownership
interest in Idenix.
Novartis paid us a license fee of $25 million in March 2006
for valopicitabine, is providing development funding for
valopicitabine, and has agreed to pay additional license fees
and milestone payments that could total up to $500 million
based upon the initiation of phase III trials, and regional
regulatory filings and approvals, as well as additional
milestone payments based upon achievement of predetermined sales
levels if the product candidate is approved for commercial sale.
Development
of Products and Regulatory Activities
Pursuant to the development agreement amendment which we entered
into with Novartis in February 2006, certain responsibilities
relating to the conduct of the phase III clinical
development of valopicitabine were further defined.
Specifically, since Novartis elected to exercise its option to
license valopicitabine, we currently anticipate that we will
have principal responsibility for the conduct of the
phase III program evaluating valopicitabine in
treatment-refractory patients and Novartis will have the
principal responsibility for the conduct of the phase III
program evaluating valopicitabine in treatment-naïve
patients.
For most of our product candidates, Novartis will have the right
to approve, in its reasonable discretion, the development
budget. We will develop each licensed product in accordance with
a development plan approved by a joint operating committee. The
joint operating committee is comprised of an equal number of
representatives of Idenix and Novartis. Novartis will be solely
responsible for the development expenses incurred in accordance
with approved development budgets for our HBV product and
product candidate and valopicitabine or a replacement HCV
product candidate. If valopicitabine fails to obtain regulatory
approval in the United States, Novartis will pay the development
expenses for a replacement HCV product candidate if it has
approved the corresponding development budget, up to a specified
maximum. The development expense payments for any replacement
HCV product candidates will be credited against the first sales
milestone payment payable by Novartis to us for our initial HCV
product. Novartis will also be primarily responsible for the
development expenses for any other product candidate for which
it exercises its option to obtain commercialization rights.
We have primary responsibility for preparing and filing
regulatory submissions with respect to any licensed product in
the United States, and Novartis has primary responsibility for
preparing and filing regulatory submissions with respect to any
licensed product in all other countries in the world. Under
certain circumstances, primary responsibilities for all or
certain regulatory tasks in a particular country may be switched
from one party to the other.
Product
Commercialization
We have granted Novartis an exclusive, worldwide license to
market and sell
Tyzeka®/Sebivo®,
valtorcitabine and valopicitabine. In each case 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 will act as the lead commercial
party and record revenue from product sales and will share
equally the resulting net benefit or net loss with Novartis from
co-promotion from the date of product launch. In the United
Kingdom, France, Germany, Italy and Spain, Novartis will act as
the lead commercial party and record revenue from product sales.
In the United Kingdom, France, Germany, Italy and Spain,
the net benefit we expect to realize will increase incrementally
during the first three years from the date of product launch,
such that we will share equally with Novartis the net benefit
from the co-promotion beginning in the third year from the date
of product launch.
In other countries, we will effectively sell products to
Novartis for their further sale to third parties. Novartis will
pay us to acquire such products at a price that is determined in
part by the volume of product net sales under the terms of the
supply agreement described below.
Interferon
Products
Under the development agreement, each of Novartis and us may
independently develop, market and sell in the United States,
United Kingdom, France, Germany, Italy and Spain one interferon
product whose labeled usage for co-administration with our HCV
products is covered by our intellectual property.
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Exclusivity
Novartis has agreed that it will not market, sell or promote, or
grant a license to any third party to market, sell or promote,
certain competing products. However, if Novartis seeks to engage
in such activities, it must first inform us of the competitive
product opportunity and, at our election, enter into good faith
negotiations with us concerning such opportunity. If we either
do not elect to enter into negotiations with respect to such
opportunity or are unable to reach agreement within a specified
period, Novartis would be free to proceed with its plans with
respect to such competing product. The competitive restrictions
on Novartis terminate on a
country-by-country
basis on the earlier of May 8, 2008 or the termination of
the development agreement with respect to each particular
country.
Indemnification
Under the development agreement, 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 agreement. We made numerous representations and
warranties to Novartis regarding our HBV product and product
candidate and HCV product candidate, including representations
regarding our ownership of the inventions and discoveries. If
one or more of our representations or warranties were not true
at the time we made them to Novartis, we would be in breach of
this agreement. In the event of a breach by us, Novartis has the
right to seek indemnification from us for damages suffered by
Novartis as a result of such breach. The amounts for which we
could be liable to Novartis may be substantial. For additional
information on such indemnification rights, see Stock
Purchase Agreement, Risk Factors Factors
Related to Our Relationship with Novartis and
Factors Related to Patents and Licenses.
Termination
Novartis may terminate the development agreement with respect to
a particular product, product candidate or country, in its sole
discretion, by providing us with six months written
notice. If either we or Novartis materially breach the
development agreement and do not cure such breach within
30 days, or under certain circumstances, 120 days, or
if such breach is uncurable, the non-breaching party may
terminate the development agreement:
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with respect to the particular product, product candidate or
country to which the breach relates; or
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in its entirety, if the material breach is not limited to a
particular product, product candidate or country.
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Each party may also terminate the development agreement in its
entirety upon 30 days written notice if the other
party files for bankruptcy, insolvency, reorganization or the
like. If Novartis terminates the development agreement for
material breach by us, or for bankruptcy, insolvency or
reorganization on our part, then Novartis may elect to retain
licenses to product candidates or products, in which case it
will remain obligated to make payments to us in amounts to be
negotiated in good faith at the time of termination. If we
terminate part or all of the development agreement for material
breach by Novartis, or for bankruptcy, insolvency or
reorganization on the part of Novartis, or if Novartis
terminates the development agreement unilaterally in the absence
of a breach by us, we may be obligated to make payments to
Novartis in amounts to be negotiated in good faith at the time
of termination.
Master
Manufacturing and Supply Agreement
Under the master manufacturing and supply agreement, dated as of
May 8, 2003, between Novartis and us, which we refer to as
the supply agreement, we appointed Novartis to manufacture or
have manufactured the clinical supply of the API for each
product candidate licensed under the development agreement and
certain other product candidates. The cost of the clinical
supply will be treated as a development expense, allocated
between us and Novartis in accordance with the development
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 under which Novartis has the right to
match the best third-party bid. Novartis will perform the
finishing and packaging of the APIs into the final form for sale.
In June 2006, after completing a competitive bid process where
Novartis had the right to match the best third-party bid, we
entered into a commercial manufacturing agreement with Novartis
and a packaging agreement with Novartis Pharmaceuticals
Corporation, an affiliate of Novartis. Under the commercial
manufacturing agreement, Novartis will manufacture the
commercial supply of
Tyzeka®
that is intended for sale in the United States. The
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packaging agreement provides that the supply of
Tyzeka®
intended for commercial sale in the United States will be
packaged by Novartis Pharmaceuticals Corporation. We are in
discussions with Novartis about finalizing the manufacturing
rights for the long-term supply of
Sebivo®
in the rest of the world.
Stockholders
Agreement
In connection with Novartis purchase of our stock from our
then existing stockholders, we and substantially all of our
stockholders entered into a stockholders agreement with
Novartis which was amended and restated in 2004 in connection
with our initial public offering. Under the terms of the amended
and restated stockholders agreement, we have:
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granted Novartis, together with certain other holders of our
common stock, rights to cause us to register, under the
Securities Act, such shares of common stock;
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agreed to 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 at least one designee of Novartis for so long
as Novartis and its affiliates own at least 19.4% of our voting
stock;
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granted Novartis approval rights over a number of corporate
actions that we or our subsidiaries may take as long as Novartis
and its affiliates continue to own at least 19.4% of our voting
stock; and
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required that, with certain limited exceptions, Novartis and its
affiliates not acquire additional shares of our voting stock
unless a majority of our independent directors approves or
requests the acquisition. These restrictions will terminate on
May 8, 2008, unless sooner terminated under the terms of
the stockholders agreement.
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Novartis
Stock Purchase Rights
Novartis has certain rights to acquire shares of our capital
stock. Such rights are further described below under the heading
Managements Discussion and Analysis of Financial
Condition and Results of Operations Critical
Accounting Policies and Estimates.
Stock
Purchase Agreement
Under the stock purchase agreement, dated as of March 21,
2003, which we refer to as the stock purchase agreement, among
us, Novartis and substantially all holders of our capital stock
as of May 8, 2003, Novartis purchased approximately 54% of
our outstanding capital stock from our stockholders for
$255 million in cash, with an additional aggregate amount
of up to $357 million contingently payable to these
stockholders if we achieve predetermined development milestones
with respect to an HCV product candidate. The future contingent
payments are payable in cash or, under certain circumstances,
Novartis AG American Depository Shares. At present, Novartis
owns approximately 56% of our outstanding common stock.
Under the stock purchase agreement, we agreed to indemnify
Novartis and its affiliates against losses suffered as a result
of our breach of representations and warranties in the stock
purchase agreement. In the stock purchase agreement, we and our
stockholders who sold shares to Novartis, which include certain
of our directors and many of our officers, made numerous
representations and warranties. The stock purchase agreement
representations and warranties we made to Novartis regarding our
HCV and HBV product candidates and our ownership of related
inventions and discoveries are substantially the same as the
representations and warranties we made to Novartis in the
development agreement. If one or more of our representations or
warranties were not true at the time we made them to Novartis,
we would be in breach of this agreement. 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 for damages suffered by
Novartis as a result of such breach. The amounts for which we
could be liable to Novartis may be substantial. For additional
information on such indemnification rights, see
Development, License and Commercialization
Agreement, Risk Factors Factors Related
to Our Relationship with Novartis and Factors
Related to Patents and Licenses.
12
Co-operative
Laboratory Agreements
CNRS
and the University of Montpellier
In May 2003, we and Novartis entered into an amended and
restated agreement with Le Centre National de la Recherche
Scientifique, or CNRS, and LUniversite
Montpellier II, or the University of Montpellier, pursuant
to which we worked in collaboration with scientists from CNRS
and the University of Montpellier to discover and develop
technologies relating to antiviral substances. The agreement
includes provisions relating to ownership and commercialization
of the technology which is discovered or obtained as part of the
collaboration as well as rights regarding ownership and use of
such technology, including telbivudine, upon termination of the
agreement. This agreement amended and restated an agreement that
our subsidiary, Idenix SARL, the University of Montpellier and
CNRS had originally entered into in January 1999. Under the
terms of the agreement, we made payments to the University of
Montpellier for use of the facilities, certain improvements to
the facilities and for supplies consumed in connection with
research activities. This cooperative agreement expired in
December 2006, but we will retain rights to exploit the patents
derived from the collaboration.
University
of Cagliari
We have entered into two agreements with the University of
Cagliari, the co-owner of the patent applications covering our
HCV and certain HIV technology upon which we currently rely. One
agreement covers our cooperative research program and the other
agreement is an exclusive license under these patent
applications to develop and sell the jointly created HCV and HIV
product candidates. In May 2003, Novartis became a party to each
of these agreements. The cooperative research agreement includes
provisions with respect to cost sharing, ownership and
commercialization of the technology which is discovered or
obtained as part of the collaboration. Under the terms of the
cooperative agreement, we make payments to the University of
Cagliari for use of the facilities and for supplies consumed in
connection with the research activities. This agreement has been
amended to extend the term until January 2011.
Under the terms of the license agreement with the University of
Cagliari, we have the exclusive worldwide right to make, use and
sell valopicitabine and certain other HCV and HIV technology and
the right to sublicense any of those rights. Under the terms of
the agreement, we assume the costs and responsibility for
filing, prosecuting, maintaining and defending the jointly owned
patents. If we receive license fees or milestone payments with
respect to technology licensed to us by the University of
Cagliari, we must provide payments to the University of
Cagliari. In addition, we will be liable to the University of
Cagliari for a fixed royalty payment on worldwide sales of
licensed drug products. The license agreement terminates at the
expiration of all royalty payment obligations, unless terminated
earlier by us, by the mutual agreement of the parties, or by a
material breach of the terms of the agreement.
Manufacturing
We have developed the capacity to synthesize compounds in
quantities ranging from milligrams to metric tons. Our medicinal
chemists focus on small-scale synthesis that leads to the
discovery of new compounds and the analysis of
structure-activity relationships for each identified compound
series. In addition, these scientists aim to design efficient
synthetic routes suitable for process chemistry scale up to the
level of one-kilogram batches of the lead molecule. This
material supports key preclinical studies, including
proof-of-principle
studies in animal models, early pharmacokinetic assays, initial
toxicology studies and formulation development. The process
chemistry facility we maintain in Cambridge, Massachusetts
allows us to accelerate these key studies. This facility also
allows us to provide non-good manufacturing practices materials
in quantities up to one kilogram to support early toxicological
studies and the initial development of formulations. These
formulations could then be manufactured using current good
manufacturing practices, or cGMP, material. We also contract
with third parties, including Novartis, for the synthesis of
material used in our toxicology studies and for formulation
development.
We contract with third parties, including Novartis, for the
synthesis of cGMP material used in our clinical trials. To
reduce costs and preserve manufacturing proprietary rights, we
provide these manufacturers with only the required portion of
the synthetic method and a sufficient quantity of the starting
or intermediate material to prepare the quantity and quality of
material necessary for the conduct of our clinical trials and
related nonclinical toxicology
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studies. We currently rely upon a number of third-party
manufacturers for the supply of our product candidates in bulk
quantities.
We have selected manufacturers that we believe comply with cGMP
and other regulatory standards. We have established a quality
control and quality assurance program, including a set of
standard operating procedures, analytical methods and
specifications, designed to ensure that our product candidates
are manufactured in accordance with cGMP and other domestic and
foreign regulations.
All of the materials that we require for manufacture of
Tyzeka®/Sebivo®
are currently available from more than one qualified source. The
process used for the manufacture of
Tyzeka®/Sebivo®
is robust and has been repeated by different manufacturers on a
multiple kilogram scale. We are currently pursuing the same
result with respect to the other product candidates we currently
have in clinical development.
We rely upon Novartis as well as other third-party manufacturers
for the dosage form of our product and product candidates. We do
not expect to internally manufacture material for our clinical
trials or undertake the commercial-scale manufacture of our drug
products. Accordingly, we are using Novartis as our current
manufacturer for the supply of
Tyzeka®
in the United States and we are in discussions with Novartis
about finalizing the manufacturing rights for the long-term
supply of
Sebivo®
in the rest of the world.
Sales and
Marketing
In accordance with the arrangements set forth in our development
agreement with Novartis, we will co-promote or co-market with
Novartis in the United States, United Kingdom, France, Germany,
Italy and Spain our HBV and HCV products and any other products
that Novartis subsequently licenses from us. In the markets
outside of the United States, Novartis is primarily responsible
for the marketing, distribution and sale of
Sebivo®,
valtorcitabine and valopicitabine, as well as other products
which it may license from us. We have established our own
commercial organization in the United States, including
marketing capabilities, a field force of sale representatives,
medical scientific liaisons, and regional business managers. As
of December 31, 2006, we had 20 sales representatives.
These professionals have extensive experience selling antiviral
products. We are in the process of building our European
commercial organization for the markets where we will co-promote
or co-market
Sebivo®.
Our product is primarily sold directly to pharmaceutical
wholesalers. There are a limited number of major wholesalers as
a result of significant consolidation among companies in the
industry. Therefore, as is typical in the pharmaceutical
industry, a few customers provide a significant portion of our
overall product revenues.
In the United States, United Kingdom and Western Europe,
approximately 80% of patients receiving antiviral therapy for
HBV and HCV are treated by medical specialists in the areas of
gastroenterology, hepatology or infectious diseases. By using a
specialized sales force, and offering treatments with clinical
benefits over other marketed products, we believe that we will
achieve significant rates of market penetration at reasonable
cost. We expect to utilize this specialized sales force in the
United States, United Kingdom, France, Germany, Italy and Spain
for the co-promotion and co-marketing and sale of all hepatitis
products that we may successfully develop.
Patents
and Licenses
Our policy is to pursue patents and to otherwise endeavor to
protect our technology, inventions and improvements that are
commercially important to the development of our business. We
also rely upon trade secrets that may be important to the
development of our business.
In 2006, we filed five pending provisional applications in one
or more of the therapeutic areas of HBV, HCV and HIV treatment.
14
Hepatitis
B Patent Portfolio and Licenses
Our hepatitis B patent portfolio was initiated with two
provisional applications filed on the use of telbivudine,
L-deoxycytidine, or LdC, and generically valtorcitabine, for the
treatment of HBV in the United States in August 1998 and April
1999. Subsequent U.S. patent applications were filed in
1999 and 2001 with four patents issued in 2002 and 2003 for the
treatment of HBV. These patents, which expire in 2019, are set
forth below:
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U.S. Patent No. 6,395,716 entitled
ß-L-2-Deoxy-Nucleosides for the Treatment of
Hepatitis B;
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U.S. Patent No. 6,569,837 entitled
ß-L-2-Deoxy Pyrimidine Nucleosides for the
Treatment of Hepatitis B;
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U.S. Patent No. 6,444,652 entitled
ß-L-2-Deoxy-Nucleosides for the Treatment of
Hepatitis B; and
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U.S. Patent No. 6,566,344, entitled
ß-L-2-Deoxy-Nucleosides for the Treatment of
Hepatitis B.
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Applications for patent term extensions to extend the term of
one of U.S. Patent No. 6,395,716 or 6,569,837, but not
both, were filed in the U.S. Patent Office. Although there
is no guarantee either application will be granted by the
U.S. Patent Office, if one of the applications for term
extension were granted, it could extend the term of
U.S. Patent No. 6,395,716 or 6,569,837, but not both,
to October 25, 2020.
An international patent application for LdC was filed in 1999
under the Patent Cooperation Treaty, and subsequently
corresponding patent applications were filed regionally in
Europe as well as nationally in 11 foreign countries. The
patents are co-owned by us, CNRS and University of Montpellier,
and under an agreement with these entities described under the
caption Collaborations, we have the exclusive right
to exploit the technology. Our HBV product, telbivudine, and the
biologically active form of valtorcitabine, LdC, were known
compounds at the time scientists at the CNRS and University of
Montpellier discovered that they are effective for the treatment
of HBV-infected patients. Accordingly, we will not obtain claims
directed to the composition of matter of telbivudine or LdC. We
have, however, obtained patent claims directed to the method of
treatment of HBV-infected patients with telbivudine and the
biologically active LdC in the U.S. We will attempt to
obtain similar patent claims directed to the use of telbivudine
and the biologically active LdC outside of the U.S.
In June 2000, a provisional application was filed on
valtorcitabine and its use to treat HBV in the United States and
a subsequent U.S. patent application was filed in 2001. The
U.S. Patent Office has issued to us a patent on
valtorcitabine itself, as well as claims on pharmaceutical
composition that include valtorcitabine. This patent will expire
in 2021. An international patent application was filed in 2001
under the Patent Cooperation Treaty, and subsequently,
corresponding patent applications were filed regionally in
Europe, Eurasia, the African Regional Industrial Property
Office, or ARIPO, and the Organisation Africaine de la
Propriete, Intellectuelle, or OAPI, as well as nationally in 20
foreign countries. Eurasia is a patent convention made up of a
number of Asian countries, including China. Corresponding
applications also were filed directly in 13 additional foreign
countries. Since valtorcitabine, a prodrug of LdC, is a new
compound, we will attempt to obtain patent claims covering the
compound itself as well as patent claims directed to the use of
the compound to treat HBV-infected patients.
In June 1998, we entered into an exclusive license agreement,
which we refer to as the UAB license agreement, with the
University of Alabama at Birmingham Research Foundation, or
UABRF, pursuant to which we were granted an exclusive license to
the rights that the University of Alabama at Birmingham, or UAB,
an entity affiliated with UABRF, Emory University and CNRS,
which we refer to collectively as the 1998 licensors, 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 infection. In January 2004, February
2005 and June 2005, UABRF notified us that it intended to file a
U.S. continuation patent application claiming priority to
the 1995 patent application, which itself is a continuation in
part of a 1993 application that would purportedly enable the
1998 licensors to prosecute and seek to obtain generic patent
claims generally encompassing the method of using telbivudine to
treat patients infected with HBV. In July 2005, UABRF filed such
a continuation patent application.
In February 2006, UABRF notified us that it and Emory University
were asserting a claim that, as a result of the filing of a
continuation patent application in July 2005 by UABRF, the UAB
license agreement covers our telbivudine technology. UABRF
contends that we are obligated to pay the 1998 licensors an
aggregate of
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$15.3 million comprised of 20% of the $75 million
license fee we received from Novartis in May 2003 in connection
with the license of our HBV product candidates and a
$0.3 million payment in connection with the submission to
the FDA of the IND pursuant to which we conducted clinical
trials of telbivudine. We disagree with UABRFs contentions
and have advised UABRF and Emory University that we will utilize
the dispute resolution procedures set forth in the UAB license
agreement for resolution of this dispute. Under the terms of
that agreement, if resolution cannot be achieved through
negotiations between the parties or mediation, it must be
decided by binding arbitration under the rules of the American
Arbitration Association before a panel of three arbitrators.
If it is determined that the UAB license agreement does cover
our technology, we could be obligated to make payments to the
1998 licensors in the amounts and manner specified in the UAB
license agreement. While we dispute the demands made by UABRF,
even if liability were found to exist, UABRFs claims, in
addition to those described above could include payments in the
aggregate amount of $1.0 million due upon achievement of
regulatory milestones, a 6% royalty on annual sales up to
$50 million and a 3% royalty on annual sales greater than
$50 million made by us or an affiliate of ours.
Additionally, if we sublicense our rights to any entity other
than one which holds or controls at least 50% of our capital
stock, or if Novartis ownership interest in us declines
below 50% of our outstanding shares of capital stock, UABRF
could contend that we would be obligated to pay to the 1998
licensors 30% of all royalties received on sales by the
sublicensee of telbivudine and 20% of all fees, milestone
payments and other cash consideration received from the
sublicensee with respect to telbivudine.
If we fail to perform our material obligations under the UAB
license agreement, UABRF, acting for the 1998 licensors, may
attempt to terminate the UAB license agreement or render the
license to us non-exclusive. We do not believe that we are in
default of any of the material obligations to which we are
subject under the UAB license agreement. Any attempt to
terminate the agreement would be subject to binding arbitration.
In the event UABRF is successful in terminating the license
agreement as a result of a breach by us after a period of
arbitration, and the 1998 licensors obtain a valid enforceable
claim that generally covers the use of telbivudine to treat HBV,
it would be necessary for us to obtain another license from the
1998 licensors. Such license may not be available to us on
reasonable terms, on an exclusive basis or at all. This could
materially adversely affect or preclude our ability to continue
to commercialize telbivudine.
If the 1998 licensors were instead to render the UAB license
agreement to us non-exclusive, we would not be prohibited from
commercializing telbivudine to treat HBV, but a non-exclusive
license could be granted to one or more of our competitors by
one or more of the 1998 licensors. In the event that the 1998
licensors exclusively or nonexclusively license any claims
covering the use of telbivudine to treat HBV to a competitor, we
believe that such a competitor would have to overcome
substantial legal and commercial hurdles to successfully
commercialize the product. For example, we have already obtained
four U.S. patents covering the use of telbivudine to treat
HBV, which we believe a competitor would infringe if it sought
to commercialize telbivudine. Our patent applications are also
pending or granted in Europe, Australia, Canada, and Japan, as
well as numerous other countries. Additionally, since we are the
first company that is taking telbivudine through clinical
trials, we expect to benefit from a five-year period of
commercialization exclusivity in the United States that is
granted by the FDA during which it will refuse to grant
marketing approval to any competitor to sell telbivudine for the
treatment of HBV. We may also receive regulatory exclusivity
periods in Europe and in other countries.
If it is determined that the UAB license agreement between us
and UABRF does cover our use of telbivudine to treat HBV, or we
must otherwise rely upon a license agreement granted by the 1998
licensors to commercialize telbivudine, we may be in breach of
certain of the representations and warranties we made to
Novartis under the development agreement and the stock purchase
agreement. For a further description see
Collaborations Relationship with
Novartis Indemnification and Risk
Factors Factors Related to Our Relationship with
Novartis and Factors Related to Patents and
Licenses.
In January 2007, the Board of Trustees of the University of
Alabama and related entities filed a complaint in the United
States District Court for the Northern District of Alabama
Southern Division against us, CNRS and the University of
Montpellier. The complaint alleges that a former employee of UAB
is a co-inventor of certain patents 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®,
our product for the treatment of HBV. We intend to vigorously
defend this lawsuit.
16
Hepatitis
C Patent Portfolio
Our HCV patent portfolio was initiated in May 2000 with one
provisional U.S. patent application directed to the
treatment of HCV with nucleoside analogs. Additional
U.S. provisional applications were filed in May 2000 and
April 2001 directed generally to the treatment of flaviviruses
and pestiviruses with the same compounds. Two U.S. patent
applications corresponding to these two sets of provisional
applications were filed in May 2001 in the United States. One of
these applications issued as U.S. Patent
No. 6,812,219, covering the use of NM107, its prodrugs and
certain other nucleoside analogs to treat pestiviruses and
flaviviruses, and the second application issued as
U.S. Patent No. 6,914,057, covering the use of these
compounds to treat HCV. Additional applications based on the
first application covering the use of NM107, its prodrugs
and/or
certain other nucleoside analogs to treat pestiviruses and
flaviviruses that have issued include U.S. Patent
No. 7,105,493, U.S. Patent No. 7,101,861 and
U.S. Patent No. 7,148,206; and additional applications
based on the second application covering the use of these
compounds to treat HCV that have issued include U.S. Patent
No. 7,169,766 and U.S. Patent No. 7,157,441. The
patents will expire in 2021. Two international patent
applications were filed in 2001 under the Patent Cooperation
Treaty, and subsequently corresponding patent applications were
filed regionally in Europe, Eurasia, ARIPO, and for one of the
applications, OAPI, as well as nationally in 20 foreign
countries. Corresponding applications for these two sets of
applications were also each filed directly in 13 additional
foreign countries. We co-own these filings with the University
of Cagliari, which has exclusively licensed its interest to us.
The patent applications cover the use of NM107 and
valopicitabine generically, to treat HCV and other flaviviridae
infections. Valopicitabine is a prodrug of the biologically
active molecule NM107.
In June 2002 and April 2003, three U.S. provisional patent
applications were filed to be directed to the use of prodrugs of
branched nucleosides to treat HCV and other flaviviridae
infections. These applications generically and specifically
describe valopicitabine and its use to treat these infections.
In June 2003, three U.S. patent applications were filed,
claiming priority to the provisional applications. If issued,
these patents will expire in 2023. Also in June 2003, three
international patent applications were filed under the Patent
Cooperation Treaty, and corresponding applications were filed
directly in 12 additional countries and subsequently
corresponding patent applications were filed regionally in
Europe, Eurasia, ARIPO and OAPI, as well as nationally in 21
foreign countries. NM107 was a known compound at the time of the
discovery of its activity against HCV. As a result, we will not
obtain composition of matter claims for these compounds, but
instead will attempt to obtain patent claims directed to the
method of treatment of HCV-infected patients with these product
candidates. Since we believe that valopicitabine is a new
compound, we will attempt to obtain patent claims covering the
compound itself as well as patent claims directed to the use of
valopicitabine to treat HCV-infected patients. These patent
filings are owned by us and one or more of the University of
Cagliari or CNRS.
HIV
Patent Portfolio
Our HIV patent portfolio covering non-nucleoside reverse
transcriptase inhibitor compounds includes U.S. provisional
applications filed in September 2004 and August 2005, which were
together filed as a U.S. normal patent application in
September 2005 and an international patent application that was
also filed in September 2005 under the Patent Cooperation
Treaty. These applications are owned by us.
Additionally, we have other applications covering the NNRTI
class that are based on a U.S. provisional application
filed in 2001, which was filed as a U.S. patent application
in 2002. This U.S. application has now been issued as
U.S. Patent No. 6,710,068 which will expire in 2022.
An international patent application was filed in 2002 under the
Patent Cooperation Treaty and subsequently corresponding patent
applications were filed regionally in Europe and nationally in
three foreign countries. Corresponding applications also were
filed directly in four additional foreign countries. A further
provisional application was filed in 2002, directed to NNRTI
prodrugs. A U.S. patent application was filed in 2003, and
the patent, if issued, will expire in 2023. An international
patent application was filed in 2003 under the Patent
Cooperation Treaty and subsequently corresponding applications
were filed regionally in Europe and nationally in two other
countries. A corresponding application was filed directly in one
other country. These applications are co-owned by us with the
University of Cagliari, which has exclusively licensed its
rights to us.
17
We hold exclusive licenses from TherapX and Dr. Raymond
Schinazi to one U.S. issued patent, U.S. Patent
No. 5,750,493 entitled Method to Improve the
Biological and Antiviral Activity of Protease Inhibitors,
and five associated
non-U.S. patent
filings expiring on or before 2016 that cover a method of using
roxythromycin, a generic compound, to enhance the antiviral
activity of protease inhibitors.
Competition
Our industry is highly competitive and subject to rapid
technological change. Significant competitive factors in our
industry include:
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product effectiveness;
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safety;
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timing and scope of regulatory approvals;
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price of products;
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availability of supply;
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patent protection; and
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sales and marketing capabilities and resources.
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Many of the companies competing against us have substantially
greater financial and other resources. In addition, many of our
competitors have significantly greater experience in testing
pharmaceutical and other therapeutic product candidates and
obtaining FDA and other regulatory approvals of products for use
in health care and marketing and selling those products.
Accordingly, our competitors may be more successful than we may
be in obtaining FDA approval for products and achieving
widespread market acceptance. We also compete with respect to
manufacturing efficiency and marketing capabilities, areas in
which we have substantially less experience than our competitors.
Tyzeka®/Sebivo®,
and any future products that we successfully develop, will
compete with existing and future therapies. The key competitive
factors affecting the commercial success of our products are
likely to be its efficacy, resistance profile, safety profile,
convenience of dosing and price in comparison with available
therapies.
Many organizations, including large pharmaceutical and
biopharmaceutical companies as well as academic and research
organizations and government agencies, are commercializing or
pursuing novel drug therapies targeting the treatment of HBV,
HCV and HIV. We are aware of at least three small molecule
products that are currently marketed in the United States and
elsewhere for the treatment of chronic hepatitis B. Such
therapies are lamivudine, marketed by GlaxoSmithKline plc as
Epivir-HBV®;
adefovir dipoxil, marketed by Gilead Sciences, Inc., as
Hepsera®;
and entecavir, marketed by Bristol-Myers Squibb Company, as
Baraclude®.
Pegylated interferon is also approved for the treatment of
chronic hepatitis B. Pegylated interferon together with
ribavirin is the current standard of care for the treatment of
hepatitis C. Additional companies with which we expect to
compete include Abbott Laboratories, Boehringer Ingelheim
International GmbH, F. Hoffman-LaRoche & Co. ,
Johnson & Johnson, Merck & Co., Inc., Pfizer
Inc., Schering-Plough Corporation, Human Genome Sciences, Inc.,
InterMune, Inc., Isis Pharmaceuticals, Inc., Ribapharm, Inc., a
wholly-owned subsidiary of Valeant Pharmaceuticals
International, SciClone Pharmaceuticals, Inc., Anadys
Pharmaceuticals, Inc., and Vertex Pharmaceuticals Inc. Many of
these companies and organizations, either alone or with their
collaborative partners, have substantially greater financial,
technical and human resources than we do. In addition, our
competitors also include smaller private companies such as
Pharmasset, Ltd.
We believe that a significant number of drugs are currently
under development and will become available in the future for
the treatment of HBV, HCV and HIV. We anticipate that we will
face intense and increasing competition as new products enter
the market and advanced technologies become available. Our
competitors products may be more effective, or more
effectively marketed and sold, than any product we may
commercialize. Competitive products may render our product
obsolete or non-competitive before we can recover the expenses
of developing and commercializing any of our product candidates.
We are also aware that the development of a cure or new
treatment methods for the diseases we are targeting could render
our products non-competitive or obsolete.
18
Pharmaceutical
Pricing and Reimbursement
In both domestic and foreign markets, sales of our products will
depend in part upon the availability of reimbursement from
third-party payers. Third-party payers include government health
agencies, managed care providers, private health insurers and
other organizations. These third-party payers are increasingly
challenging drug prices and are examining the cost-effectiveness
of medical products and services. In addition, significant
uncertainty exists as to the reimbursement status of newly
approved healthcare products. We may need to conduct
pharmacoeconomic studies to demonstrate the cost-effectiveness
of our products. Any product candidates we successfully develop
may not be considered cost-effective. Adequate third-party
reimbursement may not be available to enable us to maintain
price levels sufficient to realize an appropriate return on our
investment in product development. The U.S. and foreign
governments continue to propose and pass legislation designed to
reduce the cost of healthcare. Accordingly, legislation and
regulations affecting the pricing of pharmaceutical products may
change before our product candidates are approved for marketing.
Adoption of new legislation could further limit reimbursement
for pharmaceutical products.
The marketability of any products we successfully develop may
suffer if the government and third-party payers fail to provide
adequate coverage and reimbursement rates for such products. In
addition, an increasing emphasis on managed care in the United
States has and will continue to increase the pressure on
pharmaceutical pricing.
Regulatory
Matters
In December 2005, we submitted an NDA to the FDA for marketing
approval of
Tyzeka®
as an oral,
once-a-day
treatment of chronic hepatitis B in adults. In October 2006, we
received approval from the FDA to market
Tyzeka®
in the United States. In January 2006, Novartis submitted a
marketing authorization application, or an MAA to the EMEA
seeking authorization to market telbivudine in the European
Union. In February 2007, the EMEAs Committee for Medicinal
Products for Human Use recommended
Sebivo®
for approval. Regulatory applications for marketing approval
have also been submitted by Novartis in 2006 in China, Canada,
Switzerland, Taiwan, South Korea and Australia. To date, we have
received marketing approval of
Sebivo®
for the treatment of chronic hepatitis B in more than 10
countries including Switzerland, China, South Korea and Canada.
Currently, we are evaluating valtorcitabine and valopicitabine
in phase II clinical trials.
FDA
Requirements for Approval of Drug Products
The research, testing, manufacture and marketing of drug
products are extensively regulated by numerous governmental
authorities in the United States and other countries. In the
United States, drugs are subject to rigorous regulation by the
FDA. The Federal Food, Drug and Cosmetic Act and other federal
and state statutes and regulations govern, among other things,
the research, development, testing, manufacture, storage, record
keeping, labeling, promotion and marketing and distribution of
pharmaceutical products. If we fail to comply with applicable
regulatory requirements, we may be subject to a variety of
administrative or judicially imposed sanctions, including:
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product seizures;
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voluntary or mandatory recalls;
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voluntary or mandatory patient and physician notification;
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withdrawal of product approvals;
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restrictions on, or prohibitions against, marketing our
products, if approved for commercial sale;
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fines;
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restrictions on importation of our products;
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injunctions;
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debarment;
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civil and criminal penalties; and
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suspension of review, refusal to approve pending applications.
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The steps ordinarily required before a new pharmaceutical
product may be marketed in the United States include preclinical
studies, animal tests and formulation studies, the submission to
the FDA of an IND, which must become effective before human
clinical trials may commence in the United States and adequate
and well-controlled human clinical trials to establish the
safety and effectiveness of the drug for each indication for
which it is being tested. Satisfaction of FDA pre-market
approval requirements typically takes several years, and the
actual time required may vary substantially based upon the type,
complexity and novelty of the product candidate or disease.
Government regulation may delay or prevent marketing of
potential product candidates for a considerable period of time
and impose costly procedures upon a manufacturers
activities. Success in early stage clinical trials does not
assure success in later stage clinical trials. Data obtained
from clinical activities is not always conclusive and may be
susceptible to varying interpretations that could delay, limit
or prevent regulatory approval. Even if a product receives
regulatory approval, later discovery of previously unknown
problems with a product may result in restrictions on the
product or even complete withdrawal of the product from the
market.
Preclinical studies include laboratory evaluation of product
chemistry and formulation, as well as in vitro and
animal studies to assess the potential safety and efficacy of
the product candidate. The conduct of the preclinical studies
and formulation of compounds for testing must comply with
federal regulations and requirements. The results of preclinical
studies are submitted to the FDA, as part of the IND to justify
the administration of the product candidate to human subjects in
the proposed clinical trial.
A 30-day
waiting period after the filing of each IND is required prior to
the commencement of clinical testing in humans. If the FDA has
not commented on or questioned the IND within this
30-day
period, the proposed clinical trial may begin. If the FDA has
comments or questions, the questions must be answered to the
satisfaction of the FDA before initial clinical testing can
begin.
After the commencement of clinical trials, the FDA may, at any
time, impose a clinical hold on ongoing clinical trials. If the
FDA imposes a clinical hold, clinical trials cannot commence or
recommence without FDA authorization and then only under terms
authorized by the FDA. Additionally, if a clinical hold is
imposed on an ongoing clinical trial, further administration of
the investigational agent to patients would not be permitted
unless specifically allowed by the FDA. In some instances, the
IND process can result in substantial delay and expense.
Clinical trials involve the administration of the product
candidate to healthy volunteers or patients under the
supervision of a qualified principal investigator. Clinical
trials must be conducted in compliance with federal regulations
and requirements, under protocols detailing the objectives of
the clinical trial, the parameters to be used in monitoring
safety and the effectiveness criteria to be evaluated. Each
protocol must be submitted to the FDA as part of the IND. The
clinical trial protocol and informed consent information for
patients to be enrolled in the clinical trial must also be
approved by the institutional review board at each institution
where the clinical trials will be conducted.
Clinical trials to support NDAs for marketing approval are
typically conducted in three sequential phases, but the phases
may overlap. In phase I, the initial introduction of a
product candidate into healthy human subjects or patients, a
product candidate is tested to assess metabolism,
pharmacokinetics and pharmacological actions and safety,
including side effects associated with increasing doses.
Phase II usually involves clinical trials in a limited
subset of the intended patient population, to determine dosage
tolerance and optimum dosage, identify possible adverse effects
and safety risks and provide preliminary support for the
efficacy of the product candidate in the indication being
studied.
If a product candidate is found to be effective and to have an
acceptable safety profile in phase II evaluations,
phase III clinical trials are undertaken to further
evaluate clinical efficacy and to further test for safety within
an expanded patient population at geographically dispersed
clinical trial sites. There can be no assurance that
phase I, phase II or phase III testing of our
product candidates will be completed successfully within any
specified time period, if at all.
20
After completion of the required clinical testing, generally an
NDA is prepared and submitted to the FDA. FDA approval of the
NDA is required before marketing of the product may begin in the
United States. The NDA must include, among other things, the
results of extensive clinical and preclinical studies and the
compilation of data relating to the products chemistry,
pharmacology, manufacture, safety and effectiveness. The cost of
an NDA is substantial, both in terms of studies required to
generate and compile the requisite data, as well as the
mandatory user fees submitted with the application.
The FDA has 60 days from its receipt of the NDA to
determine whether the application will be accepted for filing
based on the agencys threshold determination that the NDA
is sufficiently complete to permit substantive review. Once the
submission is accepted for filing, the FDA may designate the
submission for priority review. Priority review is granted to
product candidates that demonstrate a significant improvement to
approved products in terms of safety or efficacy in the
treatment, diagnosis or prevention of serious or
life-threatening conditions. The FDAs decision to grant
priority review is driven solely by the data submitted and
cannot be assured in advance. Under the Prescription Drug User
Fee Act, or PDUFA, product candidates that are given a priority
review designation have a
6-month FDA
review timeline.
After a submission is accepted for filing, the FDA begins an
in-depth review of the NDA. Under federal law, the FDA has
180 days in which to review the application and respond to
the applicant. The review timeline is often significantly
extended by FDA requests for additional information or
clarification regarding information already provided in the
submission. The FDA may also refer the application to an
appropriate advisory committee, typically a panel that includes
clinicians, statisticians and other experts for review,
evaluation and a recommendation as to whether the application
should be approved. The FDA is not bound by the recommendation
of an advisory committee.
If FDA evaluations of the NDA and the manufacturing facilities
are favorable, the FDA may issue an approval letter, or, in some
cases, an approvable letter followed by an approval letter.
Approvable letters usually contain a number of conditions that
must be met to secure final approval of the NDA. When and if
those conditions have been met to the FDAs satisfaction,
the FDA will issue an approval letter. The approval letter
authorizes commercial marketing of the drug for specific
indications. As a condition of NDA approval, the FDA may require
post-marketing testing and surveillance to monitor the
drugs safety or efficacy or impose other conditions. Once
granted, product approvals may be withdrawn if compliance with
regulatory standards is not maintained or problems occur
following initial marketing.
Once the NDA is approved, a product will be subject to certain
post-approval requirements, including requirements for adverse
event reporting and submission of periodic reports
and/or
supplemental new drug applications for approval of changes to
the originally approved prescribing information, product
formulation, and manufacturing and testing requirements.
Following approval, drug products are required to be
manufactured and tested for compliance with the NDA
and/or
compendial specifications prior to release for commercial
distribution. The manufacture and testing must be performed in
approved manufacturing and testing sites complying with cGMP
requirements and subject to FDA inspection authority.
Approved drug products must be promoted in a manner which is
consistent with their terms and conditions of approval. In
addition, the FDA requires substantiation of any claims of
superiority of one product over another including, in many
cases, requirements that such claims be proven by adequate and
well controlled
head-to-head
clinical trials. To the extent that market acceptance of our
product candidates may depend on their superiority over existing
therapies, any restriction on our ability to advertise or
otherwise promote claims of superiority, or requirements to
conduct additional expensive clinical trials to provide proof of
such claims, could negatively affect the sales of our products
and/or our
expenses.
From time to time, legislation is drafted and introduced that
could significantly change the statutory provisions governing
the approval, manufacturing and marketing of drug products. In
addition, FDA regulations and guidance are often revised or
reinterpreted by the FDA or the courts in ways that may
significantly affect our business and our product candidates. It
is impossible to predict whether legislative changes will be
enacted, or FDA regulations, guidance or interpretations
changed, or what the impact of such changes, if any, may be.
21
If the FDAs evaluation of the NDA submission or
manufacturing facilities is not favorable, the FDA may refuse to
approve the NDA or issue a not approvable letter. The not
approvable letter outlines the deficiencies in the submission
and often requires additional testing or information. The FDA
ultimately may decide that the application does not satisfy the
regulatory criteria for approval.
Foreign
Regulation of Drug Product Approval
Under the terms of our agreement with Novartis, we have primary
responsibility for preparing and filing U.S. regulatory
submissions with respect to any product candidate which Novartis
has licensed from us. Novartis has primary responsibility for
preparing and filing regulatory submissions with respect to any
licensed product in all other countries in the world. Under
certain circumstances, primary responsibilities for all or
certain regulatory tasks in a particular country may be switched
from one party to the other.
Europe
In the European Union, which we refer to as the EU,
investigational products are subject to extensive regulatory
requirements. As in the United States, the marketing of
medicinal products is subject to the granting of marketing
authorizations by relevant regulatory agencies. The grant of
these marketing authorizations can involve testing in addition
to that which the FDA requires and the time required may also
differ from that required for FDA approval. In the EU, approval
of new pharmaceutical products can be granted either through a
mutual recognition procedure and decentralized approval or
through a centralized procedure. The processes are described
below.
Mutual Recognition Procedure and Decentralized
Approval. An applicant submits an application in
one EU member state, known as the reference member state,
and requests the reference member state to approve the drug. The
reference member state will review the registration documents
within 210 days after receipt of a valid application. With
the approved dossier and the summary of product characteristics,
the applicant then requests the mutual recognition in the
concerned member states of the reference authorization of the
reference member state. Within 90 days of receipt, the
concerned member states shall approve the assessment report,
summary of product characteristics, and labeling and package
leaflet, and inform the reference member state accordingly. The
reference member state shall record the agreement of all
parties, close the procedure and inform the applicant
accordingly.
Each member state in which the application has been submitted
shall adopt a decision in conformity with the approved
assessment report, summary of product characteristics, and the
labeling and package leaflet as approved, within 50 days
after acknowledgement of the agreement. If a member state cannot
approve the assessment report, summary of product
characteristics, and the labeling and package leaflet on the
grounds of potential serious risk to public health, it will give
a detailed exposition of the reasons for its position to the
reference member state, the other member states concerned, and
to the applicant. The points of disagreement will be referred to
a coordination group for resolution. Alternatively, the
applicant could implement changes in the summary of product
characteristics as requested by a country.
Centralized Procedure. This procedure is
currently mandatory for products developed by means of a
biotechnological process and optional for certain new active
substances. However beginning November 2005, medicinal products
containing new active substances and for which the indication is
treatment of AIDS, cancer, neurodegenerative disorder or
diabetes must be submitted via the centralized process.
Additionally, beginning May 2008, the centralized procedure
will also be mandatory for products which contain new active
substance and for which the indication is treatment of
autoimmune diseases and other immune dysfunctions, and viral
diseases. Our product candidates fall into the last category.
Under the centralized procedure, an application is submitted to
the EMEA. Two EU member states are appointed to conduct an
initial evaluation of each application, the so-called rapporteur
and co-rapporteur countries. The regulatory authorities in both
the rapporteur and co-rapporteur countries each prepare an
assessment report. These reports become the basis of a
scientific opinion of the Committee for Medicinal Products for
Human Use. If this opinion is favorable, it is sent to the
European Commission which drafts a decision. After consulting
with the member states, the European Commission adopts a
decision and grants a marketing authorization which is valid
throughout the EU and confers the same rights and obligations in
each of the member states as a marketing
22
authorization granted by that member state. Several other
European countries outside the EU, such as Norway and Iceland,
accept EU review and approval as a basis for their own national
approval.
Asia
Until recently, submissions to regulatory authorities in Asia
for marketing authorization have been primarily based on using
prior approvals in either the United States or the EU in
addition to small, locally conducted studies. Recently an
increasing number of companies are conducting phase III
clinical trials in several major Asian countries such as Japan,
China, Taiwan and South Korea. To conduct clinical trials in
these regions, local clinical trial applications, equivalent to
INDs, must be filed in the country. Upon completion of all
clinical trials, marketing applications similar to the
U.S. NDA may be submitted to and approved by the
appropriate regulatory authorities prior to commercialization.
Marketing
Applications Format
As part of the International Conference on Harmonization, or
ICH, standardization initiatives spearheaded by the United
States, EU and Japan, future marketing applications in these
regions will be submitted as a core global dossier known as the
Common Technical Document, or CTD. While the FDA has not
mandated that submissions be made in the CTD format, it has
indicated that this is its preferable submission format. In the
EU and Japan, the CTD is the required submission format.
Electronic CTDs, or
e-CTD, are
currently being used and are the manner of submission now
preferred by the regulatory agencies requiring and recommending
the CTD format. Non-ICH regions such as Eastern and Central
Europe, Latin America and China have indicated that the CTD will
be an acceptable submission format.
Hazardous
Materials
Our research and development processes involve the controlled
use of numerous hazardous materials, chemicals and radioactive
materials and produce waste products. We are subject to federal,
state and local laws and regulations governing the use,
manufacture, storage, handling and disposing of hazardous
materials and waste products, including certain regulations
promulgated by the U.S. Environmental Protection Agency, or
EPA. The EPA regulations to which we are subject require that we
register with the EPA as a generator of hazardous waste. We do
not expect the cost of complying with these laws and regulations
to be material. While we maintain insurance, it is possible that
costs for which we may become liable as a result of any
environmental liability or toxic tort claims that may be
asserted against us in connection with our use or disposal of
hazardous materials, chemicals and radioactive materials, may
exceed or otherwise be excluded from such insurance coverage.
Such amounts could be substantial.
Employees
As of December 31, 2006, we had 277 full time employees,
160 of whom were engaged in research, development and
manufacturing functions and 117 of whom were engaged in
administration, finance and commercialization activities.
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 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. You should
consider the following risks, together with all of the other
information in this Annual Report on
Form 10-K
for the year ended December 31, 2006, before deciding to
invest in our securities.
23
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 product
sales, we will not be profitable.
We have incurred significant losses since our inception in May
1998. We have generated limited revenue from the sale of
products to date and are unable to make an accurate assessment
of potential future revenue. We expect to incur annual operating
losses over the next several years as we expand our drug
discovery, development and commercialization 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 sales, regulatory approval for products we
successfully develop must be obtained and we and Novartis must
effectively manufacture, market and sell such products. We
introduced
Tyzeka®
commercially in the United States in the fourth quarter of 2006.
Even if we successfully commercialize
Tyzeka®
in the United States or other product 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.
Our failure to become and remain profitable may depress the
market price of our common stock and impair our ability to raise
capital, expand our business or continue our operations.
We
will need additional capital to fund our operations, including
the commercialization of
Tyzeka®/Sebivo®
and the development, manufacture and commercialization of our
product candidates. If we do not have or cannot raise additional
capital when needed, we will be unable to develop and
commercialize our product candidates successfully.
Our cash, cash equivalents and marketable securities balance was
approximately $186 million at December 31, 2006. We
believe that this balance, milestone payments we expect to
receive from Novartis for the approval of
Sebivo®
in Europe and China, the development funding we expect to
receive from Novartis relating to
Tyzeka®/Sebivo®,
valtorcitabine and valopicitabine, and the anticipated proceeds
from sales of
Tyzeka®/Sebivo®
will be sufficient to satisfy our anticipated cash needs until
the end of 2008. However, we may need or choose to seek
additional funding within this period of time. The
commercialization of
Tyzeka®/Sebivo®
and other products, if any, and the development of our product
candidates will require substantial additional cash to fund
expenses that we will incur in connection with sales and
marketing efforts, manufacturing of commercial supply,
preclinical studies and clinical trials and regulatory review.
We expect that our selling, general and administrative expenses
will increase significantly as we continue to commercialize and
launch
Tyzeka®/Sebivo®
in the United States and, if approved, in the United Kingdom,
Germany, Italy, France and Spain, and thereafter continue
efforts to market and sell
Tyzeka®/Sebivo®
and any other product candidates we successfully develop.
Our need for additional funding will depend in large part on
whether:
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Tyzeka®/Sebivo®
is approved for sale in other major markets in addition to the
United States;
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with respect to
Tyzeka®/Sebivo®,
valtorcitabine and valopicitabine, Novartis continues to
reimburse us for development expenses, and we achieve and
receive from Novartis additional license fees and milestone
payments relating to the development and regulatory approval of
these licensed product candidates; and
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with respect to our other product candidates, Novartis exercises
its option to license other product candidates, and we receive
related license fees, milestone payments and development expense
reimbursement payments from Novartis.
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In addition, although Novartis has agreed to pay for certain
development expenses incurred under development plans it
approves for products and product candidates 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
product candidate by providing us with six months written notice.
Our future capital needs will also depend generally on many
other factors, including:
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the costs of commercializing and launching
Tyzeka®/Sebivo®
and other products, if any, which are successfully developed and
approved for commercial sale by regulatory authorities;
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24
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the amount of revenue that we may be able to realize from
commercialization and sale of telbivudine and other product
candidates, if any, which are approved for commercial sale 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, HBV and HIV;
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the cost of obtaining, maintaining and defending patents on
Tyzeka®/Sebivo®,
our product candidates and our processes;
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the arrangements we establish for manufacturing and the related
cost of manufacturing commercial supply of products;
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the cost, timing and outcome of regulatory reviews;
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the cost of establishing and maintaining sales and marketing
functions;
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the commercial potential of our product 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, product candidates or other business assets;
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the magnitude of our general and administrative
expenses; and
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any costs we may incur under current and future licensing
arrangements.
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We expect that we will incur significant costs to complete the
clinical trials and other studies required to enable us to
submit NDAs with the FDA for our HBV product candidate,
valtorcitabine, and our HCV product candidate, valopicitabine as
we continue development of each of these product candidates. The
time and cost to complete clinical development of these product
candidates may vary as a result of a number of factors.
Additionally, we expect to continue to incur significant costs
in connection with the ongoing clinical evaluation of the use of
Tyzeka®/Sebivo®
in patients with liver failure, or decompensated liver disease,
and in connection with several clinical trials of
Tyzeka®/Sebivo®
that are being conducted to further establish the product
profile and support the commercialization of
Tyzeka®/Sebivo®.
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.
If we raise additional capital through the sale of our common
stock, existing stockholders, other than Novartis, which has the
right to maintain its current level of ownership, will be
diluted 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 alliance or licensing arrangements that may not be
favorable to us. These arrangements could result in the transfer
to third parties of rights that we consider valuable.
We may
be unable to commercialize products for which we receive
approval from regulatory agencies.
Even though we have received approval from regulatory
authorities in several jurisdictions outside the United States
for
Sebivo®,
commercialization of
Sebivo®
in these jurisdictions could be delayed for a number of reasons,
some of which are outside of our control. Specifically,
commercialization of
Sebivo®
in these jurisdictions may be delayed by our failure, or the
failure of Novartis, to timely finalize distribution
arrangements, manufacturing process and arrangements, produce
sufficient inventory
and/or
properly prepare the sales force. If we are unable to launch and
commercialize
Tyzeka®/Sebivo®
on the timeline we anticipate, our business and financial
position may be materially adversely affected due to reduced
revenue from product sales during the period that
commercialization is delayed.
25
We
will not be able to continue to commercialize our drug products
successfully if we are unable to hire, train, deploy and retain
qualified sales personnel as part of our sales
force.
Our commercialization of
Tyzeka®/Sebivo®
and other products, if any, we successfully develop will depend
upon our ability to establish and maintain an effective
marketing and sales organization. Currently, we have limited
sales, marketing and distribution experience. In July 2006, we
established a U.S. sales force and we continue to recruit
sales personnel to establish a direct sales force for the
European markets in which we expect to co-promote or co-market
Sebivo®
with Novartis, if marketing authorization is received.
Competition for sales personnel is intense. Due to the
promotion, marketing and sale of competitive and potentially
competitive products within specialized markets by companies
that have significantly greater resources and existing
commercialization infrastructures, it may be difficult for us to
recruit and retain qualified personnel with experience in sales
and marketing of viral and other infectious disease
therapeutics. Even if we successfully hire sales personnel, we
may not be successful in training and deploying them. For the
commercial launch of
Sebivo®,
if approved in the United Kingdom, France, Italy, Germany
or Spain, we will rely heavily on the sales and marketing
capabilities that Novartis will provide, and in addition, if we
are not successful in hiring, training, deploying and retaining
our own qualified sales personnel in these countries, then we
may not be able to successfully commercialize
Sebivo®.
Furthermore, we do not know if our U.S. sales force or
other sales forces we seek to establish in Europe will be
sufficient in size or scope to compete successfully in the
marketplace.
We
will incur significant expense to establish and maintain our
marketing and sales capabilities.
To maintain our U.S. marketing and sales capabilities and
establish our marketing and sales capabilities in the European
countries in which we expect to co-promote and co-market with
Novartis any products for which we receive marketing
authorization, we will incur significant expenses. Moreover, if
the marketing authorizations for
Sebivo®
in any of the United Kingdom, Germany, Italy, France or Spain is
delayed substantially, or not approved, we will have incurred
significant unrecoverable expenses. The cost of establishing a
marketing and sales force may not be justifiable in light of the
revenues generated by any particular product or combination of
products in any one or more markets and if approval is delayed
or we fail to obtain marketing authorization in any particular
market, we will have incurred significant unrecoverable expenses.
In the United States and the European countries in which we
expect to co-promote and co-market with Novartis
Tyzeka®/Sebivo®,
our sales force may be unable to meet our share of the total
product details, as defined in the development agreement. If we
are unable to meet our share of total product details, then we
may be subject to financial penalties payable to Novartis, as
specified in the development agreement.
Our
market is subject to intense competition. If we are unable to
compete effectively,
Tyzeka®/Sebivo®,
other products we successfully develop and our product
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
hepatitis B infection, we are aware of four other drug products,
specifically, lamivudine, entecavir and adefovir dipivoxil, each
nucleoside analogs, and pegylated interferon, which are approved
by the FDA and commercially available in the United States.
These products have preceded
Tyzeka®/Sebivo®
into the marketplace and have gained acceptance with physicians
and patients. For the treatment of chronic hepatitis C, the
current standard of care is pegylated interferon in combination
with ribavirin, a nucleoside analog. Currently, for the
treatment of HIV infection, there are 22 antiviral therapies
approved for commercial sale in the United States. Of these
approved therapies, seven are nucleosides, three are
non-nucleosides, 11 are protease inhibitors and one is an entry
inhibitor.
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 infections. Our
competitors products may be more
26
effective, have fewer side effects, lower costs or be better
marketed and sold, than any of our products. Additionally,
products our competitors successfully develop for the treatment
of HCV and HIV may be marketed prior to any HCV or HIV product
we 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 product candidates that are
in late-stage development; and
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collaborative arrangements in our target markets with leading
companies and research institutions.
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Under certain circumstances, Novartis has the right to compete
with products and product candidates developed or licensed by
us. Novartis has the right under certain circumstances to market
and sell products that compete with the product candidates and
products that we license to it, and any competition by Novartis
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 product 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 product 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.
Our ability to compete successfully will depend in part on the
success of our marketing and sales efforts. We do not know if
our sales force in the United States or the sales force we are
establishing in Europe will be sufficient in size or scope to
compete successfully in such marketplaces. Among other factors,
we may not be able to gain sufficient access to healthcare
practitioners, which would have a negative effect on our ability
to promote our products, gain market acceptance and acquire
market share from existing products.
In addition to direct competition, to receive attention from and
be considered by physicians and patients,
Tyzeka®/Sebivo®
and any other product we may successfully develop and receive
approval to commercialize will compete against the promotional
efforts of other companies and products. In the pharmaceutical
and biopharmaceutical markets, the level of promotional effort
required to effect awareness of new products is substantial.
Market acceptance of our products will be affected by the level
of promotional effort that we are able to provide for our
products. The level of our promotional efforts will depend in
part on our ability to continue to recruit, train, deploy and
retain an effective sales and marketing organization. We cannot
offer assurance that the levels of promotional effort that we
will be able to provide for products we successfully develop
will be effective in allowing our products to compete
successfully in the market.
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.
27
If
Tyzeka®/Sebivo®
and other products, if any, we successfully develop and obtain
regulatory approval to commercialize fail to achieve and
maintain market acceptance, our business will not be
successful.
Our success and growth will depend upon the acceptance by
physicians, healthcare professionals and third-party payers of
Tyzeka®/Sebivo®
and other products, if any, we successfully develop. Acceptance
will be a function of:
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our products being clinically useful and demonstrating similar
or superior therapeutic effect with an acceptable side effect
profile as compared to existing or future treatments;
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the timing of our receipt of marketing approvals, the terms of
any approval (including labeling requirements
and/or
limitations), and the countries in which approvals are obtained;
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the perception of our products by physicians and other members
of the healthcare community and the success of our physician and
healthcare professional education programs; and
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the availability and level of government and third-party payer
reimbursement.
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Lamivudine, adefovir dipivoxil and entecavir are small molecule
therapeutics currently approved in the United States and
some other jurisdictions for the treatment of chronic hepatitis
B. The current standard of care for the treatment of chronic
hepatitis C is the combination of pegylated interferon and
ribavirin, a small molecule therapeutic. The labeling for our
approved products will have a direct impact on our marketing,
promotional and sales programs. Unfavorable labeling will
restrict our marketing, promotional and sales programs, which
would adversely affect market acceptance of our products.
We are aware that a significant number of competitor product
candidates are currently under development and may become
available in the future for the treatment of HBV, HCV and HIV
infections. If our products do not achieve market acceptance,
then we will not be able to generate sufficient revenue from
product sales to maintain or grow our business. In addition,
even if
Tyzeka®/Sebivo®
and other products, if any, we successfully develop are approved
for sale and achieve market acceptance, we may not be able to
maintain that market acceptance over time if:
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new products, including lower priced generic products or
technologies, are introduced that are more favorably received
than our products or render our products obsolete;
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there are changes in the regulatory environment affecting
manufacture, marketing or use of our products;
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litigation or threatened litigation arises with respect to the
use of our products;
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we are not successful in our marketing and sales efforts;
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we encounter unfavorable publicity regarding our products or
similar products; or
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complications, such as unacceptable levels of viral resistance
or adverse side effects, arise with respect to the use of our
products.
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Our
research and development efforts may not result in additional
product candidates being discovered on anticipated timelines, if
at all, which could limit our ability to generate
revenues.
Our research and development programs, other than our programs
for valtorcitabine for HBV, valopicitabine for HCV and NNRTIs
for HIV, are at preclinical stages. Additional product
candidates that we may develop 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 product
candidates that could generate revenues for us. We have recently
submitted to the FDA an exploratory IND, for two HIV product
candidates. This exploratory IND evaluation is intended to
enable us to gain human pharmacokinetic insights through a
microdosing study in healthy volunteers. The microdosing study
is now complete and based on the overall profile of the product
candidates, we have selected one of these product candidates,
IDX-899, to advance in clinical development.
28
Our
failure to successfully acquire or develop and market additional
product candidates or approved drugs would impair our ability to
grow.
As part of our strategy, we intend to establish a franchise in
the HBV and HCV market by developing two or more product
candidates for each therapeutic indication. The success of this
strategy depends upon the development and commercialization of
additional product candidates that we successfully discover,
license or otherwise acquire.
Product 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 product
candidates are prone to the risks of failure inherent in
pharmaceutical product development, including the possibility
that the product 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 product 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 product candidates. We may not be
able to acquire the rights to additional product candidates on
terms that we find acceptable, if at all.
As we
continue to evolve from a company that was primarily involved in
discovery and development to one also involved in
commercialization, we may encounter difficulties in managing our
growth and expanding our operations successfully.
We have experienced rapid and substantial growth that has placed
a strain on our administrative and operational infrastructure,
and we expect that our anticipated growth will continue to have
a similar impact. As we market and sell
Tyzeka®
in the United States, further our preparations for the
commercial launch of
Sebivo®
in jurisdictions outside the United States and advance our
product candidates through clinical trials and regulatory
approval processes, we are expanding significantly our marketing
and sales, development, regulatory and manufacturing
capabilities.
In both the United States and Europe, we are entering into
contracts with third parties to provide certain of these
capabilities for us. Such expansion of capabilities is requiring
us to invest substantial cash and management resources. If the
development, regulatory approval or commercialization of any of
our product candidates is delayed or terminated, we will have
incurred significant unrecoverable costs in connection with the
expansion of our administrative and operational capabilities at
a time earlier than necessary, if necessary at all.
As our operations expand, we expect that we will need to manage
additional relationships with various collaborative partners,
suppliers and other third parties. Our ability to manage our
operations and growth requires us to continue to improve our
operational, financial and management controls, reporting
systems and procedures. We may not be able to implement
improvements to our management information and control systems
in an efficient or timely manner and may discover deficiencies
in existing systems and controls that could expose us to an
increased risk of incurring financial or accounting
irregularities or fraud.
If we
are not able to attract and retain key management, scientific
and commercial personnel and advisors, we may not successfully
develop our product candidates, commercialize any products 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, research
and development, and sales and marketing personnel. Our key
personnel include our senior officers, many of whom have very
specialized scientific, medical or operational knowledge.
Additionally, the successful commercialization of
Tyzeka®/Sebivo®
will depend in large part on our ability to recruit, train,
deploy and retain an effective sales and marketing organization
in a timely fashion. Our inability to recruit, train, deploy or
retain an effective sales and marketing organization, or 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 product candidates, the development of our product
candidates, the successful commercialization of products we
develop and achievement of our other business objectives. Our
ability to attract and retain qualified personnel, consultants
and advisors is critical to our success.
29
We face intense competition for qualified individuals from
numerous pharmaceutical and biotechnology companies,
universities, 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 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 market.
For
Tyzeka®/Sebivo®,
product liability claims could be made against us based on the
use of our product in people. For
Tyzeka®/Sebivo®
and our product candidates, product liability claims could be
made against us based on the use of our product candidates in
clinical trials. We have obtained product liability insurance
for
Tyzeka®/Sebivo®
and maintain clinical trial insurance for our product 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 product candidates. A
successful product liability claim brought against us in excess
of our insurance coverage, if any, may require us to pay
substantial amounts in damages. This could adversely affect our
cash position and results of operations.
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, auto, 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
accounting principles generally accepted 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
to amortize license fee revenue from Novartis which we review on
a quarterly basis. As of December 31, 2006, we have
estimated that the performance period during which the
development of
Tyzeka®/Sebivo®,
valtorcitabine and valopicitabine will be completed is a period
of approximately seven and one half years following the
effective date of the development agreement that we entered into
with Novartis, or December 2010. If the estimated development
period changes, we will adjust periodic revenue that is being
recognized and will record the remaining unrecognized license
fees and other up-front payments over the remaining development
period during which our performance obligations will be
completed.
30
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 Securities and Exchange Commission 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 control over financial reporting.
In addition, the companys registered independent public
accountants must attest to and report on managements
assessment of the effectiveness of the companys internal
control over financial reporting.
We have completed an assessment and will continue to review in
the future our internal control 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 accountants 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 accountants may
in the future determine that our internal control over financial
reporting is 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 shares, increase
the volatility of our stock price and adversely affect our
ability to raise additional funding.
Factors
Related to Development, Clinical Testing and Regulatory Approval
of Our Product Candidates
All of
our product candidates, other than
Tyzeka®/Sebivo®,
are in development. Our product candidates remain subject to
clinical testing and regulatory approval. If we are unable to
develop our product 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 our ability to successfully commercialize
Tyzeka®/Sebivo®
and other products, if any, we successfully develop. We received
approval from the FDA in the fourth quarter of 2006 to market
and sell
Tyzeka®
for the treatment of chronic hepatitis B in the United States.
Applications seeking authorization to market
Sebivo®
have been filed with the EMEA and regulatory authorities in
certain other jurisdictions. We are conducting phase IIb
clinical trials of both valopicitabine and the combination of
valtorcitabine and telbivudine. Our other product candidates are
in various earlier stages of development. All of our product
candidates require regulatory review and approval prior to
commercialization. Approval by regulatory authorities requires,
among other things, that our product candidates satisfy rigorous
standards of safety, including assessments of the toxicity and
carcinogenicity of the product candidates we are developing, and
efficacy. To satisfy these standards, we must engage in
expensive and lengthy testing. As a result of efforts to satisfy
these regulatory standards, our product 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 product candidates is dependent
upon successful clinical development and receipt of requisite
regulatory approvals. Clinical data often are susceptible to
varying interpretations. Many
31
companies that have believed that their product candidates
performed satisfactorily in clinical trials in terms of both
safety and efficacy have nonetheless failed to obtain approval
for such product candidates. Furthermore, the FDA may request
from us and the EMEA and regulatory agencies in other
jurisdictions may request from Novartis, additional information
including data from additional clinical trials, which may delay
significantly any approval and ultimately may not grant
marketing approval for any of our product candidates.
If our
clinical trials are not successful, we will not obtain
regulatory approval for commercial sale of our product
candidates.
To obtain regulatory approval for the commercial sale of our
product candidates, we will be required to demonstrate through
preclinical studies and clinical trials that our product
candidates are safe and effective. Preclinical studies and
clinical trials are lengthy and expensive and the historical
rate of failure for product candidates is high. The results from
preclinical studies of a product 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 product
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. For example, in
our ongoing phase IIb clinical trials evaluating the
combination of valopicitabine and pegylated interferon, in March
2006, following discussions with the FDA, we modified the trial
design to reduce valopicitabine dosing levels from
800 mg/day to 200 mg/day or 400 mg/day. We made
this modification to our ongoing phase IIb clinical trials
after observing that patients receiving the 800 mg dose of
valopicitabine experienced a higher proportion of the reported
moderate or severe gastrointestinal side effects compared to
observations at the 200 to 400 mg/day dosing level.
The observation of adverse side effects in a clinical trial may
result in the FDA or foreign regulatory authorities refusing to
approve a particular product candidate for any or all
indications of use. Additionally, adverse or inconclusive
clinical trial results concerning any of our product candidates
could require us to conduct additional clinical trials, result
in increased costs, significantly delay the submission of
applications seeking marketing approval for such product
candidates, result in a filing or approval, if any, for a
narrower indication than was originally sought or result in a
decision to discontinue development of such product candidates.
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 clinical trials evaluating other
investigational agents, 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
product candidates would delay our ability to seek and
potentially obtain regulatory approvals, increase expenses
associated with clinical development and 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 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 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 product 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
product 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 complete phase III and
phase IIIb/IV clinical trials of
Tyzeka®/Sebivo®;
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we may be unable to complete phase IIb clinical trials of
valtorcitabine
and/or
valopicitabine;
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we may be unable to initiate phase III clinical trials of
valtorcitabine
and/or
valopicitabine;
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we may be unable to commence human clinical trials of any HIV
product candidate, additional HCV product candidates or other
product candidates;
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Novartis may choose not to license our product candidates other
than
Tyzeka®/Sebivo®,
valtorcitabine and valopicitabine, and we may not be able to
enter into other collaborative arrangements for any of our other
product candidates; or
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we may not have the financial resources to continue the research
and development of our product candidates.
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If our
product candidates fail to obtain U.S. and/or foreign regulatory
approval, we and our collaborators will be unable to
commercialize our product candidates.
Each of our product 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 our product candidates. Before any product candidate can be
approved for sale, we must demonstrate that it can be
manufactured in accordance with the FDAs current good
manufacturing practices, which are a rigorous set of
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 our product candidates we are currently developing
will obtain the appropriate regulatory approvals necessary to
permit commercial distribution.
We have limited experience in conducting and managing the
clinical trials necessary to obtain regulatory approvals,
including approval by the FDA. The time required for FDA and
other approvals is uncertain and typically takes a number of
years, depending upon the complexity of the product candidate.
Our 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 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 to generate
revenues from a particular product candidate. Furthermore, any
regulatory approval to market a product may be subject to
limitations on the indicated uses for which we may market the
product. These restrictions may limit the size of the market for
the product. Additionally, product candidates we 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 Novartis,
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
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Union and in China, a major market for chronic hepatitis B
therapeutics, have different approval procedures than those
required by the FDA and may impose additional testing
requirements for
Sebivo®
and our product candidates. While regulatory approval to market
Sebivo®
has been received in more than 10 countries outside the United
States, including Switzerland, China, South Korea and Canada,
the acceptability and approvability of other applications that
have been submitted by Novartis for authorization to market
Sebivo®
in jurisdictions outside the United States cannot be currently
predicted. Any failure or delay in obtaining such marketing
authorizations 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 fail to
comply with applicable U.S. and foreign regulations, we
could lose approvals we have been granted and our business would
be seriously harmed.
Even after approval, any drug product we 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
are permitted to make in labeling or advertising regarding our
marketed drugs in the United States are limited to those
specified in any FDA approval, and in other markets, regulatory
approvals similar to FDA approval. Manufacturing facilities of
Novartis, where the principal commercial supply of
Tyzeka®
will be manufactured and any other manufacturer we use to make
other approved products, if any, will be subject to periodic
review and inspection by the FDA or other similar regulatory
authorities. We 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. The
subsequent discovery of previously unknown problems with the
product, 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
Novartis and 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 product as
modified may be marketed.
If we fail to comply with applicable continuing regulatory
requirements, we 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. Because of these potential
sanctions, we seek to monitor compliance with these regulations.
If we
are subject to unfavorable pricing regulations, third-party
reimbursement practices or healthcare reform initiatives, our
business may be harmed.
The regulations governing drug product marketing authorization,
pricing and reimbursement vary widely from country to country.
Some countries require approval of the sale price of a drug
before it can be marketed. In many countries, the pricing review
period begins after product marketing authorization approval is
granted. In some foreign markets, prescription pharmaceutical
pricing remains subject to continuing governmental control even
after initial approval is granted. As a result, we or Novartis
may obtain regulatory approval for a product in a particular
country, but then be subject to price regulations, which may
delay the commercial launch of the product and may negatively
impact the revenues we are able to derive from sales by us or
Novartis of the product in that country.
Successful commercialization of our products will also depend in
part on the extent to which reimbursement for our products and
related treatments will be available from government health
administration authorities, private health insurers and other
organizations. Any of our commercial products may not be
considered cost effective and reimbursement may not be available
or sufficient to allow sale of our products on a competitive
basis. We may need to conduct expensive pharmacoeconomic studies
to demonstrate to third-party payers the cost effectiveness of
our product candidates. Sales of prescription drugs depend on
the availability and level of reimbursement from third-party
payers, such as government and private insurance plans. These
third-party payers frequently require that drug companies
provide predetermined discounts from list prices, and
third-party payers are increasingly challenging the prices
charged for medical products. Other than
Tyzeka®
in the United States, neither
Sebivo®
in countries outside of the United States nor any of our product
candidates have received the pricing approvals required to
commercialize such products, and therefore we do not know the
level of reimbursement, if any, that we will receive for
34
products. If the reimbursement we receive for any of our
products is inadequate in light of our development and other
costs, our profitability could be adversely affected.
We believe that the efforts of governments and third-party
payers to contain or reduce the cost of healthcare will increase
pressure on drug pricing and continue to affect the business and
financial condition of pharmaceutical and biopharmaceutical
companies. If we fail to obtain adequate reimbursement for our
current or future products, healthcare providers may limit how
much or under what circumstances they will prescribe or
administer them, which could reduce use of our products or cause
us to reduce the price of our products.
If we
fail to comply with ongoing regulatory requirements after
receipt of approval to commercialize a product, we may be
subject to significant sanctions imposed by the FDA, EMEA or
other U.S. and foreign regulatory authorities.
The research, testing, manufacturing and marketing of product
candidates and products are subject to extensive regulation by
numerous regulatory authorities in the United States and other
countries. Failure to comply with FDA or other applicable U.S.
and foreign regulatory 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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civil penalties;
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criminal penalties;
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injunctions;
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product seizure or detention;
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product recalls;
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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.
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The imposition of one or more of these sanctions on us could
have a material adverse effect on our business.
If we
violate healthcare statutes such as fraud and abuse laws, we
could be subject to significant penalties and
expenses.
Commercialization efforts in which we currently and expect to
continue in the future to engage in the United States are
subject to various federal and state laws pertaining to
pharmaceutical promotion and healthcare fraud and abuse,
including the Food, Drug and Cosmetic Act, the Prescription Drug
Marketing Act, federal and state anti-kickback laws and false
claims laws. Our efforts to comply with these laws will be time
consuming and expensive.
Anti-kickback laws make it illegal for any prescription drug
manufacturer to offer or pay any remuneration in exchange for,
or to induce, the referral of business, including the purchase
or prescription of a particular drug. The federal government has
published regulations that identify specific safe harbors or
exemptions for types of payment arrangements that do not violate
the anti-kickback statutes. Whenever possible, we attempt to
align our commercialization activities to such safe harbors,
however, there can be no assurance that such activities will not
be subject to scrutiny by government or private authorities.
False claims laws prohibit anyone from knowingly and willingly
presenting, or causing to be presented for payment to
third-party payers (including Medicare and Medicaid), claims for
reimbursed drugs or services that are false or fraudulent,
claims for items or services not provided as claimed, or claims
for medically unnecessary items or services.
The activities in which we and Novartis expect to engage
relating to the sale and marketing of
Tyzeka®/Sebivo®
and other products, if any, that are approved for
commercialization will be subject to scrutiny
35
under these laws and regulations. Violations may be punishable
by significant criminal
and/or civil
fines and other penalties, as well as the possibility of
exclusion of the approved product from governmental healthcare
programs (including Medicare and Medicaid). If the government
were to allege against or convict us or any of our employees of
violating these laws, there could be a material adverse effect
on our business, including our stock price.
Our activities and those of Novartis could be subject to
challenge for many reasons, including the broad scope and
complexity of these laws and regulations and the high degree of
prosecutorial resources and attention being devoted to the sales
practices of pharmaceutical companies by law enforcement
authorities. During the last few years, several companies have
agreed to enter into corporate integrity agreements and have
paid multi-million dollar fines and settlements for alleged
violation of these laws, and other companies are under active
investigation.
Although we have implemented a corporate compliance program as
part of our commercialization preparations relating to
Tyzeka®/Sebivo®,
we have limited marketing and sales experience, and we cannot
assure you that we or our employees, directors or agents are or
will be or will act in compliance with all applicable laws and
regulations. If we fail to comply with any of these laws or
regulations, various negative consequences could result,
including the termination of clinical trials, the failure to
gain regulatory approval of a product candidate, restrictions on
our products or manufacturing processes, withdrawal of the
approved product from the market, exclusion of the approved
product from governmental healthcare programs (including
Medicare and Medicaid), significant criminal
and/or civil
fines or other penalties, and costly litigation.
Additionally, Novartis has the right to terminate the
development agreement due to our uncured material breach, which
could include our failure to comply with applicable laws and
regulations relating to our efforts to commercialize
Tyzeka®/Sebivo®
and other products, if any, that we successfully develop and
receive approval to commercialize.
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, and substantial fines or penalties if we violate any of
these laws or regulations.
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 December 31, 2006, Novartis owned approximately 56%
of our outstanding common stock. For so long as Novartis owns at
least a majority of our outstanding common stock, in addition to
its contractual approval rights, 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 irrespective of how our other stockholders may vote,
including:
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the election of 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.
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Novartis
has the right to exercise control over certain corporate actions
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 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 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.
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Pursuant to the amended and restated stockholders
agreement, dated July 27, 2004, among us, Novartis and
certain of our stockholders, which we refer to as the
stockholders agreement, we are obligated to 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 at least
one designee of Novartis for so long as Novartis and its
affiliates own at least 19.4% of our voting stock.
Additionally, until such time as Novartis and its affiliates own
less than 50% of our voting stock, Novartis consent is
required for the selection and appointment of our chief
financial officer. If in Novartis reasonable judgment our
chief financial officer is not satisfactorily performing his
duties, we are required to terminate the employment of our chief
financial officer.
Furthermore, under the terms of the stock purchase agreement,
dated as of March 21, 2003, among us, Novartis and
substantially all of our then existing stockholders, which we
refer to as the stock purchase agreement, Novartis is required
to make future contingent payments of up to $357 million to
these stockholders if we achieve predetermined development
milestones with respect to an HCV product candidate. As a
result, in making determinations as to our annual operating plan
and budget for the development of our product 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.
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Under the stockholders agreement, voting stock means our
outstanding securities entitled to vote in the election of
directors, but does not include:
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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
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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 1,399,106 shares that were reserved as of May 8,
2003 for issuance under our 1998 equity incentive plan.
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Novartis has the ability to exercise substantial control over
our strategic direction, our research and development focus and
other material business decisions.
We
currently depend on one collaboration partner, Novartis, for
substantially all our revenues and for support in
commercialization of
Tyzeka®/Sebivo®
and development of product candidates Novartis has licensed from
us. If our development, license and commercialization agreement
with Novartis terminates, our business and, in particular, the
development of our product candidates and the commercialization
of any products that we successfully develop would be
significantly harmed.
In May 2003, we received a $75 million license fee from
Novartis in connection with the license to Novartis of our then
HBV product candidates, telbivudine and valtorcitabine, under a
development, license and commercialization agreement with
Novartis, dated May 8, 2003, which we refer to as the
development agreement. Telbivudine is being marketed in the
United States under the tradename
Tyzeka®
and outside the United States under the tradename
Sebivo®.
Pursuant to the development agreement, as amended, Novartis also
acquired options to license valopicitabine and additional
product candidates from us. In March 2006, Novartis exercised
its option and acquired a license to valopicitabine. In exchange
we received a $25 million license fee from Novartis and the
right to receive up to an additional $45 million in license
fee payments from Novartis upon advancement of valopicitabine
into phase III clinical trials. Assuming we continue to
successfully develop and commercialize these product candidates,
under the terms of the development agreement, we are entitled to
receive reimbursement of expenses we incur in connection with
the development of these product candidates and additional
milestone payments from Novartis. Additionally, if any of the
product 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 with respect to other product
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
product candidates in accordance with development plans mutually
agreed with Novartis.
Pursuant to the development agreement, we will co-promote and
co-market with Novartis in the United States, United Kingdom,
France, Germany, Italy and Spain, and Novartis will exclusively
commercialize
Sebivo®
and other products, if any, we successfully develop in the rest
of the world, including China, a major market for chronic
hepatitis B therapeutics. In reliance on this arrangement, we
have established marketing and sales capabilities, which when
combined with the capabilities Novartis will provide, is
anticipated to be adequate to allow us and Novartis to market
and sell such products. We do not currently have and do not
intend to establish marketing and sales capabilities in any
territories outside of the countries where we expect to
co-promote and co-market our products with Novartis. We are
dependent upon Novartis for the commercialization of our
products in the other territories.
Novartis may terminate the development agreement in any country
or with respect to any product or product candidate licensed
under the development agreement for any reason on six
months written notice. If the development agreement is
terminated in whole or in part and we are unable to enter
similar arrangements with other collaborators, our business
would be materially adversely affected.
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Novartis
has the option to license from us product candidates we
discover, or in some cases, acquire. If Novartis does not
exercise its option with respect to a product candidate, our
development, manufacture
and/or
commercialization of such product candidate may be substantially
delayed or limited.
Our drug development programs and potential commercialization of
our product candidates will require substantial additional
funding.
In addition to its license of
Tyzeka®/Sebivo®,
valtorcitabine and valopicitabine, Novartis has the option under
the development agreement to license our other product
candidates. 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 product
candidates.
If we are not successful in efforts to enter into a
collaboration arrangement with respect to a product candidate
not licensed by Novartis, we may not have sufficient funds to
develop such product 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 product 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 agreement or the stock
purchase agreement, Novartis has the right to seek
indemnification from us for damages it suffers as 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 agreement and the stock purchase
agreement. Under the development agreement and stock purchase
agreement, we made numerous representations and warranties to
Novartis regarding our HCV and HBV product candidates, including
representations regarding our ownership of and licensed rights
to the inventions and discoveries relating to such product
candidates. If one or more of our representations or warranties
were not 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
may be substantial.
In May 2004, we entered into a settlement agreement with UAB and
UABRF, 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 product candidates. Under the terms of the settlement
agreement, we agreed to make payments to UABRF, including an
initial payment made in 2004 in the amount of $2 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 product candidates and may assert that such
losses include the settlement payments.
Novartis could also suffer losses in connection with any amounts
we become obligated to pay relating to or under the terms of any
license agreement, including the UAB license agreement, or other
arrangements we may be required to enter into with UAB, Emory
University and CNRS, each licensors under the UAB license
agreement, to commercialize telbivudine. 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 product candidates.
If we are required to rely upon the UAB license agreement to
commercialize telbivudine, we will be obligated to make certain
payments to UABRF and the other licensors. Such amounts would
include payments in the aggregate amount of $1.3 million
due upon achievement of regulatory milestones, a 6% royalty on
annual sales up to $50 million and a 3% royalty on annual
sales greater than $50 million made by us or an affiliate
of ours. Additionally, if we sublicense our rights to a
non-affiliate sublicensee, which is defined as any entity other
than one which holds or controls at least 50% of our capital
stock, or if Novartiss ownership interest in us declines
below 50% of our outstanding shares of capital stock, we could
be obligated to pay to UABRF 30% of all royalties received
39
by us from sales by the sublicensee of telbivudine and 20% of
all fees, milestone payments and other cash consideration we
receive from the sublicensee with respect to telbivudine.
If we
materially breach our obligations or covenants arising under the
development agreement or our master manufacturing and supply
agreement with Novartis, we may lose our rights to commercialize
Tyzeka®/Sebivo®
or to develop or commercialize our product
candidates.
We have significant obligations to Novartis under the
development agreement and our master manufacturing and supply
agreement, dated as of May 8, 2003, between us and
Novartis. We refer to the master manufacturing and supply
agreement as the supply 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 agreement and supply
agreement include covenants relating to payment of our required
portion of development expenses under the development 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 one or both of these agreements and are
unable within an agreed time period to cure such breach, the
agreements 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 agreements were
terminated. Accordingly, if we materially breach our obligations
under the development agreement or the supply agreement, we may
lose our rights to develop our product candidates or
commercialize our successfully developed products and 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, which 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 million to our stockholders who sold
shares to Novartis in May 2003.
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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 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.
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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.
If
Novartis terminates or fails to perform its obligations under
the development agreement, we may not be able to successfully
commercialize
Tyzeka®/Sebivo®
or our product candidates licensed to Novartis and the
development and commercialization of our other product
candidates could be delayed, curtailed or
terminated.
Under the development agreement, we expect to co-promote or
co-market with Novartis in the United States, United Kingdom,
France, Germany, Italy and Spain,
Tyzeka®/Sebivo®
and other products, if any, that Novartis has licensed from us
which are successfully developed and approved for
commercialization. Novartis will market and sell these drug
products throughout the rest of the world. Additionally, we have
entered into agreements that set forth the terms and conditions
pursuant to which Novartis will manufacture the
U.S. commercial supply of
Tyzeka®
and we currently anticipate entering into similar agreements
pursuant to which Novartis will manufacture the supply of
Sebivo®
intended for sale in all other parts of the world. 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.
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
benefits we anticipate, and our results of operations may be
adversely affected.
In addition, Novartis has the right to terminate the development
agreement with respect to any product, product 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 product 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
product candidate, and we may not be successful in entering into
a collaboration with another third party.
Novartis
has the right under certain circumstances to market and sell
products that compete with the product candidates and products
that we license to it, and any competition by Novartis could
have a material adverse effect on our business.
Novartis has agreed that, except as set forth in the development
agreement, it will not market, sell or promote certain
competitive products except that:
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this agreement not to compete extends only until May 2008;
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as to any country, the agreement not to compete would terminate
if Novartis terminates the development agreement with respect to
that country; and
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if Novartis wishes to market, sell, promote or license a
competitive product, it is required to inform us of the
competitive product opportunity and, at our election, enter into
good faith negotiations with us concerning such opportunity. If
we either do not elect to enter into negotiations with respect
to such opportunity or are unable to reach agreement within a
specified period, Novartis would be free to proceed with its
plans with respect to such competing product.
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Accordingly, Novartis may under certain circumstances 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.
41
Factors
Related to Our Dependence on Third Parties
Because
we have limited sales, marketing and distribution capabilities,
we may seek to enter into additional arrangements with third
parties. We may not be successful in establishing these
relationships or, if established, the relationship may not be
successful.
Currently, we have limited sales, marketing and distribution
capabilities. Although we have recently established an internal
sales force and expanded our marketing capabilities in the
United States and are building an internal sales force and
marketing capabilities in those European countries where we
expect to co-promote and co-market
Sebivo®
and other products we may successfully develop, we may elect to
further augment our sales, marketing and distribution
capabilities through arrangements with third parties. We may not
be successful in entering into any such arrangements in time for
the anticipated launch of
Sebivo®
in jurisdictions outside the United States, if approved,
and, if entered into, the terms of any such arrangements may not
be favorable. We cannot be assured that any third party would
devote the necessary time or attention to sell, market or
distribute our products. If these arrangements are unsuccessful,
we may be unable to successfully commercialize our products.
If we
seek to enter into collaboration agreements for any product
candidates other than those licensed to Novartis and we are not
successful in establishing such collaborations, we may not be
able to continue development of those product
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 agreement with
Novartis, we may seek to enter into additional collaboration
agreements with pharmaceutical companies to fund all or part of
the costs of drug development and commercialization of product
candidates that Novartis does not license. We may not be able to
enter into collaboration agreements and the terms of the
collaboration agreements, if any, may not be favorable to us. If
we are not successful in our efforts to enter into a
collaboration arrangement with respect to a product candidate,
we may not have sufficient funds to develop this or any other
product candidate internally.
If we do not have sufficient funds to develop our product
candidates, we will not be able to bring these product
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 product 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
product 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 product
candidate.
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If any
collaborative partner terminates or fails to perform its
obligations under agreements with us, the development and
commercialization of our product candidates could be delayed or
terminated.
We have entered into the development agreement with Novartis and
we may enter into additional collaborative arrangements in the
future. If collaborative partners do not devote sufficient time
and resources to any collaboration arrangement with us, we may
not realize the potential commercial benefits of the
arrangement, and our results of operations may be adversely
affected. In addition, if Novartis or future collaboration
partners were to breach or terminate their arrangements with us,
the development and commercialization of the affected product
candidate or product could be delayed, curtailed or terminated
because we may not have sufficient financial resources or
capabilities to continue development and commercialization of
such product candidate or product.
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. Telbivudine, valtorcitabine and valopicitabine were
discovered with the research and development assistance of these
chemists and biologists. Many of the scientists who have
contributed to the discovery
42
and development of our product 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
depend 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 limited manufacturing experience and have the capability
to manufacture only small quantities of compounds required in
preclinical studies for our product candidates. We do not have,
and do not intend to develop, the ability to manufacture
material for our clinical trials or at commercial scale. To
develop our product candidates, apply for regulatory approvals
and commercialize any products, we need to contract for or
otherwise arrange for the necessary manufacturing facilities and
capabilities. Under the supply agreement, Novartis has agreed to
manufacture or have manufactured for us the active
pharmaceutical ingredients, or API, of product candidates that
we license to Novartis for our clinical supply requirements and
may manufacture API for commercial supply. Pursuant to the
manufacturing agreement and packaging agreement, Novartis will
manufacture the commercial supply of
Tyzeka®,
which is intended for sale in the United States. If the
manufacturing arrangements we have established with Novartis
relating to the manufacture of commercial supply intended for
sale in the United States were to terminate or we are unable to
successfully negotiate with Novartis an arrangement relating to
the manufacture of commercial supply of
Sebivo®
intended for sale in countries outside the United States, the
commercialization of
Tyzeka®/Sebivo®
could be interrupted or delayed, which would have an adverse
affect on our business. In addition, any change in our
manufacturers could be costly because the commercial terms of
any such arrangement could be less favorable than the commercial
terms we negotiate with Novartis.
Factors
Related to Patents and Licenses
If we
are unable to adequately protect our patents and licenses
related to our product candidates, or if we infringe the rights
of others, we may not be able to successfully commercialize
Tyzeka®/Sebivo®
or other products, if any, that we successfully
develop.
Our success will depend in part on our ability to obtain 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 affect our business either by
blocking our ability to commercialize our product candidates, by
preventing the patentability of our product candidates to us or
our licensors or co-owners, or by covering the same or similar
technologies that may invalidate our patents, limit the scope of
our future patent claims or adversely affect our ability to
market our product 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
43
the first to file, patent applications on our product candidates
or for their use as antiviral drugs. In the event that a third
party has also filed a U.S. patent application covering our
product 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, 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.
Since our HBV product, telbivudine, was a known compound before
the filing of our patent applications covering the use of this
product candidate to treat HBV infection, we cannot obtain
patent protection on telbivudine itself. As a result, we are
limited to relying upon patents granted on the method of using
telbivudine as a medical therapy for the treatment of hepatitis
B infection.
Our HBV product candidate, valtorcitabine, is a prodrug of the
L-nucleoside ß-L-2-deoxycytidine, or LdC, which is
converted into biologically active LdC in the body. The
U.S. Patent Office has issued to us a patent on
valtorcitabine itself, as well as claims on pharmaceutical
compositions that include valtorcitabine. Claims to the method
to treat HBV using valtorcitabine are pending. We will not,
however, be able to obtain patent protection on the biologically
active form of LdC itself, because it was a known compound at
the time the patent applications covering LdC were filed.
Instead, our patent protection will be limited to patents
covering the method of using LdC in medical therapy for the
treatment of HBV infection. We are aware of an issued
U.S. patent with claims directed to a broad genus of
compounds, which may be construed to include valtorcitabine. We
believe those claims to be invalid as a result of prior art in
existence at the time those claims were filed. We would assert
an invalidity defense against any such claims were they to be
asserted against us. However, there is no assurance that these
claims would be found to be invalid; in which case, we would
need to obtain a license to these patent rights, which may not
be available on reasonable terms, on an exclusive basis or at
all.
Pursuant to the UAB license agreement, we were granted an
exclusive license to the rights that the 1998 licensors 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 infection.
In February 2006, UABRF notified us that it and Emory University
were asserting a claim that, as a result of the filing of a
continuation patent application in July 2005 by UABRF, the UAB
license agreement covers our telbivudine technology. UABRF
contended that we are obligated to pay the 1998 licensors an
aggregate of $15.3 million comprised of 20% of the
$75 million license fee we received from Novartis in May
2003 in connection with the license of our HBV product
candidates and a $0.3 million payment in connection with
the submission to the FDA of the IND pursuant to which we
conducted clinical trials of telbivudine. We disagree with
UABRFs contentions and have advised UABRF and Emory
University that we will utilize the dispute resolution
procedures set forth in the UAB license agreement for resolution
of this dispute. Under the terms of that agreement, if
resolution cannot be achieved through negotiations between the
parties or mediation, it must be decided by binding arbitration
under the rules of the American Arbitration Association before a
panel of three arbitrators.
If it is determined that the UAB license agreement does cover
our use of telbivudine to treat HBV, we will be obligated to
make payments to the 1998 licensors in the amounts and manner
specified in the UAB license agreement. While we dispute the
demands made by UABRF, even if liability were found to exist,
UABRFs claims, in addition to those described above would
likely include payments in the aggregate amount of
$1.0 million due upon achievement of regulatory milestones,
a 6% royalty on annual sales up to $50 million and a 3%
royalty on annual sales greater than $50 million made by us
or an affiliate of ours. Additionally, if we sublicense our
rights to any entity other than one which holds or controls at
least 50% of our capital stock, or if Novartis ownership
interest in us declines below 50% of our outstanding shares of
capital stock, UABRF would likely contend that we would
obligated to pay to the 1998 licensors 30% of all royalties
received on sales by the sublicensee of telbivudine and 20% of
all fees, milestone payments and other cash consideration
received from the sublicensee with respect to telbivudine.
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If we fail to perform our material obligations under the UAB
license agreement, UABRF, acting for the 1998 licensors, may
attempt to terminate the UAB license agreement or render the
license to us non-exclusive. We do not believe that we are in
default of any of the material obligations to which we are
subject under the UAB license agreement. Any attempt to
terminate the agreement would be subject to binding arbitration.
In the event UABRF is successful in terminating the license
agreement as a result of a breach by us after a period of
arbitration, and the 1998 licensors obtain a valid enforceable
claim that generally covers the use of telbivudine to treat
hepatitis B, it would be necessary for us to obtain another
license from the 1998 licensors. Such license may not be
available to us on reasonable terms, on an exclusive basis or at
all. This could materially adversely affect or preclude our
ability to commercialize telbivudine.
If the 1998 licensors were instead to render the UAB license
agreement to us non-exclusive, we would not be prohibited from
using telbivudine to treat hepatitis B, but a non-exclusive
license could be granted to one or more of our competitors by
one or more of the 1998 licensors. In the event that the 1998
licensors exclusively or non-exclusively license any claims
covering the use of telbivudine to treat HBV to a competitor, we
believe that such a competitor would have to overcome
substantial legal and commercial hurdles to successfully
commercialize the product. For example, we have five
U.S. patents covering the use of telbivudine to treat HBV,
which we believe a competitor would infringe if it sought to
commercialize telbivudine. Our patent applications are also
pending in Europe, Australia, Canada, and Japan, as well as
numerous other countries. Additionally, since we are the first
company that is taking telbivudine through clinical trials, we
expect to benefit from a five-year period of commercialization
exclusivity in the United States that is granted by the FDA
during which it will refuse to grant marketing approval to any
competitor to sell telbivudine for the treatment of HBV. We may
also receive regulatory exclusivity periods in Europe and in
other countries.
If it is determined that the UAB license agreement between us
and UABRF does cover our use of telbivudine to treat HBV, or we
must otherwise rely upon a license agreement granted by the 1998
licensors to commercialize telbivudine, we may be in breach of
certain of the representations and warranties we made to
Novartis under the development agreement and the stock purchase
agreement. Pursuant to the terms of the development agreement
and the stock purchase agreement, if there is a breach Novartis
has the right to seek indemnification from us, and, under
certain circumstances, us and our stockholders who sold shares
to Novartis, for the losses Novartis incurs as a result of the
breach. The amounts for which we could be liable to Novartis may
be substantial.
In January 2007, the Board of Trustees of the University of
Alabama and related entities filed a complaint in the United
States District Court for the Northern District of Alabama
Southern Division against us, CNRS and the University of
Montpellier. The complaint alleges that a former employee of UAB
is a co-inventor of certain patents related to the use of
ß-L-2-deoxy-nucleosides for the treatment of HBV
assigned to one or more of us, CNRS and the University of
Montpellier and which cover the use of
Tyzeka®/Sebivo®,
our product for the treatment of HBV.
If the Board of Trustees of the University of Alabama and
related entities are successful in the lawsuit against us, CNRS
and the University of Montpellier, then UAB could obtain rights
in certain patents related to the use of
ß-L-2-deoxy-nucleosides for the treatment of HBV
currently assigned to one or more of us, CNRS and the University
of Montpellier and which cover the use of telbivudine, our
product for the treatment of HBV. The University of Alabama has
included a demand for damages under various theories in its
complaint, but did not specify the amount of damages that it
alleges to have been incurred. We have not yet been able to
determine whether the University of Alabama would be entitled to
damages or the extent thereof if it were successful on its
substantive claims.
Our initial HCV clinical product candidate, valopicitabine, is a
prodrug of the active molecule NM107, which is converted into
biologically active NM107 in the body. We believe that
valopicitabine may be a new compound, and therefore we are
attempting to obtain patent protection on valopicitabine itself,
as well as a method to treat HCV infection with valopicitabine.
NM107 was a known compound at the time that the patent
applications covering the use of this active form of
valopicitabine to treat HCV infection were filed. We have three
issued U.S. patents claiming methods of treatment using
NM107, one directed to treating HCV infection specifically and
two directed to treating flavivirus and pestivirus infection. We
previously received a notice of allowance from the
U.S. Patent Office for a patent covering the compound
valopicitabine, and added a new inventor and assignee to this
patent application. Subsequently, we received a new notice of
allowance. We cannot, however, obtain patent protection on the
compound NM107.
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Despite the fact that NM107 is a known compound, we are aware
that a number of companies have filed patent applications
attempting to cover NM107 specifically as a compound, as well as
valopicitabine, as members of broad classes of compounds.
Companies have also filed patent applications covering the use
of NM107, specifically, and valopicitabine, generically, to
treat HCV infection, or infection by any member of the
Flaviviridae virus family to which the HCV virus belongs. These
companies include Merck & Co., Inc. together with Isis
Pharmaceuticals, Inc., Ribapharm, Inc., a wholly-owned
subsidiary of Valeant Pharmaceuticals International, Genelabs
Technologies, Inc. and Biota, Inc., a subsidiary of Biota
Holdings Ltd., or Biota. We believe that we were the first to
file patent applications covering the use of these product
candidates to treat HCV infection. Because patents in countries
outside the United States are awarded to the first to file a
patent application covering an invention, we believe that we are
entitled to patent protection in these countries.
Notwithstanding this, a foreign country may grant patent rights
covering our product candidates to one or more other companies,
either because it is not aware of our patent filings or because
the country does not interpret our patent filing as a bar to
issuance of a patent to the other company in that country. If
that occurs, we may need to challenge the third-party patent to
establish our proprietary rights, and if we do not or are not
successful, we will need to obtain a license that may not be
available at all or on commercially reasonable terms. In the
United States, a patent is awarded to the first to invent the
subject matter. The U.S. Patent Office could initiate an
interference between us and Merck/Isis, Ribapharm, Genelabs,
Biota or another company to determine the priority of invention
of the use of these compounds to treat HCV infection. If such an
interference is initiated and it is determined that we were not
the first to invent the use of these compounds in methods for
treating HCV or other viral infection under U.S. law, we
would need to obtain a license that may not be available at all
or on commercially reasonable terms.
A number of companies have filed patent applications and have
obtained patents covering general methods for the treatment of
HBV, HCV and HIV infections that could materially affect our
ability to develop and sell
Tyzeka®/Sebivo®,
valtorcitabine and valopicitabine, as well as other product
candidates we may develop in the future. For example, we are
aware that Chiron Corporation, now a subsidiary of Novartis, and
Apath, LLC have obtained broad patents covering HCV proteins,
nucleic acids, diagnostics and drug screens. If we need to use
these patented materials or methods to develop valopicitabine or
any other HCV product 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 reasonable terms or at all. This could
materially affect or preclude our ability to develop and sell
our HCV product candidate.
If we find that any product 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 product
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 court or the
patent office of that country.
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:
|
|
|
|
|
ownership of patents and patent applications;
|
|
|
|
the patentability of our inventions relating to our product
candidates; and/or
|
46
|
|
|
|
|
the enforceability, validity or scope of protection offered by
our patents relating to our product candidates.
|
Even if we are successful in these proceedings, we may incur
substantial cost and divert management 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,
Dr. Sommadossi, entered into a settlement agreement with
UAB and UABRF resolving a dispute regarding ownership of
inventions and discoveries made by Dr. Sommadossi during
the period from November 1999 to November 2002, at which time
Dr. Sommadossi 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, our HCV product candidate.
Under the terms of the settlement agreement, we agreed to make a
$2 million initial payment to UABRF, as well as other
potential contingent payments based upon the commercial launch
of products discovered or invented by Dr. Sommadossi 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 agreement and stock purchase agreement, we made
numerous representations and warranties to Novartis regarding
valopicitabine and our HCV program, including representations
regarding our ownership of the inventions and discoveries. If
one or more of our representations or warranties were not 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 may 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, 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:
|
|
|
|
|
incur substantial monetary damages;
|
|
|
|
encounter significant delays in bringing our product candidates
to market; and/or
|
|
|
|
be precluded from participating in the manufacture, use or sale
of our product 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 proprietary 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.
If any
of our agreements that grant us the exclusive right to make, use
and sell
Tyzeka®/Sebivo®
and our product candidates are terminated, we may be unable to
develop or commercialize our product candidates.
We, together with Novartis, have 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. We,
together with Novartis, have also entered into two agreements
with the Universita degli Studi di Cagliari, which we refer to
as the
47
University of Cagliari, the co-owner of the patents and patent
applications covering our HCV product candidates and certain HIV
preclinical product 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 the jointly created HCV and HIV product 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 product candidates. Subject to
certain rights afforded to Novartis, 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 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 product 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 product candidates without
the permission of the co-owners. 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 U.S. 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, we may
not be able to exploit, license or otherwise convey to Novartis
or other third parties our rights in our product 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 product candidates and selling our
products.
Under U.S. 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 product candidates. If these
agreements terminate or their 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.
If our
cooperative research agreement with the University of Cagliari
is terminated, we may be unable to utilize research results
arising out of that work prior to the termination.
Our cooperative research agreement with the University of
Cagliari, as amended, grants us the exclusive right to directly
or indirectly use or license to Novartis or other third parties
the results of research obtained from the cooperative effort, in
exchange for a fixed royalty. If the cooperative research
agreement is terminated, our exclusive right to use the research
results will also terminate, unless those rights are also
granted under a separate license agreement. Our cooperative
agreement with the University of Cagliari currently expires in
January 2011 and can only be renewed by the written consent of
both parties. If the agreement is not renewed, there is no
guarantee that the University of Cagliari will agree to transfer
rights to any of the research results into a separate license
agreement on termination of the research program, or that it
will agree to do so on reasonable commercial terms. If we are
not able to obtain a license to research results in the event of
a termination of the cooperative research agreement, we will be
unable to develop the research results.
Factors
Related to 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
48
of outstanding options could be dilutive, and may cause the
market price for a share of our common stock to decline. As of
March 1, 2007, we had 56,153,393 shares of common
stock issued and outstanding, together with outstanding options
to purchase approximately 4,467,572 shares of common stock
with a weighted average exercise price of $13.05 per share.
Novartis and other holders of an aggregate of approximately
37,155,772 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.
Fluctuation
of our quarterly results may cause our stock price to decline,
resulting in losses to you.
Our quarterly operating results have fluctuated in the past and
are likely to fluctuate in the future. A number of factors, many
of which are not within our control, could subject our operating
results and stock price to volatility, including:
|
|
|
|
|
realization of license fees and achievement of milestones under
our development agreement with Novartis and, to the extent
applicable, other licensing and collaborative agreements;
|
|
|
|
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;
|
|
|
|
adverse developments regarding the safety and efficacy of
Tyzeka®/Sebivo®
or our product candidates;
|
|
|
|
the results of ongoing and planned clinical trials of our
product candidates;
|
|
|
|
developments in the market with respect to competing products or
more generally the treatment of HBV, HCV or HIV;
|
|
|
|
the results of regulatory reviews relating to the approval of
our product candidates;
|
|
|
|
the timing and success of the launch of
Tyzeka®/Sebivo®
and launches of other products, if any, we successfully develop;
|
|
|
|
the initiation or conclusion of litigation to enforce or defend
any of our assets; and
|
|
|
|
general and industry-specific economic conditions that may
affect our research and development expenditures.
|
Due to the possibility of significant fluctuations, we do not
believe that quarterly comparisons of our operating results will
necessarily be indicative of our future operating performance.
If our quarterly operating results fail to meet the expectations
of stock market analysts and investors, the price of our common
stock may decline, resulting in losses to you.
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 announcements regarding:
|
|
|
|
|
our collaboration with Novartis;
|
|
|
|
the results of discovery, preclinical studies and clinical
trials by us or our competitors;
|
|
|
|
the acquisition of technologies, product candidates or products
by us or our competitors;
|
|
|
|
the development of new technologies, product candidates or
products by us or our competitors;
|
|
|
|
regulatory actions with respect to our product candidates or
products or those of our competitors, including those relating
to our clinical trials, marketing authorizations, pricing and
reimbursement;
|
49
|
|
|
|
|
the timing and success of launches of any product we
successfully develop, including the launch of
Tyzeka®
in the United States and the planned launch of
Sebivo®
outside the United States;
|
|
|
|
the market acceptance of any products we successfully develop;
|
|
|
|
the initiation or conclusion of litigation to enforce or defend
any of our assets; and
|
|
|
|
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 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. 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.
|
|
Item 1B.
|
Unresolved
Staff Comments.
|
None.
We lease approximately 130,000 square feet of office and
laboratory space. Our major leased properties are described
below:
|
|
|
|
|
|
|
|
|
|
|
|
|
Approximate Square
|
|
|
|
|
Lease
|
|
Property Location
|
|
Feet
|
|
|
Use
|
|
Expiration Date
|
|
|
Cambridge, MA
|
|
|
49,912 sq ft
|
|
|
Office Headquarters
|
|
|
March 2010
|
|
|
|
|
39,014 sq ft
|
|
|
Office and Laboratory
|
|
|
December 2013
|
|
Montpellier, France
|
|
|
35,215 sq ft
|
|
|
Office and Laboratory
|
|
|
August 2017
|
|
|
|
Item 3.
|
Legal
Proceedings.
|
We are currently a party to one legal proceeding, where on
January 12, 2007, the Board of Trustees of the University
of Alabama and related entities filed a complaint in the United
States District Court for the Northern District of Alabama
Southern Division against us, CNRS and the University of
Montpellier. The complaint alleges that a former employee of UAB
is a co-inventor of certain patents related to the use of
ß-L-2-deoxy-nucleosides for the treatment of HBV
assigned to one or more of us, CNRS and the University of
Montpellier and which cover the use of
Tyzeka®/Sebivo®,
our product for the treatment of HBV. The University of Alabama
has included a demand for damages under various theories in its
complaint, but did not specify the amount of damages that it
alleges to have been incurred. We have not yet been able to
determine whether the University of Alabama would be entitled to
damages or the extent thereof if it were successful on its
substantive claims. We intend to vigorously defend this lawsuit.
|
|
Item 4.
|
Submission
of Matters to a Vote of Security Holders.
|
None
50
PART II
|
|
Item 5.
|
Market
for Registrants Common Equity, Related Stockholder Matters
and Issuer Purchases of Equity Securities.
|
Market
Information
Our common stock has been traded on the NASDAQ Global Market
under the symbol IDIX. On March 1, 2007 the
closing price of our common stock, as reported on the NASDAQ
Global Market, $8.52 per share. The following table sets
forth for the periods indicated the high and low sales prices
per share of our common stock based on closing prices, as
reported by the NASDAQ Global Market and, prior to July 1,
2006, the NASDAQ National Market.
|
|
|
|
|
|
|
|
|
|
|
High
|
|
|
Low
|
|
|
2005
|
|
|
|
|
|
|
|
|
First quarter
|
|
$
|
23.01
|
|
|
$
|
15.66
|
|
Second quarter
|
|
$
|
22.97
|
|
|
$
|
17.27
|
|
Third quarter
|
|
$
|
27.22
|
|
|
$
|
20.86
|
|
Fourth quarter
|
|
$
|
26.96
|
|
|
$
|
16.86
|
|
2006
|
|
|
|
|
|
|
|
|
First quarter
|
|
$
|
23.74
|
|
|
$
|
13.56
|
|
Second quarter
|
|
$
|
13.33
|
|
|
$
|
7.76
|
|
Third quarter
|
|
$
|
10.87
|
|
|
$
|
8.63
|
|
Fourth quarter
|
|
$
|
9.88
|
|
|
$
|
8.12
|
|
Stockholders
On March 1, 2007, we had approximately 84 stockholders of
record.
Dividends
We have never declared or paid cash dividends on our common
stock. We currently intend to reinvest our future earnings, if
any, for use in the business and do not expect to declare or pay
cash dividends.
Repurchase
of Securities
None.
51
|
|
Item 6.
|
Selected
Consolidated Financial Data
|
The following selected financial data are derived from our
financial statements. The consolidated statement of operations
data for the years ended December 31, 2006, 2005 and 2004
and the consolidated balance sheet data as of December 31,
2006 and 2005 have been derived from our audited consolidated
financial statements included elsewhere in this annual report on
Form 10-K.
This data should be read in conjunction with our audited
consolidated financial statements and related notes which are
included elsewhere in this Annual Report on
Form 10-K,
and Managements Discussion and Analysis of Financial
Condition and Results of Operations included in
Item 7 below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
2002
|
|
|
|
(In thousands, except per share data)
|
|
|
Consolidated Statement of
Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
67,377
|
|
|
$
|
64,718
|
|
|
$
|
95,389
|
|
|
$
|
29,570
|
|
|
$
|
3,465
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales
|
|
|
62
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
96,080
|
|
|
|
86,590
|
|
|
|
79,979
|
|
|
|
51,477
|
|
|
|
29,317
|
|
Selling, general and administrative
|
|
|
56,954
|
|
|
|
33,657
|
|
|
|
23,603
|
|
|
|
20,193
|
|
|
|
12,721
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
153,096
|
|
|
|
120,247
|
|
|
|
103,582
|
|
|
|
71,670
|
|
|
|
42,038
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(85,719
|
)
|
|
|
(55,529
|
)
|
|
|
(8,193
|
)
|
|
|
(42,100
|
)
|
|
|
(38,573
|
)
|
Investment and other income, net
|
|
|
9,487
|
|
|
|
4,038
|
|
|
|
1,383
|
|
|
|
404
|
|
|
|
256
|
|
Income tax benefit (expense)
|
|
|
1,145
|
|
|
|
714
|
|
|
|
566
|
|
|
|
(184
|
)
|
|
|
(39
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
(75,087
|
)
|
|
|
(50,777
|
)
|
|
|
(6,244
|
)
|
|
|
(41,880
|
)
|
|
|
(38,356
|
)
|
Accretion of redeemable
convertible preferred stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(29,074
|
)
|
|
|
(59,165
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to common
stockholders
|
|
$
|
(75,087
|
)
|
|
$
|
(50,777
|
)
|
|
$
|
(6,244
|
)
|
|
$
|
(70,954
|
)
|
|
$
|
(97,521
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted net loss per
common share
|
|
$
|
(1.34
|
)
|
|
$
|
(1.03
|
)
|
|
$
|
(0.15
|
)
|
|
$
|
(2.70
|
)
|
|
$
|
(15.19
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used in computing basic and
diluted net loss per common share
|
|
|
56,005
|
|
|
|
49,395
|
|
|
|
41,369
|
|
|
|
26,232
|
|
|
|
6,421
|
|
Consolidated Balance Sheet
Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
55,892
|
|
|
$
|
83,733
|
|
|
$
|
42,083
|
|
|
$
|
43,485
|
|
|
$
|
8,548
|
|
Working capital
|
|
|
110,159
|
|
|
|
167,069
|
|
|
|
70,123
|
|
|
|
30,399
|
|
|
|
1,602
|
|
Total assets
|
|
|
228,465
|
|
|
|
277,657
|
|
|
|
187,118
|
|
|
|
67,090
|
|
|
|
12,226
|
|
Deferred revenue, current
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
107
|
|
|
|
1,306
|
|
Deferred revenue, net of current
portion
|
|
|
4,272
|
|
|
|
4,272
|
|
|
|
4,272
|
|
|
|
4,272
|
|
|
|
3,345
|
|
Deferred revenue, related party,
current
|
|
|
13,490
|
|
|
|
9,695
|
|
|
|
9,695
|
|
|
|
10,756
|
|
|
|
|
|
Deferred revenue, related party,
net of current portion
|
|
|
40,471
|
|
|
|
29,089
|
|
|
|
38,779
|
|
|
|
54,239
|
|
|
|
|
|
Long-term obligations
|
|
|
2,251
|
|
|
|
2,792
|
|
|
|
3,691
|
|
|
|
4,849
|
|
|
|
732
|
|
Redeemable convertible preferred
stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
160,982
|
|
Accumulated deficit
|
|
|
(355,941
|
)
|
|
|
(280,854
|
)
|
|
|
(230,077
|
)
|
|
|
(223,833
|
)
|
|
|
(153,058
|
)
|
Total stockholders equity
(deficit)
|
|
|
142,025
|
|
|
|
206,887
|
|
|
|
109,058
|
|
|
|
(27,731
|
)
|
|
|
(161,362
|
)
|
52
|
|
Item 7.
|
Managements
Discussion and Analysis of Financial Condition and Results of
Operations.
|
The following discussion and analysis of financial condition
and results of operations should be read together with
Selected Consolidated Financial Data, and our
consolidated financial statements and related notes appearing
elsewhere in this document. This discussion contains
forward-looking statements based on our current expectations
related to future events and future financial performance that
involve known and unknown risks, uncertainties and assumptions.
Our actual results may differ materially from those anticipated
in these forward-looking statements as a result of many
important factors, including those set forth under Risk
Factors and elsewhere in this document.
Overview
Idenix Pharmaceuticals, Inc. is a biopharmaceutical company
engaged in the discovery, development and commercialization of
drugs for the treatment of human viral and other infectious
diseases with operations in the United States and Europe. Our
current focus is on diseases caused by HBV, HCV and HIV. In
October 2006, the Company received approval from the FDA to
market its first product,
Tyzeka®
(telbivudine), for the treatment of patients with chronic
hepatitis B in the United States. In territories outside the
United States, telbivudine will be marketed as
Sebivo®.
Each of
Tyzeka®/Sebivo®
and the product candidates that we are developing are selective
and specific, are being developed for once a day oral
administration, and we believe may be used in combination with
other therapeutic agents to improve clinical benefits.
The following table summarizes key information regarding
Tyzeka®/Sebivo®
and our pipeline of product candidates and discovery programs:
|
|
|
|
|
|
|
|
|
|
|
Current Stage
|
Indication
|
|
Product/Product Candidates/Programs
|
|
of Development
|
|
HBV
|
|
Tyzeka®/Sebivo®
|
|
|
Received marketing approval in
more than
10 countries to date, including the United
States, Switzerland, China, South Korea
and Canada
|
|
|
|
|
|
|
Filed applications seeking
marketing
authorization in the European Union, or EU,
and certain other territories
|
|
|
|
|
|
|
Ongoing phase III and
phase IIIb/IV clinical studies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
HBV
|
|
Valtorcitabine
|
|
|
Phase IIb
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
HCV
|
|
Valopicitabine
|
|
|
Phase IIb
|
|
|
|
Discovery Program
|
|
|
Preclinical
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
HIV
|
|
IDX-899
|
|
|
Completed microdosing study (phase
0)
|
|
In October 2005, we completed a public offering of our common
stock in which we issued and sold 7,278,020 shares of
common stock, including 3,939,131 shares of common stock to
Novartis. From this sale of stock, we received approximately
$145.4 million in net proceeds, after deducting
underwriting discounts and commissions and offering expenses.
In July 2004, we completed an initial public offering and
concurrent private placement in which we issued and sold
4,600,000 shares of common stock in the public offering and
5,400,000 shares of common stock to Novartis in the private
placement. We received approximately $132.6 million in net
proceeds from these offerings, after deducting underwriting
discounts and commissions and offering expenses.
In May 2003, we entered into a collaboration with Novartis
relating to the worldwide development and commercialization of
our product candidates. The collaboration includes the
development, license and commercialization agreement dated as of
May 8, 2003, by and among us and Novartis as amended, and
the master manufacturing and supply agreement dated as of
May 8, 2003, between us and Novartis. Novartis paid us a
license fee of $75 million for our HBV product and product
candidate,
Tyzeka®/Sebivo®
and valtorcitabine, respectively, is providing development
funding for
Tyzeka®/Sebivo®
and valtorcitabine and will make milestone payments, which
53
could total up to $35 million upon the achievement of
specific regulatory approvals. We achieved one of these
regulatory milestones in February 2007 with the regulatory
approval of
Sebivo®
in China for which we expect to receive $10 million from
Novartis. Additional commercialization milestone payments will
be paid to us by Novartis upon achievement of predetermined HBV
product sales levels.
Novartis also acquired an option to license our HCV and other
product candidates. In March 2006, Novartis exercised its option
to license valopicitabine, our lead HCV product candidate. As a
result, we received a $25 million license payment from
Novartis in March 2006 and Novartis is providing development
funding for valopicitabine. Novartis has agreed to pay us up to
$500 million in additional license fees and regulatory
milestone payments for valopicitabine as follows:
$45 million in license fees upon the advancement of
valopicitabine into phase III clinical trials in
treatment-naïve and treatment-refractory patients in the
United States and $455 million in milestone payments upon
achievement of regulatory filings and marketing authorization
approvals of valopicitabine in the United States, Europe and
Japan. In addition, Novartis has agreed to pay us additional
commercialization milestone payments based upon achievement of
predetermined sales levels for valopicitabine.
We plan to co-promote or co-market with Novartis in the United
States, United Kingdom, France, Germany, Italy and Spain all
products Novartis licenses from us that are successfully
developed and approved for commercial sales, including
Tyzeka®/Sebivo®.
Novartis has the exclusive right to promote and market such
products in the rest of the world. In support of such
co-promotion and co-marketing activities, we have recruited and
employed a sales force in the United States and anticipate
recruiting a sales force in each of the other co-promotion and
co-marketing countries in advance of the marketing authorization
approval, if any, of
Sebivo®
in each of these European countries.
Pursuant to the supply agreement, Novartis was appointed to
finish and package licensed products for commercial sale.
Novartis was also afforded the opportunity to manufacture API
for the commercial supply of licensed products if certain
conditions and criteria were satisfied. In June 2006, we entered
into a commercial manufacturing agreement with Novartis and a
packaging agreement with Novartis Pharmaceuticals Corporation,
an affiliate of Novartis. Under the manufacturing agreement,
Novartis will manufacture the commercial supply of
Tyzeka®
that is intended for sale in the United States. The packaging
agreement provides that the supply of
Tyzeka®
intended for commercial sale in the United States will be
packaged by Novartis Pharmaceuticals Corporation. We are in
discussions with Novartis about finalizing the manufacturing
rights for the long-term supply of
Sebivo®
in the rest of the world.
In addition to the collaboration described above, Novartis
purchased approximately 54% of our outstanding capital stock in
May 2003 from our then existing stockholders for
$255 million in cash, with an additional aggregate amount
of up to $357 million contingently payable to these
stockholders if we achieve predetermined development milestones
relating to an HCV product candidate. Novartis presently owns
approximately 56% of our outstanding common stock.
In addition to
Tyzeka®/Sebivo®,
we have three product candidates that are currently in
preclinical development or clinical development. To
commercialize any of our product candidates, we will be required
to obtain marketing authorization approvals after successfully
completing preclinical studies and clinical trials of such
product candidates. Currently,
Tyzeka®/Sebivo®
has received regulatory approval in more than 10 countries
including the United States, Switzerland, China, South Korea and
Canada. Additionally, Novartis has submitted applications
seeking authorization to market
Sebivo®
in other territories, including the European Union and Taiwan.
Even with the approval of
Tyzeka®/Sebivo®
in the United States and several other markets, we do not expect
to realize sufficient product sales in 2007 to support our
operating costs. Accordingly, we expect our sources of funding
for 2007 to consist principally of the reimbursement of expenses
we may incur in connection with the development of
Tyzeka®/Sebivo®,
valtorcitabine and valopicitabine; milestone payments we expect
to receive from the approval of
Sebivo®
in the European Union and China; and anticipated proceeds from
product sales of
Tyzeka®/Sebivo®.
Since our inception through December 31, 2006, we have
recognized revenues from
Tyzeka®
product sales in the United States, license fees and milestone
payments, development expense reimbursements received from our
collaborators and government grants. We derived substantially
all of our total revenues from Novartis for the years ended
December 31, 2006, 2005 and 2004, respectively. We
anticipate recognizing additional revenues from our
collaboration with Novartis. These revenues include additional
development expense funding for
Tyzeka®/Sebivo®,
54
valtorcitabine and valopicitabine and other product candidates
that Novartis may elect to subsequently license from us, as well
as, regulatory milestones and, if products are approved for
sale, commercialization milestones and revenues derived from
sales by us or Novartis of our licensed product candidates.
In October 2006, we received approval from the FDA to market our
first product,
Tyzeka®
for the treatment of patients with chronic hepatitis B in the
United States. Shortly thereafter, we started recognizing
revenue from product sales associated with
Tyzeka®
in the United States. We have also received marketing
authorization approvals for
Sebivo®
in a number of countries, including Switzerland, South Korea,
and Canada. We expect that our revenues associated with product
sales from
Tyzeka®/Sebivo®
will increase in 2007 as we and Novartis increase our sales
efforts to launch this new product.
We have incurred significant losses since our inception in May
1998 and expect losses to continue in the foreseeable future.
Historically, we have generated losses principally from costs
associated with research and development expenses, including
clinical trial costs, and general and administrative activities.
As a result of planned expenditures for future discovery,
development and commercialization activities, principally
focused on the commercial launch of
Tyzeka®/Sebivo®,
and the expansion of our sales, operational and administrative
infrastructure, we expect to incur additional operating losses
for the foreseeable future.
Our research and development expenses consist primarily of
salaries and payroll-related expenses for research and
development personnel, including stock-based compensation, fees
paid to clinical research organizations and other professional
service providers in conjunction with our clinical trials, fees
paid to research organizations in conjunction with preclinical
studies, costs of material used in research and development,
costs of contract manufacturing consultants, occupancy costs
associated with the use of our research facilities and
equipment, consulting and license fees paid to third parties,
and depreciation of property and equipment related to research
and development. We incur the majority of our research and
development spending as a result of clinical, preclinical and
manufacturing activity with third-party contractors relating to
the development of our HBV, HCV and HIV product candidates. We
expense internal and external research and development costs as
incurred. We expect our research and development expenses to
increase as we continue to engage in research activities,
further develop our potential product candidates and advance our
clinical trials.
Set forth below are the direct third-party research and
development expenses incurred during the period from May 1,
1998 through December 31, 2003, the years ended
December 31, 2004, 2005 and 2006 in connection with our
preclinical studies and clinical trials of
Tyzeka®/Sebivo®,
valtorcitabine and valopicitabine.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
from
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
May
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1998
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Inception)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Through
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Disease
|
|
Product/Product
|
|
31,
|
|
|
Years Ended December 31,
|
|
|
|
|
Indication
|
|
Candidate
|
|
2003
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
Total
|
|
|
|
(In thousands)
|
|
|
|
HBV
|
|
|
Tyzeka®/Sebivo®
|
|
$
|
41,519
|
|
|
$
|
43,483
|
|
|
$
|
46,447
|
|
|
$
|
36,310
|
|
|
$
|
167,759
|
|
|
HBV
|
|
|
Valtorcitabine
|
|
|
8,338
|
|
|
|
8,673
|
|
|
|
3,770
|
|
|
|
3,726
|
|
|
|
24,507
|
|
|
HCV
|
|
|
Valopicitabine
|
|
|
8,947
|
|
|
|
7,096
|
|
|
|
12,140
|
|
|
|
11,489
|
|
|
|
39,672
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
58,804
|
|
|
$
|
59,252
|
|
|
$
|
62,357
|
|
|
$
|
51,525
|
|
|
$
|
231,938
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
55
We anticipate that we will incur significant additional direct
third-party research and development expenses prior to the
commercial launch of our HBV and HCV product candidates. We
expect such amounts to approximate those set forth below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated Additional
|
|
|
|
|
|
|
Amount of
|
|
|
|
|
|
|
Direct Third-Party
|
|
|
|
|
|
|
Research and
|
|
|
|
|
|
|
Development Expenses
|
|
|
|
|
|
|
Expected to
|
|
|
|
|
|
|
be Incurred
|
|
|
|
Current Stage of
|
|
|
Prior to
|
|
Product Candidate
|
|
Development
|
|
|
Commercial Launch
|
|
|
Valtorcitabine
|
|
|
phase IIb
|
|
|
$
|
40 to $70 million
|
|
Valopicitabine
|
|
|
phase IIb
|
|
|
$
|
100 to $150 million
|
|
Our current estimates of additional direct third-party research
and development expenses do not include the cost of
phase IIIb/IV clinical trials and other clinical trials
that are not required for regulatory approval. We use our
employees and our infrastructure resources across several
projects, including our product discovery efforts. We do not
allocate our infrastructure costs on a
project-by-project
basis. As a result, we are unable to estimate the internal costs
incurred to date for our product candidates on a
project-by-project
basis.
Pursuant to our development agreement with Novartis, after it
licenses a product candidate, Novartis is obligated to fund
development expenses that we incur in accordance with
development plans agreed upon by us and Novartis. The option we
have granted to Novartis with respect to its exclusive right to
license our product candidates generally requires that Novartis
exercise the option for each such product candidate prior to the
commencement of phase III clinical trials. The expenses
associated with phase III clinical trials generally are the
most costly component in the development of a successful new
product.
Our current estimates for additional research and development
expenses are subject to risks and uncertainties associated with
research, development, clinical trials and the FDA and foreign
regulatory review and approval processes. The time and cost to
complete development of our product 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, our collaboration with Novartis and its
participation in the manufacturing and clinical development of
our product candidates.
Results
of Operations
Comparison
of Years Ended December 31, 2006 and 2005
Revenues
Total revenues were $67.4 million for the year ended
December 31, 2006 as compared with $64.7 million for
the year ended December 31, 2005.
Total revenues for the year ended December 31, 2006 were
primarily comprised of $66.7 million in related party
revenue from Novartis, consisting of $12.0 million in
license fee revenue and $54.7 million in reimbursement of
research and development expenses, and $0.4 million in
product sales in 2006 after the approval of
Tyzeka®
in the United States in October 2006.
Total revenues for the year ended December 31, 2005 were
primarily comprised of $64.4 million in related party
revenue from Novartis, consisting of $9.7 million in
license fee revenue and $54.7 million in reimbursement of
research and development expenses.
The increase in revenues of $2.7 million for the year ended
December 31, 2006 as compared with 2005 was primarily due
to an increase in license fee revenue from Novartis as a result
of the licensing by Novartis of valopicitabine in March 2006.
56
Research
and Development Expenses
Research and development expenses were $96.1 million for
the year ended December 31, 2006 as compared with
$86.6 million for the year ended December 31, 2005.
The increase of $9.5 million was primarily due to increases
of $5.2 million for HCV and HIV collaborations with third
parties; $2.4 million in salary and other payroll-related
expenses associated with the hiring of additional employees for
expanded research and development activities; and
$2.2 million in stock-based compensation with the adoption
of the Statement of Financial Accounting Standard, or SFAS,
No. 123(R). These increases were partially offset by a
decrease of $3.2 million in expenses for third party
contractors, primarily related to lower clinical trial activity
as a result of nearing completion of our GLOBE study and certain
phase IIIb clinical trials for telbivudine.
We expect our research and development expenses to increase in
future periods as we continue to devote substantial resources to
our research and development activities, engage in a greater
number of later stage clinical trials as we continue to advance
our product candidates and explore collaborations with other
entities.
Selling,
General and Administrative Expenses
Selling, general and administrative expenses were
$57.0 million for the year ended December 31, 2006 as
compared with $33.7 million for the year ended
December 31, 2005. The increase of $23.3 million was
primarily due to an increase of $5.1 million in stock-based
compensation with the adoption of SFAS 123(R); and
increases in selling and marketing expenses in preparation of
and for the commercial launch of
Tyzeka®/Sebivo®.
We expect that our selling, general and administrative expenses
will increase significantly in the future as we expand our
selling and marketing activities and continue to increase our
commercial infrastructure to support
Tyzeka®/Sebivo®,
implement new computer systems and hire additional personnel to
support our growing operations.
Investment
Income, Net
Net investment income was $9.5 million for the year ended
December 31, 2006 as compared with $4.0 million for
the year ended December 31, 2005. The increase of
$5.5 million was primarily the result of higher average
cash and marketable securities balances held during the year
ended December 31, 2006 due to the receipt of proceeds from
our public offering in October 2005 and the license payment
received from Novartis in March 2006 and higher interest rates
in 2006.
Income
Taxes
Income tax benefit was $1.1 million for the year ended
December 31, 2006 compared with income tax benefit of
$0.7 million for the year ended December 31, 2005. The
income tax benefits for the years ended December 31, 2006
and 2005 were due to amounts our French subsidiary has received
or is expected to receive for certain research and development
tax credits. The increase of $0.4 million in the income tax
benefit was primarily due to higher research and development
costs incurred by our French subsidiary in 2006 that were
eligible for the research and development credit.
Comparison
of Years Ended December 31, 2005 and 2004
Revenues
Total revenues were $64.7 million for the year ended
December 31, 2005 as compared with $95.4 million for
the year ended December 31, 2004.
Total revenues for the year ended December 31, 2005 were
primarily comprised of $64.4 million in related party
revenue from Novartis, consisting of $9.7 million in
license fee revenue and $54.7 million in reimbursement of
research and development expenses.
57
Total revenues for the year ended December 31, 2004 were
primarily comprised of $95.0 million in related party
revenue from Novartis, consisting of $9.1 million in
license fee revenue, net of a $1.9 million reduction due to
Novartis stock subscription rights, $25.0 million in
milestone revenue relating to the development of valopicitabine
and $60.9 million in reimbursement of research and
development expenses relating to
Tyzeka®/Sebivo®
and valopicitabine.
The decrease in revenues of $30.7 million for the year
ended December 31, 2005 as compared with 2004 was primarily
due to a one time $25.0 million milestone payment received
in June 2004 from Novartis relating to the development of
valopicitabine and lower reimbursements from Novartis as a
result of the decrease in 2005 of the development costs for
Tyzeka®/Sebivo®
and valopicitabine.
Research
and Development Expenses
Research and development expenses were $86.6 million for
the year ended December 31, 2005 as compared with
$80.0 million for the year ended December 31, 2004.
The increase of $6.6 million was principally due to an
increase of $2.2 million in expenses for third party
contractors, primarily for clinical trials of valopicitabine and
the purchase of comparator drug product used in the clinical
trials of valopicitabine and an increase of $3.3 million
increase in salary and other payroll-related expenses.
Selling,
General and Administrative Expenses
Selling, general and administrative expenses were
$33.7 million for the year ended December 31, 2005 as
compared with $23.6 million for the year ended
December 31, 2004. The increase of $10.1 million was
primarily due to an increase of $4.7 million in salary and
payroll-related expenses in support of our growing operations
and $4.3 million in general marketing and consulting
activities in anticipation of the commercial launch of
Tyzeka®/Sebivo®.
Investment
Income, Net
Net investment income was $4.0 million for the year ended
December 31, 2005 as compared with $1.4 million for
the year ended December 31, 2004. The increase of
$2.6 million was primarily the result of higher average
cash and marketable securities balances held during the year
ended December 31, 2005 due to the receipt of proceeds from
our public offerings completed in July 2004 and October 2005.
Income
Taxes
Income tax benefit was $0.7 million for the year ended
December 31, 2005 compared with income tax benefit of
$0.6 million for the year ended December 31, 2004. The
income tax benefits for the years ended December 31, 2005
and 2004 were due to amounts our French subsidiary has received
or is expected to receive for certain research and development
credits. The increase of $0.1 million in the income tax
benefit was primarily due to higher research and development
costs incurred by our French subsidiary in 2005 that were
eligible for the research and development credit.
Liquidity
and Capital Resources
Since our inception in 1998, we have primarily financed our
operations with proceeds obtained in connection with license and
development arrangements and equity financings. These proceeds
include license, milestone and other payments from Novartis,
reimbursement from Novartis for costs we have incurred
subsequent to May 8, 2003 in connection with the
development of
Tyzeka®/Sebivo®,
valtorcitabine and valopicitabine, net proceeds from Sumitomo
for reimbursement of development costs, net proceeds from
private placements of our convertible preferred stock, net
proceeds from the initial public offering and concurrent private
placement of our common stock in July 2004, net proceeds from a
public offering of our common stock in October 2005 and proceeds
from the exercise of stock options granted pursuant to our
equity compensation plans.
In July 2004, we completed an initial public offering and
concurrent private placement in which we issued and sold
4,600,000 shares of common stock in the public offering and
5,400,000 shares of common stock to Novartis in the private
placement. In connection with the initial public offering and
concurrent private placement, we received approximately
$132.6 million in net proceeds, after deducting
underwriting discounts and offering expenses.
58
In October 2005, we completed a public offering of our common
stock. In this transaction we issued and sold
7,278,020 shares of common stock, including
3,939,131 shares of common stock to Novartis. From this
issuance and sale of stock, we received approximately
$145.4 million in proceeds, after deducting underwriting
discounts and commissions and offering expenses.
We had $55.9 million and $83.7 million in cash and
cash equivalents as of December 31, 2006 and 2005,
respectively. We invest our excess cash balances in short-term
and long-term marketable debt securities. All of our marketable
securities are classified as available for sale. Our investments
have an effective maturity not greater than 24 months and
investments with maturities greater than 12 months are
classified as non-current marketable securities. As of
December 31, 2006, we had $71.3 million in current
marketable securities and $59.2 million in non-current
marketable securities. As of December 31, 2005, we had
$95.6 million in current marketable securities and
$62.9 million in non-current marketable securities.
Net cash used in operating activities was $48.8 million,
$56.3 million and $16.4 million for the years ended
December 31, 2006, 2005 and 2004, respectively. The net
cash used in operating activities for the years ended
December 31, 2006, 2005 and 2004, respectively, was due
primarily to the net losses for the periods, excluding
stock-based compensation and other non-cash charges adjusted for
changes in working capital. The decrease in cash used in
operating activities for the year ended December 31, 2006
in comparison to the year ended December 31, 2005 was due
primarily to the receipt of a $25.0 million license payment
from Novartis in March 2006 offset by an increase in operating
expenses. The increase in the net cash used in operating
activities for the year ended December 31, 2005 in
comparison to the year ended December 31, 2004 was
primarily due to an increase in operating expenses, principally
for research and development and marketing activities. These
increases were offset by a net loss for the period excluding
stock-based compensation expense, an increase in accounts
receivable from Novartis for the reimbursement of certain
research and development costs and deposit payments made to
vendors on contracts associated with our phase III
telbivudine clinical trials.
Net cash provided by investing activities was $19.9 million
for the year ended December 31, 2006. Net cash used in
investing activities in 2006 was $49.1 million and
$119.4 million for the years ended December 31, 2005
and 2004, respectively. The cash provided by investing
activities was due to net transfers of $29.5 million from
our investment portfolio to finance operating activities,
partially offset by capital expenditures. The net cash used in
investing activities for the year ended December 31, 2005
was principally due to the investment of a portion of the net
proceeds from our public offering completed in October 2005, net
of $113.8 million in sales of marketable securities;
capital expenditures primarily for leasehold improvements in
Cambridge, Massachusetts and Montpellier, France and the
implementation of computer systems projects. The net cash used
in investing activities for the year ended December 31,
2004 was principally due to the investment of a portion of the
net proceeds from our initial public offering and concurrent
private placement in marketable securities and capital
expenditures primarily on leasehold improvements in Cambridge,
Massachusetts and Cagliari, Italy.
Net cash provided by financing activities was $1.0 million,
$147.5 million and $134.3 million for the years ended
December 31, 2006, 2005 and 2004, respectively. The net
cash provided by financing activities for the year ended
December 31, 2006 was primarily due to the exercise of
stock options by employees. The net cash provided by financing
activities for the year ended December 31, 2005 was
primarily due to the net proceeds from our public offering and
concurrent private placement completed in October 2005 and the
exercise of stock options held by employees. The net cash
provided by financing activities for the year ended
December 31, 2004 was primarily due to net proceeds from
the initial public offering and concurrent private placement
completed in July 2004.
Set forth below is a description of our contractual obligations
as of December 31, 2006.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Period
|
|
|
|
|
|
|
Less
|
|
|
One
|
|
|
Three
|
|
|
|
|
|
|
|
|
|
Than
|
|
|
to
|
|
|
to
|
|
|
After
|
|
|
|
|
|
|
One
|
|
|
Three
|
|
|
Five
|
|
|
Five
|
|
Contractual Obligations
|
|
Total
|
|
|
Year
|
|
|
Years
|
|
|
Years
|
|
|
Years
|
|
|
|
(In thousands)
|
|
|
Operating leases
|
|
$
|
20,081
|
|
|
$
|
3,376
|
|
|
$
|
6,396
|
|
|
$
|
4,328
|
|
|
$
|
5,981
|
|
Consulting and other agreements
|
|
|
7,513
|
|
|
|
2,151
|
|
|
|
4,302
|
|
|
|
1,060
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total contractual obligations
|
|
$
|
27,594
|
|
|
$
|
5,527
|
|
|
$
|
10,698
|
|
|
$
|
5,388
|
|
|
$
|
5,981
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
59
We have certain potential milestone payment obligations relating
to our HBV and HCV product and product candidates. These
obligations are excluded from the contractual obligations table
above.
In April 2005, we entered into a lease agreement for office and
laboratory space in Montpellier, France. The term of the lease
is for 12 years expiring in April 2017 but is cancellable
by either party after six years. The lease agreement also
includes an option allowing us the ability to purchase the
building at any time after April 16, 2011. The purchase
option extends until the expiration of the lease term.
In June 2005, we entered into a lease agreement for additional
office space in Cambridge, Massachusetts. We entered into
amendments to this lease agreement in July 2006 and September
2006 to lease additional office space in the same building. The
term of the lease for all office space being rented under this
lease agreement and its amendments expires in March 2010. The
lease agreement also includes an option, exercisable not later
than nine months prior to the expiration of the initial term, to
extend the term of the lease for one additional
48-month
period and with rights of first offer with respect to certain
expansion space on two of the floors that we occupy. We also
have been provided allowances totaling $1,211,000 to finance a
portion of capital improvements to the facility. These
allowances have been recorded as deferred rent, which is being
amortized as a reduction of rent over the lease term.
In connection with certain of our operating leases, we have
letters of credit with a commercial bank totaling
$1.2 million which expire at varying dates through May 2013.
Pursuant to the license agreement, between us and the University
of Alabama at Birmingham, or the UAB license agreement, we were
granted an exclusive license to the rights that the University
of Alabama at Birmingham Research Foundation, or UABRF, Emory
University and Le Centre Nationale de la Recherche Scientifique,
or CNRS, collectively the 1998 licensors, 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 infection.
In February 2006, UABRF notified us that it and Emory University
were asserting a claim that, as a result of the filing of a
continuation patent application in July 2005 by UABRF, the UAB
license agreement covers our telbivudine technology. UABRF
contended that we are obligated to pay the 1998 licensors an
aggregate of $15.3 million comprised of 20% of the
$75 million license fee we received from Novartis in May
2003 in connection with the license of our HBV product
candidates and a $0.3 million payment in connection with
the submission to the FDA of the IND pursuant to which we have
conducted clinical trials of telbivudine. We disagree with
UABRFs contentions and have advised UABRF and Emory
University that we will utilize the dispute resolution
procedures set forth in the UAB license agreement for resolution
of this dispute. Under the terms of that agreement, if
resolution cannot be achieved through negotiations between the
parties or mediation, it must be decided by binding arbitration
under the rules of the American Arbitration Association before a
panel of three arbitrators.
We do not regard it to be probable that UABRFs position
will be upheld and as such, we have not recorded a liability as
of December 31, 2006. However, if it were determined that
the UAB license agreement does cover our technology, we will
become obligated to make payments to the 1998 licensors in the
amounts and manner specified in the UAB license agreement. While
we dispute the demands made by UABRF, even if liability were
found to exist, UABRFs claims, in addition to those
described above would likely include payments in the aggregate
amount of $1.0 million due upon achievement of regulatory
milestones, a 6% royalty on annual sales up to $50 million
and a 3% royalty on annual sales greater than $50 million
made by us or an affiliate of ours. Additionally, if we
sublicense our rights to any entity other than one which holds
or controls at least 50% of our capital stock, or if
Novartis ownership interest in us declines below 50% of
our outstanding shares of capital stock, UABRF would likely
contend that we would be obligated to pay to the 1998 licensors
30% of all royalties received by us from sales by the
sublicensee of telbivudine and 20% of all fees, milestone
payments and other cash consideration we receive from the
sublicensee with respect to telbivudine.
If it were determined that the UAB license agreement between us
and UABRF does cover our use of telbivudine to treat HBV, or we
must otherwise rely upon a license agreement granted by the 1998
licensors to commercialize telbivudine, we may be in breach of
certain of the representations and warranties we made in the
development agreement and the stock purchase agreement. For a
further description see Collaborations
60
Relationship with Novartis Indemnification and
Risk Factors Factors Related to Our
Relationship with Novartis and Factors Related to
Patents and Licenses.
Separately, we had a research collaboration with CNRS, one of
the 1998 licensors. In May 2003, we and Novartis entered into an
amended and restated cooperative agreement with CNRS and
LUniversite Montpellier, or the University of Montpellier,
pursuant to which we worked in collaboration with scientists
from CNRS and the University of Montpellier to discover and
develop technologies relating to antiviral substances. The
agreement included provisions relating to the ownership and
commercialization of the technology, which is discovered or
obtained as part of the collaboration as well as rights
regarding ownership or use of such technology upon termination
of the agreement. This cooperative agreement expired in December
2006. We do not believe that the matters disputed by UABRF and
Emory University regarding the UAB license agreement will have
any effect on either our cooperative agreement with CNRS and the
University of Montpellier or the technology licenses, including
a license to telbivudine, which have been granted to us pursuant
to the cooperative agreement.
In January 2007, the Board of Trustees of the University of
Alabama and related entities filed a complaint in the United
States District Court for the Northern District of Alabama
Southern Division against us, CNRS and the University of
Montpellier. The complaint alleges that a former employee of the
UAB is a co-inventor of certain patents related to the use of
ß-L-2-deoxy-nucleosides for the treatment of HBV
assigned to one or more of us, CNRS and the University of
Montpellier and which cover the use of
Tyzeka®/Sebivo®,
our product for the treatment of HBV. The University of Alabama
has included a demand for damages under various theories in its
complaint, but did not specify the amount of damages that it
alleges to have been incurred. We have not yet been able to
determine whether the University of Alabama would be entitled to
damages or the extent thereof if it were successful on its
substantive claims. We intend to vigorously defend this lawsuit.
Additionally, in connection with the resolution of matters
relating to certain of our HCV product candidates we entered
into a settlement agreement with UABRF which provides for a
milestone payment of $1.0 million to UABRF 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. Such HCV products would include
valopicitabine if successfully developed and commercialized.
Further, we have potential payment obligations under the license
agreement with the University of Cagliari pursuant to which we
have the exclusive worldwide right to make, use and sell
valopicitabine and certain other HCV and HIV technology. We are
liable for certain payments to the University of Cagliari if we
receive from Novartis or another collaborator license fees or
milestone payments with respect to such technology.
In March 2003, we entered into a final settlement agreement with
Sumitomo Pharmaceuticals Corporation or 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 agreement with Sumitomo became
effective upon consummation of our collaboration with Novartis
in May 2003. The settlement agreement which we entered into with
Sumitomo provides for a $5.0 million milestone payment to
Sumitomo if and when the first commercial sale of telbivudine
occurs in Japan.
In October 2006, we entered into a two-year research
collaboration agreement with Metabasis Therapeutics, Inc., or
Metabasis. Under the terms of the agreement, Metabasis
proprietary liver-targeted technology will be applied to certain
of our compounds to develop second-generation nucleoside analog
product candidates for the treatment of HCV. As part of the
agreement, we provided a $2.0 million upfront payment to
Metabasis, which was recorded in research and development
expense in the fourth quarter of 2006. If a lead candidate is
identified, we will assume development responsibility and
Metabasis will be eligible to receive payments upon achievement
of predetermined clinical development and regulatory milestones.
For any resultant marketed products, we will retain full
commercial rights and pay Metabasis a royalty based on net sales
of the product.
We believe that our current cash and cash equivalents and
marketable securities; funding we expect to receive from
Novartis relating to the development of
Tyzeka®/Sebivo®,
valtorcitabine and valopicitabine; and milestone payments we
expect to receive from Novartis for the approval of
Sebivo®
in the European Union and China, together with anticipated
proceeds from sales of
Tyzeka®/Sebivo®
will be sufficient to satisfy our cash needs until the end of
2008. At any time, it is possible that we may seek additional
financing. We may seek such financing
61
through a combination of public or private equity or debt
financing, collaborative relationships or other arrangements.
Additional funding may not be available to us or, if available,
may not be on terms favorable to us. Further, any additional
equity financing may be dilutive to stockholders, other than
Novartis which has the right to maintain its current ownership
level, and debt financing, if available, may involve restrictive
covenants. Our failure to obtain financing when needed may harm
our business and operating results.
Off-Balance
Sheet Transactions
We currently have no off-balance sheet transactions.
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 accounting
principles generally accepted 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 collaborative research and development, revenue recognition,
accrued expenses and stock-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 values of assets and liabilities
that are not readily apparent from other sources. Actual results
may differ from these estimates under different assumptions or
conditions.
While our significant accounting policies are more fully
described in Note 2 to our consolidated financial
statements included in this document, we believe the following
accounting policies to be the most critical in understanding the
judgments and estimates we use in preparing our financial
statements:
Collaborative
Research and Development Revenue
We recognize revenues relating to our collaborative research and
development arrangements in accordance with the SECs Staff
Accounting Bulletin No. 104, or SAB 104,
Revenue Recognition in Financial Statements.
Revenues under such collaborative research and development
arrangements may include non-refundable license fees, milestones
and research and development payments from collaborative
partners.
Where we have continuing performance obligations under the terms
of a collaborative arrangement, we recognize non-refundable
license fees as revenue over the specified development period
during which we complete our performance obligations. When our
level of effort is relatively constant over the performance
period, the revenue is recognized on a straight-line basis. The
determination of the performance period involves judgment on the
part of our management. If this estimated performance period
changes, then we will adjust the periodic revenue we are
recognizing and will record the remaining unrecognized
non-refundable license fees over the remaining period during
which our performance obligations will be completed. Significant
judgments and estimates are involved in determining the
estimated development period and different assumptions could
yield materially different results.
To date, we have received from Novartis a $25.0 million
license fee for valopicitabine, a $75.0 million license fee
for
Tyzeka®/Sebivo®
and valtorcitabine, and a $5.0 million reimbursement for
reacquiring product rights from Sumitomo to develop and
commercialize
Sebivo®
in certain markets in Asia. We included this reimbursement as
part of the license fee for accounting purposes because Novartis
required the repurchase of these rights as a condition to
entering into the Development Agreement. We also incurred
approximately $2.2 million in costs associated with the
development of valopicitabine prior to Novartis licensing
valopicitabine in March 2006 for which Novartis has reimbursed
us. The sum of these amounts received from Novartis, totaling
$107.2 million has been recorded as license fees and is
being recognized over the development period of the licensed
product candidates.
We review our assessment and judgment on a quarterly basis with
respect to the expected duration of the development period of
our licensed product candidates. We have estimated that the
performance period during which the development of
Tyzeka®/Sebivo®,
valtorcitabine and valopicitabine will be completed is a period
of
62
approximately seven and one-half years following the effective
date of the development agreement that we entered into with
Novartis, or December 2010. We are recognizing revenue on the
license fee payments over this period. If the estimated
performance period changes, we will adjust the periodic revenue
that is being recognized and will record the remaining
unrecognized license fee payments over the remaining development
period during which our performance obligations will be
completed. Significant judgments and estimates are involved in
determining the estimated development period and different
assumptions could yield materially different results.
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. The Novartis stock purchase rights will remain in effect
until the earlier of the date that Novartis and its affiliates
own less than 19.4% of our voting stock or the date that
Novartis becomes obligated to make contingent payments of
$357.0 million to those holders of the our stock who sold
shares to Novartis on May 8, 2003.
Additionally, 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. Subject to certain
exceptions, upon the grant of options and stock awards under
stock incentive plans, other than the 1998 Equity Incentive
Plan, we record, as a reduction of the license fees and payments
received from Novartis, the fair value of our common stock that
would be issuable to Novartis, less the exercise price, if any,
payable by the option or award holder. The amount is attributed
proportionately between cumulative revenue recognized as of that
date and the remaining amount of deferred revenue. These amounts
are adjusted through the date that either Novartis elects to
exercise its stock subscription rights or the right expires.
These adjustments will also be attributed proportionately
between cumulative revenue recognized through the measurement
date and the remaining deferred revenue.
In connection with the closing of our initial public offering in
July 2004, Novartis terminated a common stock subscription right
with respect to 1,399,106 shares of common stock issuable
pursuant to the 1998 Equity Incentive Plan in connection with
the exercise of stock options granted after May 8, 2003. In
exchange for Novartis termination of such right, we issued
1,100,000 shares of our 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 to Novartis 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 for
options exercised under this plan. Prior to the termination of
the stock subscription rights under the 1998 Equity Incentive
Plan, as we granted options that were subject to Novartis
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 license fee and payments received from
Novartis in May 2003. We are still subject to potential revenue
adjustments relating to future grants of options and stock
awards under our 2005 Stock Incentive Plan and other equity
plans that our board of directors may approve and stockholders
adopt.
As of December 31, 2006, the license fee has been reduced
by $15.5 million and has been reclassified to additional
paid-in capital. Of this amount, $7.4 million has been
recorded as a reduction of deferred revenue as of
December 31, 2006 with the remaining amount of
$8.1 million recorded as a reduction of revenue.
In March 2003, we entered into a final settlement agreement with
Sumitomo Pharmaceuticals Corporation or 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 agreement with Sumitomo became
effective upon consummation of our collaboration with Novartis
in May 2003. We repurchased these product rights for
$5.0 million. The repurchase of these rights resulted in a
$4.6 million reversal of revenue that we previously
recognized under our original arrangements with Sumitomo. We
recorded the remaining amount of $0.4 million as a
reduction of deferred revenue. We have also included
$4.3 million in deferred revenue on our consolidated
balance sheet at December 31, 2006 representing amounts
received from Sumitomo that we have not included in our revenue
to date. We are required to pay an additional $5.0 million
to Sumitomo upon the first commercial sale of telbivudine in
Japan. This payment will be recorded first as a reduction of the
remaining $4.3 million of deferred revenue, with the excess
recorded as an expense. If and when we determine that we will
not seek regulatory approval
63
for telbivudine in Japan, we would have no further obligations
under the settlement agreement with Sumitomo and, therefore, the
$4.3 million of remaining deferred revenue would be
recognized as revenue at that time.
We recognize payments received from collaborative partners for
research and development efforts that we perform or others
perform on our behalf as revenue as the related costs are
incurred. We recognize such revenue only if we believe that
collection of these amounts is reasonably assured. This
assessment involves judgment on our part. If we do not believe
that collection of amounts billed, or amounts to be billed to
our collaborators, is reasonably assured, then we defer revenue
recognition.
We recognize revenues from milestones related to arrangements
under which we have continuing performance obligations upon
achievement of the milestone if the milestone is deemed
substantive. Milestones are considered substantive if all of the
following conditions are met:
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|
|
|
|
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, the other milestones in the arrangement and
the related risk associated with the achievement of the
milestone.
|
In June 2004, we recognized a $25 million milestone payment
from Novartis based upon results of a phase I clinical
trial relating to valopicitabine. Since the milestone was
determined to be substantive, this amount was recognized as
revenue when it became payable.
Where we have no continuing involvement 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, and we
record milestones when we receive appropriate notification from
the collaborative partner of achievement of the milestones.
In November 2002, the Emerging Issues Task Force, or EITF,
reached a consensus on EITF
No. 00-21,
Accounting for Revenue Arrangements with Multiple
Deliverables, which we refer to as EITF
No. 00-21.
EITF
No. 00-21
provides guidance on how to account for arrangements that
involve the delivery or performance of multiple products,
services
and/or
rights to use assets. The provisions of EITF
No. 00-21
apply to revenue arrangements entered into on or after
July 1, 2003.
Accrued
Expenses
As part of the process of preparing our financial statements, we
are required to estimate accrued expenses. This process involves
identifying services that third parties have performed on our
behalf and estimating the level of service performed and the
associated cost incurred on these services as of each balance
sheet date in our financial statements. Examples of estimated
accrued expenses include contract service fees, such as amounts
due to clinical research organizations, professional service
fees, such as attorneys and accountants, and investigators in
conjunction with preclinical and clinical trials, fees paid to
contract manufacturers in conjunction with the production of
materials related to our product candidates and third party
expenses relating to marketing efforts associated with
commercialization of our product and product candidates.
Accruals for amounts due to clinical research organizations are
among our most significant estimates. In connection with these
service fees, our estimates are most affected by our
understanding of the status and timing of services provided
relative to the actual level of services incurred by the service
providers. In the event that we do not identify certain costs
that have been incurred or we under- or over-estimate the level
of services or the costs of such services, our reported expenses
for a reporting period could be overstated or understated. The
date on which certain services commence, the level of services
performed on or before a given date, and the cost of services is
often subject to our judgment. We make these judgments based
upon the facts and circumstances known to us and account for
these estimates in accordance with accounting principles
involving accrued expenses and income tax liabilities generally
accepted in the United States.
64
Stock-Based
Compensation
In December 2004, the Financial Accounting Standards Board, or
FASB, issued Statement of Financial Accounting Standard
No. 123 (revised 2004), or SFAS No. 123(R),
Share-Based Payment. This Statement replaces
SFAS No. 123, Accounting for Stock-Based
Compensation and supersedes Accounting Principles
Board Opinion No. 25, Accounting for Stock Issued
to Employees, or APB No. 25.
SFAS No. 123(R) requires share-based transactions for
employees and directors to be accounted for using a fair value
based method resulting in expense being recognized in our
financial statements.
We adopted SFAS No. 123(R) on January 1, 2006. We
applied the modified prospective method at adoption in which
stock compensation expense was determined based on fair value
using the Black-Scholes method at grant dates for stock options.
Accordingly, financial statement amounts for the periods prior
to the adoption of SFAS No. 123(R) including the years
ended December 31, 2005 and 2004, respectively, have not
been restated to reflect the fair value method of expensing
required by SFAS No. 123(R). Prior to January 1,
2006, we accounted for stock-based awards to employees and
directors using the intrinsic value method prescribed in APB
No. 25 and related interpretations.
In November 2005, the FASB issued FASB Staff Position FAS
123(R)-3 Transition Election Related to Accounting for Tax
Effects of Share-based Payment Awards, or FSP FAS 123(R)-3.
In accordance with FSP FAS 123(R)-3, entities can choose to
follow either the transitional guidance of SFAS 123(R) or
the alternative transition method described in FSP FAS 123(R)-3.
Effective in the fourth quarter of 2006, we elected to adopt the
alternative transition method for calculating the tax effects of
stock-based compensation pursuant to SFAS 123(R). The
alternative transition method includes simplified methods to
establish the beginning balance of the additional paid-in
capital pool, or APIC pool or windfall, related to the tax
effects of employee stock-based compensation, and to determine
the subsequent impact on the APIC pool and consolidated
statements of cash flows of the tax effects of employee-stock
based compensation awards that are outstanding upon adoption of
SFAS 123(R). The adoption of the alternative transition
method resulted in no impact on our financial statements.
For purposes of estimating the fair value of stock options
granted during the year ended December 31, 2006 using the
Black-Scholes method, we have made assumptions for the inputs in
the model regarding expected dividend yield, risk-free interest
rate, expected option term and expected volatility. The amounts
recognized for stock-based compensation expense could vary
depending upon changes in assumptions in the model.
No dividend yield was assumed as we do not pay dividends on our
common stock. The risk-free interest rate is based on the yield
of U.S. Treasury securities consistent with the expected
life of the option (4.78% for the year ended December 31,
2006). The expected option term (5 years for the year ended
December 31, 2006) and expected volatility (63% for
the year ended December 31, 2006) were determined by
examining the expected option term and volatility of our own
stock as well as the expected terms and volatilities of
similarly sized biotechnology companies.
As share-based compensation expense recognized in the condensed
consolidated statements of operations for the year ended
December 31, 2006 is based on awards ultimately expected to
vest, it should be reduced for estimated forfeitures.
SFAS No. 123(R) requires forfeitures to be estimated
at the time of grant and revised, if necessary, in subsequent
periods as options vest, if actual forfeitures differ from those
estimates. During the year ended December 31, 2006, because
substantially all of the Companys stock option grants vest
monthly, no forfeiture assumption was applied. In our pro forma
information required under SFAS No. 123 for the
periods prior to fiscal 2006, we accounted for forfeitures as
they occurred.
We recognize compensation expense for restricted stock sold and
stock options granted to non-employees in accordance with the
requirements of SFAS No. 123(R) and EITF Issue
No. 96-18,
Accounting for Equity Instruments that Are Issued to
Other than Employees for Acquiring, or in Conjunction with
Selling, Goods or Services, or
EITF 96-18.
EITF 96-18
requires such equity instruments to be recorded at their fair
value at the measurement date, which is generally the vesting
date of the instruments. Therefore, the measurement of
stock-based compensation is subject to periodic adjustments as
the underlying equity instruments vest.
Our equity incentive plans are administered by the compensation
committee of our board of directors. The compensation committee
determines the type and term of each award, the award exercise
or purchase price, if applicable, the number of shares
underlying each award granted and the rate at which each award
becomes vested or
65
exercisable. Incentive stock options may be granted only to
employees at an exercise price per share not less than the fair
market value per share of common stock as determined by the
board of directors on the date of grant (not less than 110% of
the fair market value in the case of holders of more than 10% of
our common stock) and with a term not to exceed ten years from
the date of grant (five years for incentive stock options
granted to holders of more than 10% of our voting common stock).
Nonqualified stock options may be granted to any officer,
employee, director, consultant or advisor at a per share
exercise price in such amount as the compensation committee may
determine. The compensation committee may also grant restricted
stock and other stock-based awards on terms and conditions it
may determine. These equity incentive plans are described more
fully in Note 11 to the Consolidated Financial Statements.
For purposes of our consolidated statements of operations, we
have allocated stock-based compensation to expense categories
based on the nature of the service provided by the recipients of
the stock option and restricted stock grants. We expect to
continue to grant options to purchase common stock in the future.
Recent
Accounting Pronouncements
In June 2006, the FASB published FASB Interpretation
(FIN) No. 48, Accounting for Uncertain
Tax Positions or FIN No. 48. This
interpretation seeks to reduce the significant diversity in
practice associated with recognition and measurement in the
accounting for income taxes. It would apply to all tax positions
accounted for in accordance with SFAS 109,
Accounting for Income Taxes.
FIN No. 48 requires that a tax position meet a
more likely than not threshold for the benefit of
the uncertain tax position to be recognized in the financial
statements. This threshold is to be met assuming that the tax
authorities will examine the uncertain tax position.
FIN No. 48 contains guidance with respect to the
measurement of the benefit that is recognized for an uncertain
tax position, when that benefit should be derecognized, and
other matters. FIN No. 48 should clarify the
accounting for uncertain tax positions in accordance with
SFAS 109. FIN No. 48 is effective for fiscal
years beginning after December 15, 2006, and interim
periods within those years. We are currently evaluating the
impact, if any, that this Interpretation will have on our
financial statements.
In September 2006, FASB Statement No. 157, Fair
Value Measurements, or SFAS 157, was issued. This
statement defines fair value, establishes a framework for
measuring fair value in generally accepted accounting
principles, or GAAP, and expands disclosures about fair value
measurements. This statement applies under other accounting
pronouncements that require or permit fair value measurements,
the FASB having previously concluded in those accounting
pronouncements that fair value is the relevant measurement
attribute. Accordingly, this statement does not require any new
fair value measurements. However, for some entities, the
application of this Statement will change current practice. The
Statement is effective for financial statements issued for
fiscal years beginning after November 15, 2007, and interim
periods within those fiscal years. We are currently evaluating
the impact, if any, that this standard will have on our
financial statements.
In September 2006, the SEC issued Staff Accounting Bulletin, or
SAB No. 108, Considering the Effects of Prior
Year Misstatements when Quantifying Misstatements in Current
Year Financial Statements, or SAB No. 108,
which is effective for fiscal years beginning after
November 15, 2006. SAB No. 108 provides
interpretive guidance on the consideration of the effects of
prior year misstatements in quantifying current year
misstatements for the purpose of a materiality assessment. The
adoption of SAB No. 108 did not have a material impact
on our financial statements.
In September 2006, the FASB issued FASB Statement No 158,
Employers Accounting for Defined Benefit Pension
and Other Postretirement Plans an amendment of SASB
Statements No. 87, 88, 106, and 132(R), or
SFAS No. 158. This Statement improves financial
reporting by requiring an employer to recognize the overfunded
or underfunded status of a defined benefit postretirement plan
(other than a multiemployer plan) as an asset or liability in
its statement of financial position and to recognize changes in
that funded status in the year in which the changes occur
through comprehensive income of a business entity or changes in
unrestricted net assets of a
not-for-profit
organization. We adopted SFAS No. 158 effective
December 31, 2006 and the adoption did not have a material
impact on our financial statements.
66
|
|
Item 7A.
|
Quantitative
and Qualitative Disclosure about Market Risk.
|
Market risk represents the risk of loss that may impact our
financial position, operating results or cash flows due to
changes in interest rates. 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 excess cash in high quality financial
instruments, primarily money market funds, U.S. government
guaranteed debt obligations, repurchase agreements with major
financial institutions and certain corporate debt securities
with the dollar weighted average effective maturity of the
portfolio less than 12 months and no security with an
effective maturity in excess of 24 months. Since our
investments are short term in duration and the investments are
denominated in U.S. dollars, we believe that we are not
subject to any material credit, market or foreign exchange risk
exposure. We do not have any derivative financial instruments.
In addition, the fair value of our marketable securities is
subject to change as a result of potential changes in market
interest rates. The potential change in fair value for interest
rate sensitive instruments has been assessed on a hypothetical
100 basis point adverse movement across all maturities. We
estimate that such hypothetical adverse 100 basis point movement
would result in a hypothetical loss in fair value of
approximately $1.3 million to our interest rate sensitive
instruments.
|
|
Item 8.
|
Financial
Statements and Supplementary Data.
|
The financial statements required by this item are incorporated
by reference to the financial statements listed in
Item 15(a) of Part IV of this Annual Report on
Form 10-K.
|
|
Item 9.
|
Changes
in and Disagreements With Accountants on Accounting and
Financial Disclosure.
|
There have been no disagreements with our independent registered
public accounting firm on accounting and financial disclosure
matters.
|
|
Item 9A.
|
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
December 31, 2006, our disclosure controls and procedures
are effective.
Managements
Annual Report on Internal Control Over Financial
Reporting
Our management is responsible for establishing and maintaining
adequate internal control over financial reporting. Internal
control over financial reporting is defined in
Rules 13a-15(f)
and
15d-15(f)
promulgated under the Exchange Act as a process designed by, or
under the supervision of, our principal executive officer and
principal financial officer and effected by our management and
other personnel, to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
U.S. generally accepted accounting principles and includes
those policies and procedures that:
|
|
|
|
|
pertain to the maintenance of records that in reasonable detail
accurately and fairly reflect the transactions and dispositions
of Idenixs assets;
|
|
|
|
provide reasonable assurance that transactions are recorded as
necessary to permit preparation of financial statements in
accordance with U.S. generally accepted accounting
principles, and that receipts and expenditures of Idenix are
being made only in accordance with authorizations of our
management and directors; and
|
|
|
|
provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use or disposition of
Idenixs assets that could have a material effect on the
financial statements.
|
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Projections of any evaluation of effectiveness to future periods
are subject to the risk that controls may become inadequate
because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate.
67
Our management assessed the effectiveness of our internal
control over financial reporting as of December 31, 2006.
In making this assessment, our management used the criteria set
forth by the Committee of Sponsoring Organizations of the
Treadway Commission, or COSO, in Internal Control-Integrated
Framework. Based on our assessment, management concluded
that, as of December 31, 2006, our internal control over
financial reporting was effective.
Our managements assessment of the effectiveness of our
internal control over financial reporting as of
December 31, 2006 has been audited by
PricewaterhouseCoopers LLP, an independent registered public
accounting firm, as stated in their report which appears herein.
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
December 31, 2006 that has materially affected, or is
reasonably likely to materially affect, our internal control
over financial reporting.
|
|
Item 9B.
|
Other
Information.
|
None
Part III
|
|
Item 10.
|
Directors,
Executive Officers and Corporate Governance
|
The response to this Item is incorporated herein by reference to
our Proxy Statement for our 2007 Annual Meeting of Stockholders
(the 2007 Proxy Statement) under the captions
Proposal 1 Election of Directors,
Corporate Governance, Compensation of
Directors and Sections 16(a) Beneficial
Ownership Reporting and Compliance.
Codes of
Business Conduct
We have adopted a Code of Business Conduct and Ethics that
applies to all of our officers and employees, including our
principal executive officer, principal financial officer, and
principal accounting officer or controller, and persons
performing similar functions. The Code of Business Conduct and
Ethics is posted on our web site, www.idenix.com, and is
available in print to any shareholder upon request. Information
regarding any amendments to the Code of Business Conduct and
Ethics will also be posted on our web site.
|
|
Item 11.
|
Executive
Compensation
|
The response to this Item is incorporated herein by reference to
our 2007 Proxy Statement under the captions Compensation
of Executive Officers, Compensation Interlocks and
Insider Participation and Compensation Committee
Report.
|
|
Item 12.
|
Security
Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters
|
The response to this Item is incorporated herein by reference to
our 2007 Proxy Statement under the captions Stock
Ownership of Certain Beneficial Owners and Management and
Compensation of Executive Officers Equity
Compensation Plan Information.
|
|
Item 13.
|
Certain
Relationships and Related Transactions, and Director
Independence
|
The response to this Item is incorporated herein by reference to
our 2007 Proxy Statement under the captions Certain
Relationships and Related Transaction, Employment
Agreements and Corporate Governance
Director Independence.
|
|
Item 14.
|
Principal
Accounting Fees and Services
|
The response to this Item is incorporated herein by reference to
our 2007 Proxy Statement under the captions Audit
Fees, Audit-Related Fees, All Other
Fees and Pre-Approval Policies.
68
PART IV
|
|
Item 15.
|
Exhibits
and Financial Statement Schedules
|
(a)(1) Financial Statements: The financial
statements required to be filed as part of this annual report on
Form 10-K
are as follows:
(a)(2) Financial Statement Schedules. The
financial statement schedules have been omitted as the
information required is inapplicable or the information is
presented in the consolidated financial statements or the
related notes.
(a)(3) Exhibits. The Exhibits have been
listed in the Exhibit Index immediately preceding the
Exhibits filed as part of this Annual Report on
Form 10-K
and incorporated herein by reference.
69
Report of
Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders of Idenix
Pharmaceuticals, Inc.:
We have completed integrated audits of Idenix Pharmaceuticals,
Inc.s December 31, 2006 and 2005 consolidated
financial statements and of its internal control over financial
reporting as of December 31, 2006 and an audit of its
December 31, 2004 consolidated financial statements in
accordance with the standards of the Public Company Accounting
Oversight Board (United States). Our opinions, based on our
audits, are presented below.
Consolidated
financial statements
In our opinion, the consolidated financial statements listed in
the index appearing under Item 15(a)(1) present fairly, in
all material respects, the financial position of Idenix
Pharmaceuticals, Inc. and its subsidiaries at December 31,
2006 and 2005, and the results of their operations and their
cash flows for each of the three years in the period ended
December 31, 2006 in conformity with accounting principles
generally accepted in the United States of America. These
financial statements are the responsibility of the
Companys management. Our responsibility is to express an
opinion on these financial statements based on our audits. We
conducted our audits of these statements in accordance with the
standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An
audit of financial statements includes examining, on a test
basis, evidence supporting the amounts and disclosures in the
financial statements, assessing the accounting principles used
and significant estimates made by management, and evaluating the
overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
As discussed in Note 11 to the consolidated financial
statements, the Company changed the manner in which it accounts
for share-based compensation in 2006.
Internal
control over financial reporting
Also, in our opinion, managements assessment, included in
Managements Report on Internal Control over Financial
Reporting appearing under Item 9A, that the Company
maintained effective internal control over financial reporting
as of December 31, 2006 based on criteria established in
Internal Control Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO), is fairly stated, in all material respects,
based on those criteria. Furthermore, in our opinion, the
Company maintained, in all material respects, effective internal
control over financial reporting as of December 31, 2006,
based on criteria established in Internal Control
Integrated Framework issued by the COSO. The Companys
management is responsible for maintaining effective internal
control over financial reporting and for its assessment of the
effectiveness of internal control over financial reporting. Our
responsibility is to express opinions on managements
assessment and on the effectiveness of the Companys
internal control over financial reporting based on our audit. We
conducted our audit of internal control over financial reporting
in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards
require that we plan and perform the audit to obtain reasonable
assurance about whether effective internal control over
financial reporting was maintained in all material respects. An
audit of internal control over financial reporting includes
obtaining an understanding of internal control over financial
reporting, evaluating managements assessment, testing and
evaluating the design and operating effectiveness of internal
control, and performing such other procedures as we consider
necessary in the circumstances. We believe that our audit
provides a reasonable basis for our opinions.
A companys internal control over financial reporting is a
process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles. A companys
internal control over financial reporting includes those
policies and procedures that (i) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the
company; (ii) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of
financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the
company are being made
70
only in accordance with authorizations of management and
directors of the company; and (iii) provide reasonable
assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the
companys assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
/s/ PricewaterhouseCoopers
LLP
Boston, Massachusetts
March 14, 2007
71
IDENIX
PHARMACEUTICALS, INC.
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
|
(In thousands,
|
|
|
|
except share data)
|
|
|
ASSETS
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
55,892
|
|
|
$
|
83,733
|
|
Restricted cash
|
|
|
411
|
|
|
|
411
|
|
Marketable securities
|
|
|
71,251
|
|
|
|
95,579
|
|
Accounts receivable, net
|
|
|
509
|
|
|
|
|
|
Receivables from related party
|
|
|
12,035
|
|
|
|
13,723
|
|
Income taxes receivable
|
|
|
201
|
|
|
|
|
|
Inventory
|
|
|
400
|
|
|
|
|
|
Prepaid expenses and other current
assets
|
|
|
6,906
|
|
|
|
6,139
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
147,605
|
|
|
|
199,585
|
|
Property and equipment, net
|
|
|
17,448
|
|
|
|
11,051
|
|
Restricted cash, non-current
|
|
|
750
|
|
|
|
750
|
|
Marketable securities, non-current
|
|
|
59,208
|
|
|
|
62,855
|
|
Income taxes receivable, non-current
|
|
|
2,060
|
|
|
|
946
|
|
Investment
|
|
|
500
|
|
|
|
500
|
|
Other assets
|
|
|
894
|
|
|
|
1,970
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
228,465
|
|
|
$
|
277,657
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND
STOCKHOLDERS EQUITY
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
6,811
|
|
|
$
|
5,665
|
|
Accrued expenses
|
|
|
15,679
|
|
|
|
16,685
|
|
Payables to related party
|
|
|
939
|
|
|
|
|
|
Deferred rent
|
|
|
338
|
|
|
|
265
|
|
Deferred revenue, related party
|
|
|
13,490
|
|
|
|
9,695
|
|
Income taxes payable
|
|
|
189
|
|
|
|
206
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
37,446
|
|
|
|
32,516
|
|
Long-term obligations
|
|
|
2,251
|
|
|
|
2,792
|
|
Deferred rent, net of current
portion
|
|
|
2,000
|
|
|
|
2,101
|
|
Deferred revenue
|
|
|
4,272
|
|
|
|
4,272
|
|
Deferred revenue, related party,
net of current portion
|
|
|
40,471
|
|
|
|
29,089
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
86,440
|
|
|
|
70,770
|
|
Commitments and contingencies
(Notes 12 and 18)
|
|
|
|
|
|
|
|
|
Stockholders equity:
|
|
|
|
|
|
|
|
|
Common stock, $0.001 par
value; 75,000,000 and 60,000,000 shares authorized at
December 31, 2006 and 2005; 56,091,632 and
55,813,275 shares issued and outstanding at
December 31, 2006 and 2005, respectively
|
|
|
56
|
|
|
|
56
|
|
Additional paid-in capital
|
|
|
497,778
|
|
|
|
488,340
|
|
Deferred compensation
|
|
|
(106
|
)
|
|
|
(320
|
)
|
Accumulated other comprehensive
income (loss)
|
|
|
238
|
|
|
|
(335
|
)
|
Accumulated deficit
|
|
|
(355,941
|
)
|
|
|
(280,854
|
)
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
142,025
|
|
|
|
206,887
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and
stockholders equity
|
|
$
|
228,465
|
|
|
$
|
277,657
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
72
IDENIX
PHARMACEUTICALS, INC.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
(In thousands, except per share data)
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
License fees and collaborative
research and development related party
|
|
$
|
66,724
|
|
|
$
|
64,418
|
|
|
$
|
95,004
|
|
Product sales, net
|
|
|
424
|
|
|
|
|
|
|
|
|
|
Government research grants
|
|
|
229
|
|
|
|
300
|
|
|
|
385
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
67,377
|
|
|
|
64,718
|
|
|
|
95,389
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales
|
|
|
62
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
96,080
|
|
|
|
86,590
|
|
|
|
79,979
|
|
Selling, general and administrative
|
|
|
56,954
|
|
|
|
33,657
|
|
|
|
23,603
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
153,096
|
|
|
|
120,247
|
|
|
|
103,582
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(85,719
|
)
|
|
|
(55,529
|
)
|
|
|
(8,193
|
)
|
Investment income, net
|
|
|
9,484
|
|
|
|
4,044
|
|
|
|
1,379
|
|
Other income (expense)
|
|
|
3
|
|
|
|
(6
|
)
|
|
|
4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before income taxes
|
|
|
(76,232
|
)
|
|
|
(51,491
|
)
|
|
|
(6,810
|
)
|
Income tax benefit
|
|
|
1,145
|
|
|
|
714
|
|
|
|
566
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(75,087
|
)
|
|
$
|
(50,777
|
)
|
|
$
|
(6,244
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted net loss per
common share
|
|
$
|
(1.34
|
)
|
|
$
|
(1.03
|
)
|
|
$
|
(0.15
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used in computing basic and
diluted net loss per common share
|
|
|
56,005
|
|
|
|
49,395
|
|
|
|
41,369
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
73
IDENIX
PHARMACEUTICALS, INC.
For
the Years Ended December 31, 2006, 2005, 2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
Other
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
Common Stock
|
|
|
Paid-In
|
|
|
Deferred
|
|
|
Comprehensive
|
|
|
Accumulated
|
|
|
Stockholders
|
|
|
Comprehensive
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Compensation
|
|
|
Income (Loss)
|
|
|
Deficit
|
|
|
Equity (Deficit)
|
|
|
Loss
|
|
|
|
(In thousands, except share data)
|
|
|
Balance at December 31, 2003
|
|
|
36,450,383
|
|
|
$
|
36
|
|
|
$
|
199,609
|
|
|
$
|
(3,889
|
)
|
|
$
|
346
|
|
|
$
|
(223,833
|
)
|
|
$
|
(27,731
|
)
|
|
|
|
|
Issuance of common stock to related
party
|
|
|
108
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock upon
initial public offering, net of offering expenses and
underwriting discounts of $7,425
|
|
|
4,600,000
|
|
|
|
5
|
|
|
|
56,970
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
56,975
|
|
|
|
|
|
Issuance of common stock upon
private placement with related party
|
|
|
5,400,000
|
|
|
|
5
|
|
|
|
75,595
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
75,600
|
|
|
|
|
|
Issuance of common stock upon
exercise of employee stock options
|
|
|
210,646
|
|
|
|
1
|
|
|
|
885
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
886
|
|
|
|
|
|
Issuance of common stock upon
vesting of restricted stock options
|
|
|
96,750
|
|
|
|
|
|
|
|
286
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
286
|
|
|
|
|
|
Deferred compensation related to
employee stock option grants
|
|
|
|
|
|
|
|
|
|
|
198
|
|
|
|
(198
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of deferred
compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,100
|
|
|
|
|
|
|
|
|
|
|
|
2,100
|
|
|
|
|
|
Issuance of common stock for
settlement of antidilution shares contingently issuable to
related party
|
|
|
1,100,000
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1
|
|
|
|
|
|
Antidilution shares contingently
issuable to related party
|
|
|
|
|
|
|
|
|
|
|
7,395
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,395
|
|
|
|
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(6,244
|
)
|
|
|
(6,244
|
)
|
|
$
|
(6,244
|
)
|
Net change in unrealized holding
losses on marketable securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(343
|
)
|
|
|
|
|
|
|
(343
|
)
|
|
|
(343
|
)
|
Cumulative translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
133
|
|
|
|
|
|
|
|
133
|
|
|
|
133
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(6,454
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2004
|
|
|
47,857,887
|
|
|
|
48
|
|
|
|
340,938
|
|
|
|
(1,987
|
)
|
|
|
136
|
|
|
|
(230,077
|
)
|
|
|
109,058
|
|
|
|
|
|
Issuance of common stock upon
follow on public offering, net of offering expenses and
underwriting discounts of $4,567
|
|
|
3,338,889
|
|
|
|
3
|
|
|
|
64,245
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
64,248
|
|
|
|
|
|
Issuance of common stock upon
follow on public offering, with related party
|
|
|
3,939,131
|
|
|
|
4
|
|
|
|
81,181
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
81,185
|
|
|
|
|
|
Compensation related to
modification of employee stock options
|
|
|
|
|
|
|
|
|
|
|
98
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
98
|
|
|
|
|
|
Issuance of common stock upon
exercise of stock options
|
|
|
590,618
|
|
|
|
1
|
|
|
|
2,017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,018
|
|
|
|
|
|
Issuance of common stock upon
vesting of stock options
|
|
|
86,750
|
|
|
|
|
|
|
|
255
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
255
|
|
|
|
|
|
Forfeiture of common stock under
stock option plans
|
|
|
|
|
|
|
|
|
|
|
(385
|
)
|
|
|
385
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of deferred
compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,282
|
|
|
|
|
|
|
|
|
|
|
|
1,282
|
|
|
|
|
|
Antidilution shares contingently
issuable to related party
|
|
|
|
|
|
|
|
|
|
|
(9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(9
|
)
|
|
|
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(50,777
|
)
|
|
|
(50,777
|
)
|
|
$
|
(50,777
|
)
|
Net change in unrealized holding
gains on marketable securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
119
|
|
|
|
|
|
|
|
119
|
|
|
|
119
|
|
Cumulative translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(590
|
)
|
|
|
|
|
|
|
(590
|
)
|
|
|
(590
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(51,248
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2005
|
|
|
55,813,275
|
|
|
|
56
|
|
|
|
488,340
|
|
|
|
(320
|
)
|
|
|
(335
|
)
|
|
|
(280,854
|
)
|
|
|
206,887
|
|
|
|
|
|
Issuance of common stock upon
exercise of stock options
|
|
|
260,612
|
|
|
|
|
|
|
|
892
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
892
|
|
|
|
|
|
Issuance of common stock upon
vesting of stock options
|
|
|
14,442
|
|
|
|
|
|
|
|
44
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
44
|
|
|
|
|
|
Issuance of common stock to related
party
|
|
|
3,303
|
|
|
|
|
|
|
|
54
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
54
|
|
|
|
|
|
Stock-based compensation for
non-employees
|
|
|
|
|
|
|
|
|
|
|
30
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
30
|
|
|
|
|
|
Amortization of deferred
compensation
|
|
|
|
|
|
|
|
|
|
|
8,393
|
|
|
|
214
|
|
|
|
|
|
|
|
|
|
|
|
8,607
|
|
|
|
|
|
Antidilution shares contingently
issuable to related party
|
|
|
|
|
|
|
|
|
|
|
25
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
25
|
|
|
|
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(75,087
|
)
|
|
|
(75,087
|
)
|
|
$
|
(75,087
|
)
|
Net change in unrealized holding
gains on marketable securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
191
|
|
|
|
|
|
|
|
191
|
|
|
|
191
|
|
Cumulative translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
382
|
|
|
|
|
|
|
|
382
|
|
|
|
382
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(74,514
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2006
|
|
|
56,091,632
|
|
|
$
|
56
|
|
|
$
|
497,778
|
|
|
$
|
(106
|
)
|
|
$
|
238
|
|
|
$
|
(355,941
|
)
|
|
$
|
142,025
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
74
IDENIX
PHARMACEUTICALS, INC.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
(In thousands)
|
|
|
Cash flows from operating
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(75,087
|
)
|
|
$
|
(50,777
|
)
|
|
$
|
(6,244
|
)
|
Adjustments to reconcile net loss
to net cash used in operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
3,463
|
|
|
|
2,066
|
|
|
|
1,304
|
|
Stock-based compensation expense
|
|
|
8,637
|
|
|
|
1,388
|
|
|
|
2,100
|
|
Accrued interest on marketable
securities
|
|
|
(1,319
|
)
|
|
|
(991
|
)
|
|
|
(70
|
)
|
Revenue adjustment for contingently
issuable shares
|
|
|
12
|
|
|
|
3
|
|
|
|
1,859
|
|
Changes in operating assets and
liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivables
|
|
|
(509
|
)
|
|
|
|
|
|
|
|
|
Receivables from related party
|
|
|
1,688
|
|
|
|
2,520
|
|
|
|
(5,091
|
)
|
Inventory
|
|
|
(400
|
)
|
|
|
|
|
|
|
|
|
Prepaid expenses and other current
assets
|
|
|
(753
|
)
|
|
|
(2,992
|
)
|
|
|
1,639
|
|
Income taxes receivable
|
|
|
(1,347
|
)
|
|
|
(576
|
)
|
|
|
(370
|
)
|
Other assets
|
|
|
1,076
|
|
|
|
(26
|
)
|
|
|
(532
|
)
|
Accounts payable
|
|
|
1,146
|
|
|
|
1,154
|
|
|
|
(1,629
|
)
|
Accrued expenses
|
|
|
(982
|
)
|
|
|
1,718
|
|
|
|
2,975
|
|
Payables to related party
|
|
|
939
|
|
|
|
|
|
|
|
|
|
Deferred rent
|
|
|
(28
|
)
|
|
|
860
|
|
|
|
(51
|
)
|
Deferred revenue
|
|
|
|
|
|
|
|
|
|
|
(107
|
)
|
Deferred revenue, related party
|
|
|
15,189
|
|
|
|
(9,697
|
)
|
|
|
(10,986
|
)
|
Income taxes payable
|
|
|
(17
|
)
|
|
|
(104
|
)
|
|
|
(277
|
)
|
Long-term obligations
|
|
|
(541
|
)
|
|
|
(865
|
)
|
|
|
(902
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in operating
activities
|
|
|
(48,833
|
)
|
|
|
(56,319
|
)
|
|
|
(16,382
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of property and equipment
|
|
|
(9,561
|
)
|
|
|
(6,586
|
)
|
|
|
(3,931
|
)
|
Purchases of marketable securities
|
|
|
(243,011
|
)
|
|
|
(155,963
|
)
|
|
|
(189,831
|
)
|
Sales and maturities of marketable
securities
|
|
|
272,496
|
|
|
|
113,824
|
|
|
|
74,375
|
|
Restricted deposits
|
|
|
|
|
|
|
(411
|
)
|
|
|
20
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in)
investing activities
|
|
|
19,924
|
|
|
|
(49,136
|
)
|
|
|
(119,367
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net proceeds from sale of common
stock in public offerings and private placements, net of
offering costs
|
|
|
|
|
|
|
145,433
|
|
|
|
133,409
|
|
Proceeds from exercise of common
stock options
|
|
|
902
|
|
|
|
2,018
|
|
|
|
897
|
|
Proceeds from issuance of common
stock to related party
|
|
|
54
|
|
|
|
|
|
|
|
|
|
Repayment of capital lease
obligations
|
|
|
|
|
|
|
|
|
|
|
(2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing
activities
|
|
|
956
|
|
|
|
147,451
|
|
|
|
134,304
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of changes in exchange rates
on cash and cash equivalents
|
|
|
112
|
|
|
|
(346
|
)
|
|
|
43
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (decrease) increase in cash and
cash equivalents
|
|
|
(27,841
|
)
|
|
|
41,650
|
|
|
|
(1,402
|
)
|
Cash and cash equivalents at
beginning of year
|
|
|
83,733
|
|
|
|
42,083
|
|
|
|
43,485
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of
year
|
|
$
|
55,892
|
|
|
$
|
83,733
|
|
|
$
|
42,083
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash
flow information:
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxes paid
|
|
$
|
144
|
|
|
$
|
53
|
|
|
$
|
178
|
|
Supplemental disclosure of
noncash investing and financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Value of shares of common stock
contingently issuable or issued to related party
|
|
|
25
|
|
|
|
(9
|
)
|
|
|
7,395
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
75
IDENIX
PHARMACEUTICALS, INC.
|
|
1.
|
Organization
and Business
|
Idenix Pharmaceuticals, Inc. (together with its consolidated
subsidiaries, the Company) is a biopharmaceutical
company engaged in the discovery, development and
commercialization of drugs for the treatment of human viral and
other infectious diseases. The Companys current focus is
on diseases caused by hepatitis B virus (HBV),
hepatitis C virus (HCV) and human
immunodeficiency virus (HIV). In October 2006, the
Company received approval from the U.S. Food and Drug
Administration (FDA) to market its first product,
Tyzeka®
(telbivudine), for the treatment of patients with chronic
hepatitis B in the United States. In territories outside the
United States, telbivudine will be marketed as
Sebivo®.
The Company is subject to risks common to companies in the
biopharmaceutical industry including, but not limited to, the
successful development and commercialization of products,
clinical trial uncertainty, regulatory approval, fluctuations in
operating results and financial risks, potential need for
additional funding, protection of proprietary technology and
patent risks, compliance with government regulations, dependence
on key personnel and collaborative partners, competition,
technological and medical risks and management of growth.
Effective May 8, 2003, Novartis Pharma AG
(Novartis), a subsidiary of Novartis AG, acquired a
majority interest in the Companys outstanding stock and
the operations of the Company have been consolidated in the
financial statements of Novartis AG since that date. Novartis
has the ability to exercise control over the Companys
strategic direction, research and development activities and
other material business decisions (Note 3).
|
|
2.
|
Summary
of Significant Accounting Policies
|
Significant accounting policies applied by the Company in the
preparation of its consolidated financial statements are as
follows:
Principles
of Consolidation
The accompanying consolidated financial statements reflect the
operations of the Company and its wholly owned subsidiaries. All
intercompany accounts and transactions have been eliminated.
Use of
Estimates and Assumptions
The preparation of consolidated financial statements in
conformity with accounting principles generally accepted in the
United States of America requires management to make estimates
and use assumptions that affect the reported amounts of assets
and liabilities and the disclosure of contingent assets and
liabilities at the dates of the financial statements and the
reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
Cash
and Cash Equivalents
The Company considers all highly liquid investments purchased
with a maturity date of 90 days or less at the date of
purchase to be cash equivalents.
In connection with certain operating lease commitments of the
Company (Note 12), the Company issued letters of credit
collateralized by cash deposits that are classified as
restricted cash on the consolidated balance sheets. Restricted
cash amounts have been classified as current or non-current
based on the expected release date of the restrictions.
Concentration
of Credit Risk
Financial instruments that potentially subject the Company to
concentrations of credit risk primarily consist of cash and cash
equivalents, marketable securities, accounts receivable and
receivables from related party. The Company invests its excess
cash, cash equivalents and marketable securities in interest
bearing accounts of major
76
IDENIX
PHARMACEUTICALS, INC.
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
U.S. financial institutions. Accordingly, management
believes these investments are subject to minimal credit and
market risk and are of high credit quality.
At December 31, 2006 and 2005, all of the Companys
receivables from related party were due from Novartis. At
December 31, 2006, accounts receivable were from product
sales of
Tyzeka®.
Revenue from Novartis represented substantially all of total
revenues for the years ended December 31, 2006, 2005 and
2004, respectively.
Marketable
Securities
The Company invests its excess cash balances in short-term and
long-term marketable debt securities. The Company classifies all
of its marketable securities as
available-for-sale.
The Company reports
available-for-sale
investments at fair value as of each balance sheet date and
includes any unrealized gains and, to the extent deemed
temporary, losses in stockholders equity. If any
adjustment to fair value reflects a decline in the value of the
investment, the Company considers available evidence to evaluate
whether the decline is other than temporary and, if
so, marks the investment to market through a charge to the
consolidated statement of operations. Realized gains and losses
are determined on the specific identification method and are
included in investment income. The Company classifies its
marketable securities with remaining maturities of
12 months or less as current marketable securities
exclusive of those categorized as cash equivalents. The Company
classifies its marketable securities with remaining maturities
greater than 12 months as non-current marketable securities.
Fair
Value of Financial Instruments
Financial instruments, including cash and cash equivalents,
restricted cash, marketable securities, accounts receivable,
receivables from related party, accounts payable and accrued
expenses, are carried in the consolidated financial statements
at amounts that approximated their fair value as of
December 31, 2006 and 2005 due to the short-term nature of
these items.
Inventory
Inventory is stated at the lower of cost or market with cost
determined under the
first-in,
first-out (FIFO) method. The Company periodically
reviews its inventory for excess or obsolete inventory and
writes down obsolete inventory to its estimated net realizable
value. The Company capitalizes inventory costs related to
products prior to regulatory approval, when, based on
managements judgment, future commercialization is
considered probable and future economic benefit is expected to
be realized. This is completed through an assessment of the
regulatory approval process and where the particular product
stands relative to the approval process, including any known
constraints to approval, including safety, efficacy, potential
labeling restrictions, anticipated research and development
initiatives and the manufacturing environment and their impact
on the Companys ability to market the product. There is
risk in these judgments and the Company would be required to
expense previously capitalized costs related to pre-approval
inventory upon a change in these estimates, such as a denial or
delay of regulatory approval. At December 31, 2006, the
Company did not have any inventory associated with products that
did not receive regulatory approval.
Investment
The Company has one long-term investment recorded under the cost
method of accounting. When the Company holds an ownership
interest of less than 20%, and does not have the ability to
exercise significant influence over the operating activities of
the entity in which the investment is held, the Company accounts
for its investment using the cost method. The Company monitors
its investment on a quarterly basis to determine whether any
impairment is required. If any adjustment to fair value reflects
a decline in the value of the investment below cost, the Company
considers available evidence, including the duration and extent
to which the market value has been less than cost, to evaluate
the extent to which the decline is
other-than-temporary.
If the decline is considered
other-than-temporary,
the cost basis of the investment is written down to fair value
as a new cost basis and the
77
IDENIX
PHARMACEUTICALS, INC.
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
amount of the write down is included in the Companys
consolidated statement of operations. The Company currently owns
500,000 shares of Pharmasset Ltd. with a cost basis of
$500,000.
Property
and Equipment
Property and equipment are recorded at cost. Depreciation is
calculated using the straight-line method over the estimated
useful life of each of the assets. Leasehold improvements are
amortized using the straight-line method over the shorter of the
asset life or the lease term. Upon disposal of fixed assets, the
related cost and accumulated depreciation is removed from the
accounts and any resulting gain or loss is included in the
results of operations.
Impairment
of Long-Lived Assets
The Company evaluates the recoverability of its property and
equipment and other long-lived assets when circumstances
indicate that an event of impairment may have occurred in
accordance with the provisions of Statement of Financial
Accounting Standards (SFAS) No. 144,
Accounting for the Impairment of Disposal of Long-Lived
Assets (SFAS No. 144).
Impairment is measured based on the difference between the
carrying value of the related assets or businesses and the
discounted future cash flows of such assets or businesses. No
impairment was recognized for any of the years ended
December 31, 2006, 2005 and 2004.
Revenue
Recognition
The Company records revenue provided that there is persuasive
evidence that an arrangement exists, the price is fixed or
determinable and collectibility is reasonably assured. The
Company records revenue earned under collaborative research and
development arrangements, product sales and government research
grants.
Collaborative Research and Development
Revenue Revenue related to collaborative
research and development arrangements includes nonrefundable
license fees, milestones and collaborative research and
development funding from the Companys collaborative
partners. Where the Company has continuing performance
obligations under the terms of a collaborative arrangement,
nonrefundable license fees are recognized as revenue over the
specified development period as the Company completes its
performance obligations. When the Companys level of effort
is relatively constant over the performance period, the revenue
is recognized on a straight-line basis. The determination of the
performance period involves judgment on the part of management.
Payments received from collaborative partners for research and
development efforts by the Company are recognized as revenue
over the contract term as the related costs are incurred, net of
any amounts due to the collaborative partner for costs incurred
during the period for shared development costs. Revenues from
milestones related to an arrangement under which the Company has
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 nonrefundable; 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, the other milestones in the
arrangement and the related risk associated with achievement of
the milestone. If any of these conditions is not met, the
milestone payment is deferred and recognized as revenue as the
Company completes its performance obligations.
Where the Company has no continuing involvement under a
collaborative arrangement, the Company records nonrefundable
license fee revenue when the Company has the contractual right
to receive the payment, in accordance with the terms of the
license agreement, and records milestones upon appropriate
notification to the Company of achievement of the milestones by
the collaborative partner.
In November 2002, the Emerging Issues Task Force
(EITF) reached a consensus on EITF Issue
No. 00-21,
Accounting for Revenue Arrangements with Multiple
Deliverables (EITF
No. 00-21).
EITF
No. 00-21
78
IDENIX
PHARMACEUTICALS, INC.
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
provides guidance on how to account for arrangements that
involve the delivery or performance of multiple products,
services
and/or
rights to use assets. The provisions of EITF
No. 00-21
apply to revenue arrangements entered into on or after
July 1, 2003.
Product Sales Product sales consist of sales
of
Tyzeka®
in the United States. Revenues from product sales are recognized
when the product is shipped and title and risk of ownership has
been transferred to the customer, typically upon delivery.
Product sales are recorded net of any applicable allowances for
sales returns, trade term discounts, early pay discounts,
Medicaid rebates, managed care discounts, vouchers, coupons,
patient assistance programs and other allowances. The Company
estimates its deductions from product sales at the time of sale
based on a number of factors, including historical experience of
Novartis and industry knowledge updated for changes in facts,
where appropriate. The Company has a commercial collaboration
profit-sharing arrangement with Novartis on
Tyzeka®
sales in the United States. In this arrangement, the Company
co-promotes
Tyzeka®
with Novartis in the United States, but the Company has primary
responsibility for U.S. commercialization. As a result, the
Company records net product sales and related production costs
for the Companys U.S. commercial collaboration in the
statement of operations on a gross basis since the Company has
the inventory and credit risk, and meets the criteria as a
principal in the transaction. The Company records the
U.S. commercial collaboration profit-sharing expense with
Novartis as a reduction of license fees and collaborative
research and development revenue.
Government Research Grant Revenue Government
research grants that provide for payments to the Company for
work performed are recognized as revenue when the related
expense is incurred and the Company has obtained governmental
approval to use the grant funds for these expenses.
Research
and Development Expenses
All costs associated with internal research and development and
external research and development services, including
pre-clinical and clinical trial studies are expensed as
incurred. Research and development expenses include costs for
salaries, employee benefits, subcontractors, facility related
expenses, depreciation, license fees and stock-based
compensation related to employees involved in the Companys
research and development.
Patents
All costs to secure and defend patents are expensed as incurred.
Share-Based
Compensation
In December 2004, the Financial Accounting Standards Board
(FASB) issued Statement of Financial Accounting
Standard (SFAS) No. 123 (revised 2004), or
SFAS No. 123(R), Share-Based Payment.
This Statement replaces SFAS No. 123,
Accounting for Stock-Based Compensation, and
supersedes Accounting Principles Board Opinion No. 25, or
APB No. 25, Accounting for Stock Issued to
Employees. SFAS No. 123(R) requires
share-based transactions for employees and directors to be
accounted for using a fair value based method that results in
expense being recognized in the Companys financial
statements.
The Company adopted SFAS No. 123(R) on January 1,
2006. The Company applied the modified prospective method at
adoption in which stock compensation expense was determined
based on fair value using the Black-Scholes method at grant
dates for stock options. Accordingly, financial statement
amounts for the periods prior to the adoption of
SFAS No. 123(R), including the years ended
December 31, 2005 and 2004, have not been restated to
reflect the fair value method of expensing. Prior to
January 1, 2006, the Company accounted for its stock-based
awards to employees and directors using the intrinsic method
prescribed in APB No. 25 and related interpretations.
In November 2005, the FASB issued FASB Staff Position FAS
123(R)-3 Transition Election Related to Accounting for Tax
Effects of Share-based Payment Awards, or FSP FAS 123(R)-3.
In accordance with FSP FAS 123(R)-3, entities can choose to
follow either the transitional guidance of SFAS 123(R) or
the alternative transition method described in FSP FAS 123(R)-3.
Effective in the fourth quarter of 2006, the Company elected to
adopt the
79
IDENIX
PHARMACEUTICALS, INC.
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
alternative transition method for calculating the tax effects of
stock-based compensation pursuant to SFAS 123(R). The
alternative transition method includes simplified methods to
establish the beginning balance of the additional paid-in
capital pool, or APIC pool or windfall, related to the tax
effects of employee stock-based compensation, and to determine
the subsequent impact on the APIC pool and consolidated
statements of cash flows of the tax effects of employee-stock
based compensation awards that are outstanding upon adoption of
SFAS 123(R). The adoption of the alternative transition
method resulted in no impact on the Companys financial
statements.
The Company recognizes compensation expense for stock options
granted to non-employees in accordance with the requirements of
SFAS No. 123(R) and EITF Issue No. 96-18,
Accounting for Equity Instruments that Are Issued to
Other than Employees for Acquiring, or in Conjunction with
Selling, Goods or Services
(EITF 96-18). EITF 96-18 requires such
equity instruments to be recorded at their fair value at the
measurement date, which is generally the vesting date of the
instruments. Therefore, the measurement of stock-based
compensation is subject to periodic adjustments as the
underlying equity instruments vest.
Foreign
Currency
The functional currencies of the Companys foreign
subsidiaries are the local currency or the U.S. dollar.
When the functional currency of the foreign subsidiary is the
local currency, assets and liabilities of the foreign subsidiary
are translated into U.S. dollars at the rates of exchange
in effect at the end of the accounting period. Income and
expense items are translated at the average exchange rates for
the period. Net gains and losses resulting from foreign currency
translation are included in other comprehensive loss which is a
separate component of stockholders equity. When the
functional currency of the foreign subsidiary is the
U.S. dollar, a combination of current and historical
exchange rates are used in remeasuring the local currency
transactions of the foreign subsidiary. Nonmonetary assets and
liabilities, including equity, are remeasured using historical
exchange rates. Monetary assets and liabilities are remeasured
at current exchange rates. Revenue and expense amounts are
remeasured using the average exchange rate for the period. Gains
and losses resulting from foreign currency remeasurements are
included in the consolidated statement of operations. Net
realized gains and losses from foreign currency transactions are
included in the consolidated statement of operations.
Income
Taxes
Deferred tax assets and liabilities are recognized based on the
expected future tax consequences, using current tax rates, of
temporary differences between the financial statement carrying
amounts and the income tax basis of assets and liabilities. A
valuation allowance is applied against any net deferred tax
asset if, based on the weighted available evidence, it is more
likely than not that some or all of the deferred tax assets will
not be realized (Note 13). The Company records liabilities
for tax contingencies if it is probable that the Company has
incurred a tax liability and the liability or the range of loss
can be reasonably estimated.
Comprehensive
Income (Loss)
Comprehensive income (loss) is comprised of net loss and certain
changes in stockholders equity that are excluded from net
loss. The Company includes foreign currency translation
adjustments for subsidiaries in which the functional currency is
not the U.S. dollar and unrealized gains and losses on
marketable securities in other comprehensive income (loss). The
consolidated statements of stockholders equity and
comprehensive loss reflect total comprehensive loss for the
years ended December 31, 2006, 2005 and 2004.
Net
Income (Loss) per Common Share
The Company accounts for and discloses net income (loss) per
common share in accordance with SFAS No. 128,
Earnings Per Share
(SFAS No. 128). Under the provisions
of SFAS No. 128, basic net income (loss) per common
share is computed by dividing net income (loss) available to
common stockholders by the weighted average number of common
shares outstanding during the period. Diluted net income (loss)
per
80
IDENIX
PHARMACEUTICALS, INC.
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
common share is computed by dividing net income (loss) available
to common stockholders by the weighted average number of common
shares and dilutive 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 3) and
restricted stock awards.
Segment
Reporting
SFAS No. 131, Disclosures About Segments of
an Enterprise and Related Information
(SFAS No. 131), requires companies to
report information about the annual financial statements of
operating segments. It also establishes standards for related
disclosures about products and services, geographical areas and
major customers. Management of the Company, which uses
consolidated financial information in determining how to
allocate resources and assess performance, has determined that
it operates in only one reportable segment.
Overview
In May 2003, the Company entered into a collaboration with
Novartis relating to the worldwide development and
commercialization of the Companys product candidates. The
collaboration includes the development, license and
commercialization agreement dated May 8, 2003 by and among
the Company and Novartis (as amended, the Development
Agreement). As a part of such arrangement, Novartis paid
the Company a license fee of $75,000,000 for its HBV product and
product candidate,
Tyzeka®/Sebivo®
and valtorcitabine, respectively, is providing development
funding for
Tyzeka®/Sebivo®
and valtorcitabine and will make milestone payments which could
total up to $35,000,000 upon the achievement of certain
regulatory approvals, as well as additional commercial milestone
payments based upon achievement of predetermined HBV product
sales levels. One of these regulatory milestones was achieved in
February 2007 with the regulatory approval of
Sebivo®
in China for which the Company expects to receive a
$10,000,000 milestone payment from Novartis.
Novartis also acquired an option to license the Companys
HCV and other product candidates. In March 2006, Novartis
exercised its option to license valopicitabine, the
Companys lead HCV product candidate. As a result, Novartis
paid the Company a license fee of $25,000,000 in March 2006 and
is providing development funding for valopicitabine. Novartis
has agreed to pay the Company up to $500,000,000 in additional
license fees and regulatory milestone payments for
valopicitabine as follows: $45,000,000 in license fees upon the
advancement of valopicitabine into phase III clinical
trials in treatment-naïve and treatment-refractory patients
in the United States and $455,000,000 in milestone payments upon
achievement of regulatory filings and marketing authorization
approvals of valopicitabine in the United States, Europe and
Japan. In addition, Novartis has agreed to pay the Company
additional commercial milestone payments based upon achievement
of predetermined sales levels for valopicitabine. In June 2004,
the Company received a $25,000,000 milestone payment from
Novartis that it recognized as revenue based upon results from a
phase I clinical trial of valopicitabine.
Under the Development Agreement, the Company granted Novartis an
exclusive, worldwide license to market and sell
Tyzeka®/Sebivo®,
valtorcitabine and valopicitabine and the Company will grant
Novartis similar licenses with respect to any other product
candidates for which Novartis exercises its option to license.
The Company has retained the right to co-promote or co-market
Tyzeka®/Sebivo®,
valtorcitabine and valopicitabine in the United States,
United Kingdom, France, Germany, Italy and Spain.
The Company is reimbursed by Novartis on a quarterly basis for
expenses it incurs in connection with the development and
registration of its licensed products and product candidates.
Pursuant to a cost sharing arrangement with Novartis, the
Company is also reimbursed for certain registration expenses and
phase IIIb clinical trial costs associated with
telbivudine, net of certain qualifying costs incurred by
Novartis.
81
IDENIX
PHARMACEUTICALS, INC.
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Simultaneously with the collaboration described above, Novartis
purchased approximately 54% of the Companys outstanding
capital stock from the Companys then existing stockholders
for $255,000,000 in cash, and up to an additional $357,000,000
contingently payable to these stockholders if the Company
achieves predetermined development milestones relating to an HCV
product candidate. As of December 31, 2006, Novartis owns
approximately 56% of the Companys outstanding stock.
To date, the Company has received from Novartis a $25,000,000
license fee for valopicitabine, a $75,000,000 license fee for
Tyzeka®/Sebivo®
and valtorcitabine, offset by $75,000 in interest costs, and a
$5,000,000 reimbursement for reacquiring product rights from
Sumitomo to develop and commercialize
Sebivo®
in certain markets in Asia. The Company included this
reimbursement as part of the license fee for accounting purposes
because Novartis required the repurchase of these rights as a
condition to entering into the Development Agreement. The
Company also incurred approximately $2,250,000 in costs
associated with the development of valopicitabine prior to
Novartis licensing valopicitabine in March 2006 for which
Novartis reimbursed the Company. The sum of these amounts
received from Novartis, totaling $107,175,000, has been recorded
as license fees and is being recognized over the development
period of the licensed product candidates.
The Company reviews its assessment and judgment on a quarterly
basis with respect to the expected duration of the development
period of its licensed product candidates. The Company has
estimated that the performance period during which the
development of
Tyzeka®/Sebivo®,
valtorcitabine and valopicitabine will be completed is a period
of approximately seven and one-half years following the
effective date of the Development Agreement that the Company
entered into with Novartis, or December 2010. The Company is
recognizing revenue on the license fee payments over this
period. If the estimated performance period changes, the Company
will adjust the periodic revenue that is being recognized and
will record the remaining unrecognized license fee payments over
the remaining development period during which the Companys
performance obligations will be completed. Significant judgments
and estimates are involved in determining the estimated
development period and different assumptions could yield
materially different results.
Stockholders
Agreement
In connection with Novartis purchase of stock from the
Companys stockholders, the Company, Novartis and
substantially all of the Companys stockholders entered
into a stockholders agreement which was amended and
restated in 2004 in connection with the Companys initial
public offering of its common stock (Stockholders
Agreement). The Stockholders Agreement provides,
among other things, that the Company will use its 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 the Companys voting stock and at least
one designee of Novartis for so long as Novartis and its
affiliates own at least 19.4% of the Companys voting
stock. As long as Novartis and its affiliates continue to own at
least 19.4% of the Companys voting stock, Novartis will
have approval rights over a number of corporate actions that the
Company may take, including the authorization or issuance of
additional shares of capital stock and significant acquisitions
and dispositions.
Subject to certain exceptions, Novartis and its affiliates have
contractually agreed not to acquire prior to May 8, 2008,
additional shares of the Companys voting stock unless a
majority of the independent board members waive such contractual
provision. Acquisitions of the Companys voting stock by
exercise of Novartis stock purchase rights under the
Stockholders Agreement or acquisitions of voting stock to
maintain a 51% ownership interest in the Companys fully
diluted common stock, exclusive of any shares formerly held by
Novartis BioVentures, Ltd., are specifically excepted from this
restriction.
Novartis
Stock Purchase Rights
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 the Companys voting
stock if the Company issues shares of capital stock in
connection with the acquisition or in-licensing of technology
through the issuance of up to 5% of the Companys
82
IDENIX
PHARMACEUTICALS, INC.
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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 the Companys voting
stock; or b) the date that Novartis becomes obligated to
make the additional contingent payments of $357,000,000 to
holders of the Companys stock who sold shares to Novartis
on May 8, 2003.
If the Company issues any shares of its capital stock, other
than in certain situations, Novartis has the right to purchase
such number of shares required to maintain its percentage
ownership of the Companys voting stock for the same
consideration per share paid by others acquiring the
Companys stock. Upon the grant of options and stock awards
under stock incentive plans, with the exception of the 1998
Equity Incentive Plan, the fair value of the Companys
common stock that would be issuable to Novartis, less the
exercise price, if any payable by the option or award holder, is
recorded as a reduction of the license fees associated with the
Novartis collaboration. The amount is attributed proportionately
between cumulative revenue recognized through that 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 the Companys common stock and in
Novartis percentage ownership. These adjustments will also
be attributed proportionately between cumulative revenue
recognized through the final measurement date and the remaining
deferred revenue.
In connection with the closing of the Companys initial
public offering in July 2004, Novartis terminated a common stock
subscription right with respect to 1,399,106 shares of
common stock issuable by the Company 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, the Company issued
1,100,000 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 $15,400,000 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 are
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 the Company granted options that were subject to this
stock subscription right, the fair value of the Companys
common stock that would be issuable to Novartis, less par value,
was recorded as an adjustment of the license fee and payments
received from Novartis. The Company remains subject to potential
revenue adjustments with respect to grants of options and stock
awards under its stock incentive plans other than the 1998
Equity Incentive Plan.
As of December 31, 2006, Novartis stock subscription rights
have reduced the license fees by an aggregate of $15,451,000
which has been recorded to additional paid-in capital. Of this
amount, $7,419,000 is recorded in deferred revenue as of
December 31, 2006 with the remaining amount of $8,032,000
recorded as a reduction of revenue.
Manufacturing
and Packaging Agreements
In June 2006 after completing a competitive bid process where
Novartis had the right to match the best third-party bid, the
Company entered into a commercial manufacturing agreement
(Manufacturing Agreement) with Novartis and a
packaging agreement (Packaging Agreement) with
Novartis Pharmaceuticals Corporation, an affiliate of Novartis.
Under the Manufacturing Agreement, Novartis will manufacture the
commercial supply of
Tyzeka®
that is intended for sale in the United States. The Packaging
Agreement provides that the supply of
Tyzeka®
intended for commercial sale in the United States will be
packaged by Novartis Pharmaceuticals Corporation.
Product
Sales Arrangements
In connection with the Novartis license of product candidates
under the Development Agreement, the Company 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, the Company will act as the lead party and record
revenue from product sales and share equally the net benefit
from co-promotion from the date of product launch. In the
83
IDENIX
PHARMACEUTICALS, INC.
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
United Kingdom, France, Germany, Italy and Spain, Novartis will
act as the lead party, record revenue from product sales and
will share with the Company 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 will be shared with the Company will 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, the
Company will effectively sell products to Novartis for their
further sale to third parties. Novartis will pay the Company for
such products at a price that is determined under the terms the
Companys supply agreement with Novartis.
In October 2006, the Company received approval from the FDA to
market its first product,
Tyzeka®,
in the United States. The Company recognized $424,000 in net
sales from
Tyzeka®
during the year ended December 31, 2006 after receiving FDA
approval.
Sebivo®
also has been approved in a number of jurisdictions, including
Switzerland, China, South Korea and Canada. There were no sales
of
Sebivo®
in territories outside of the United States during the year
ended December 31, 2006.
|
|
4.
|
Public
Offerings of Common Stock
|
Initial
Public Offering of Common Stock
In July 2004, the Company completed an initial public offering
of 5,800,000 shares of its common stock, consisting of:
|
|
|
|
|
4,600,000 shares offered by the Company; and
|
|
|
|
1,200,000 shares offered by the Companys selling
stockholders.
|
In addition, the Company entered into two stock purchase
agreements with Novartis, providing for the purchase by Novartis
and sale by the Company of:
|
|
|
|
|
5,400,000 shares of the Companys common stock at a
purchase price per share equal to the public selling price of
the Companys common stock in the initial public
offering; and
|
|
|
|
1,100,000 shares of the Companys common stock at a
purchase price per share equal to $0.001, the par value of the
Companys common stock in settlement of certain stock
subscription rights (Note 3).
|
In connection with this initial public offering and concurrent
stock purchases, the Company realized approximately $132,600,000
in net proceeds, after deducting underwriting discounts and
offering expenses.
Subsequent
Public Offering of Common Stock
In October 2005, the Company completed a subsequent public
offering in which:
|
|
|
|
|
the Company issued and sold 7,278,020 shares of its common
stock; and
|
|
|
|
certain stockholders sold 942,507 shares of the
Companys common stock.
|
The net proceeds to the Company were approximately $145,400,000,
after deducting underwriting discounts and commissions and
offering expenses. Of the shares offered and sold by the
Company, 3,939,131 shares were sold to Novartis. In
November 2005, the underwriters exercised the over allotment
option associated with this offering resulting in the sale by
the selling stockholders of 1,130,387 additional shares of the
Companys common stock. The Company did not receive any
proceeds from the sale of shares by the selling stockholders.
84
IDENIX
PHARMACEUTICALS, INC.
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
5.
|
Net Loss
Per Common Share
|
The following sets forth the computation of basic and diluted
net loss per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
(In thousands, except per share data)
|
|
|
Basic and diluted net loss per
common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(75,087
|
)
|
|
$
|
(50,777
|
)
|
|
$
|
(6,244
|
)
|
Basic and diluted weighted average
number of common shares outstanding
|
|
|
56,005
|
|
|
|
49,395
|
|
|
|
41,369
|
|
Basic and diluted net loss per
common share
|
|
$
|
(1.34
|
)
|
|
$
|
(1.03
|
)
|
|
$
|
(0.15
|
)
|
The following common shares were excluded from the calculation
of diluted net loss per common share because their effect was
antidilutive:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
(In thousands)
|
|
|
Options
|
|
|
4,387
|
|
|
|
3,584
|
|
|
|
3,162
|
|
Contingently issuable shares to
related party
|
|
|
77
|
|
|
|
26
|
|
|
|
30
|
|
Restricted stock
|
|
|
|
|
|
|
11
|
|
|
|
98
|
|
The Company invests its excess cash with large U.S. based
financial institutions and considers its investment portfolio
and marketable securities
available-for-sale
as defined in SFAS No. 115, Accounting for
Certain Investments in Debt and Equity Securities.
Accordingly, these marketable securities are recorded at
fair value, which is based on quoted market prices. The fair
values of
available-for-sale
investments by type of security, contractual maturity and
classification in the consolidated balance sheets as of
December 31, 2006 and 2005 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2006
|
|
|
|
|
|
|
Gross Unrealized
|
|
|
Gross Unrealized
|
|
|
|
|
|
|
Amortized Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Market Value
|
|
|
|
(In thousands)
|
|
|
Type of security:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market funds
|
|
$
|
13,940
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
13,940
|
|
Commercial paper
|
|
|
5,988
|
|
|
|
|
|
|
|
|
|
|
|
5,988
|
|
Corporate debt securities
|
|
|
111,486
|
|
|
|
17
|
|
|
|
(53
|
)
|
|
|
111,450
|
|
U.S. Treasury securities and
obligations of U.S. government agencies
|
|
|
9,176
|
|
|
|
2
|
|
|
|
(11
|
)
|
|
|
9,167
|
|
Taxable auction rate securities
|
|
|
8,511
|
|
|
|
14
|
|
|
|
(2
|
)
|
|
|
8,523
|
|
Accrued interest
|
|
|
1,371
|
|
|
|
|
|
|
|
|
|
|
|
1,371
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
150,472
|
|
|
$
|
33
|
|
|
$
|
(66
|
)
|
|
$
|
150,439
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
85
IDENIX
PHARMACEUTICALS, INC.
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2005
|
|
|
|
|
|
|
Gross Unrealized
|
|
|
Gross Unrealized
|
|
|
|
|
|
|
Amortized Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Market Value
|
|
|
|
(In thousands)
|
|
|
Type of security:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market funds
|
|
$
|
11,580
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
11,580
|
|
Corporate debt securities
|
|
|
108,559
|
|
|
|
2
|
|
|
|
(132
|
)
|
|
|
108,429
|
|
U.S. Treasury securities and
obligations of U.S. government agencies
|
|
|
23,469
|
|
|
|
|
|
|
|
(90
|
)
|
|
|
23,379
|
|
Taxable auction rate securities
|
|
|
51,311
|
|
|
|
|
|
|
|
(4
|
)
|
|
|
51,307
|
|
Accrued interest
|
|
|
1,427
|
|
|
|
|
|
|
|
|
|
|
|
1,427
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
196,346
|
|
|
$
|
2
|
|
|
$
|
(226
|
)
|
|
$
|
196,122
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
|
(In thousands)
|
|
|
Contractual maturity:
|
|
|
|
|
|
|
|
|
Maturing in one year or less
|
|
$
|
91,231
|
|
|
$
|
133,267
|
|
Maturing after one year through
two years
|
|
|
16,310
|
|
|
|
|
|
Maturing after two years through
ten years
|
|
|
24,922
|
|
|
|
26,030
|
|
Maturing after ten years
|
|
|
17,976
|
|
|
|
36,825
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
150,439
|
|
|
$
|
196,122
|
|
|
|
|
|
|
|
|
|
|
Included in the table above are taxable auction rate securities,
which typically reset to current interest rates every 28 to
45 days, but are included in the table above based on their
stated maturities.
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
|
(In thousands)
|
|
|
Classification in balance sheets:
|
|
|
|
|
|
|
|
|
Cash equivalents
|
|
$
|
19,980
|
|
|
$
|
37,688
|
|
Marketable securities
|
|
|
71,251
|
|
|
|
95,579
|
|
Marketable securities, non-current
|
|
|
59,208
|
|
|
|
62,855
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
150,439
|
|
|
$
|
196,122
|
|
|
|
|
|
|
|
|
|
|
The cash equivalent amounts of $19,980,000 and $37,688,000 at
December 31, 2006 and 2005, respectively, are included as
part of cash and cash equivalents on the Companys
consolidated balance sheets. The Company has the ability to hold
its marketable securities to their effective maturity.
86
IDENIX
PHARMACEUTICALS, INC.
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
7.
|
Receivables
from Related Party
|
Receivables from related party consist of the following:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
|
(In thousands)
|
|
|
Unbilled receivables from related
party
|
|
$
|
12,035
|
|
|
$
|
13,723
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
12,035
|
|
|
$
|
13,723
|
|
|
|
|
|
|
|
|
|
|
Unbilled receivables from related party represent amounts under
collaborative arrangements in the normal course of business for
reimbursement of development, regulatory and marketing
expenditures that have not been billed at December 31, 2006
and 2005. The reimbursement of development and regulatory
expenditures is billed quarterly. All related party receivables
are due from Novartis.
|
|
8.
|
Property
and Equipment
|
Property and equipment consists of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated
|
|
|
|
|
|
|
|
|
|
Useful
|
|
|
|
|
|
|
|
|
|
Life
|
|
|
December 31,
|
|
|
|
(Years)
|
|
|
2006
|
|
|
2005
|
|
|
|
|
|
|
(In thousands)
|
|
|
Office equipment
|
|
|
5
|
|
|
$
|
71
|
|
|
$
|
266
|
|
Scientific equipment
|
|
|
7
|
|
|
|
5,738
|
|
|
|
3,869
|
|
Computer equipment and software
|
|
|
2
|
|
|
|
4,005
|
|
|
|
2,752
|
|
Enterprise software
|
|
|
5
|
|
|
|
2,307
|
|
|
|
|
|
Office furniture
|
|
|
7
|
|
|
|
1,645
|
|
|
|
1,303
|
|
Trade show booths
|
|
|
2
|
|
|
|
382
|
|
|
|
49
|
|
Equipment under capital lease
|
|
|
*
|
|
|
|
|
|
|
|
30
|
|
Leasehold improvements
|
|
|
*
|
|
|
|
7,540
|
|
|
|
6,027
|
|
Construction-in-progress
|
|
|
|
|
|
|
3,944
|
|
|
|
1,378
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
25,632
|
|
|
|
15,674
|
|
Less
accumulated depreciation
|
|
|
|
|
|
|
(8,184
|
)
|
|
|
(4,623
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
17,448
|
|
|
$
|
11,051
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
Shorter of asset life or lease term. |
Depreciation expense for the years ended December 31, 2006,
2005 and 2004 was $3,463,000, $2,066,000 and $1,304,000
respectively.
Construction-in-progress
consists primarily of build-out costs of office and laboratory
space and computer software projects.
87
IDENIX
PHARMACEUTICALS, INC.
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Accrued expenses consist of the following:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
|
(In thousands)
|
|
|
Research and development contract
costs
|
|
$
|
5,502
|
|
|
$
|
8,018
|
|
Payroll and benefits
|
|
|
5,676
|
|
|
|
4,916
|
|
License fees
|
|
|
1,000
|
|
|
|
1,000
|
|
Professional fees
|
|
|
753
|
|
|
|
884
|
|
Marketing
|
|
|
489
|
|
|
|
619
|
|
Other
|
|
|
2,259
|
|
|
|
1,248
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
15,679
|
|
|
$
|
16,685
|
|
|
|
|
|
|
|
|
|
|
Accrued license fees represent amounts owing to Microbiologica
for the right to use certain manufacturing technology and
patents (Note 18).
Each share of common stock entitles the holder to one vote on
all matters submitted to a vote of the Companys
stockholders. Common stockholders are entitled to receive
dividends, if any, as may be declared by the Board of Directors.
In July 2004, the stockholders approved an amendment to the
Companys restated certificate of incorporation increasing
the authorized number of shares of the Companys capital
stock from 50,000,000 shares of common stock to
60,000,000 shares of common stock.
In December 2005, the stockholders approved an amendment to the
Companys restated certificate of incorporation increasing
the authorized number of shares of the Companys capital
stock from 60,000,000 shares of common stock to
75,000,000 shares of common stock. The amendment to the
Companys restated certificate of incorporation became
effective in January 2006.
Novartis and certain holders of the Companys common stock
are party to the Stockholders Agreement. The terms of the
stockholders agreement generally provide for registration
rights in favor of Novartis and such other stockholders and
certain approval rights in favor of Novartis with respect to
corporate actions that might be taken by the Company.
|
|
11.
|
Equity
Incentive Plans and Share-Based Compensation
|
In May 1998, the Company adopted the 1998 Equity Incentive Plan,
as amended (1998 Plan), which provides for the grant
of incentive stock options, nonqualified stock options, stock
awards and stock appreciation rights. The Company initially
reserved 1,468,966 shares of common stock for issuance
pursuant to the 1998 Plan. The Company subsequently amended the
1998 Plan and reserved an additional 3,600,000 shares of
common stock for issuance under the 1998 Plan.
In July 2004, the Company adopted the 2004 Stock Incentive Plan
(2004 Plan). The 2004 Plan provided for the grant of
incentive stock options, non-qualified stock options, stock
appreciation rights, performance share awards and restricted and
unrestricted stock awards for the purchase of an aggregate of
800,000 shares of common stock.
In June 2005, the Companys stockholders approved the 2005
Stock Incentive Plan (2005 Plan). The 2005 Plan
allows for the granting of incentive stock options,
non-qualified stock options, stock appreciation rights,
88
IDENIX
PHARMACEUTICALS, INC.
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
performance share awards and restricted stock awards
(Awards). The 2005 Plan, as approved by the
Companys stockholders, provided for the authorization of
Awards covering an aggregate of 2,200,000 shares of common
stock plus 800,000 shares previously authorized for
issuance under the 2004 Stock Incentive Plan. In connection with
the Companys public offering in October 2005, the
Companys Board of Directors reduced the number of shares
of common stock reserved for issuance under the 2005 Plan to
1,400,000 shares. In March 2006, the Companys Board
of Directors authorized the restoration of the reserve of
1,600,000 shares for issuance under the 2005 Plan.
The equity incentive plans are administered by the Compensation
Committee of the Board of Directors. The Compensation Committee
determines the type and term of each award, the award exercise
or purchase price, if applicable, the number of shares
underlying each award granted and the rate at which each award
becomes vested or exercisable. Incentive stock options may be
granted only to employees of the Company at an exercise price
per share of not less than the fair market value per share of
common stock as determined by the Board of Directors on the date
of grant (not less than 110% of the fair market value in the
case of holders of more than 10% of the Companys voting
common stock) and with a term not to exceed ten years from date
of grant (five years for incentive stock options granted to
holders of more than 10% of the Companys voting common
stock). Nonqualified stock options may be granted to any
officer, employee, director, consultant or advisor at a per
share exercise price in such amount as the Compensation
Committee may determine.
The Compensation Committee may also grant restricted stock and
other stock-based awards on such terms and conditions as it may
determine.
The following table summarizes option activity under the equity
incentive plans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
|
|
|
Number
|
|
|
Weighted
|
|
|
|
Options Available
|
|
|
of Options
|
|
|
Average
|
|
|
|
for Future Grant
|
|
|
Outstanding
|
|
|
Exercise Price
|
|
|
Outstanding, December 31, 2003
|
|
|
826,240
|
|
|
|
2,495,454
|
|
|
$
|
5.17
|
|
Granted
|
|
|
|
|
|
|
930,900
|
|
|
|
12.95
|
|
Exercised
|
|
|
|
|
|
|
(210,646
|
)
|
|
|
4.20
|
|
Cancelled
|
|
|
|
|
|
|
(53,918
|
)
|
|
|
4.68
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, December 31, 2004
|
|
|
749,258
|
|
|
|
3,161,790
|
|
|
|
7.50
|
|
Granted
|
|
|
|
|
|
|
1,167,750
|
|
|
|
20.27
|
|
Exercised
|
|
|
|
|
|
|
(590,618
|
)
|
|
|
3.42
|
|
Cancelled
|
|
|
|
|
|
|
(154,600
|
)
|
|
|
10.67
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, December 31, 2005
|
|
|
338,608
|
|
|
|
3,584,322
|
|
|
|
12.20
|
|
Granted
|
|
|
|
|
|
|
1,373,187
|
|
|
|
14.50
|
|
Exercised
|
|
|
|
|
|
|
(263,804
|
)
|
|
|
3.42
|
|
Cancelled
|
|
|
|
|
|
|
(306,944
|
)
|
|
|
17.84
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, December 31, 2006
|
|
|
869,869
|
|
|
|
4,386,761
|
|
|
$
|
13.05
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable, December 31, 2004
|
|
|
|
|
|
|
1,509,531
|
|
|
$
|
4.82
|
|
Exercisable, December 31, 2005
|
|
|
|
|
|
|
1,841,858
|
|
|
$
|
8.33
|
|
Exercisable, December 31, 2006
|
|
|
|
|
|
|
2,483,361
|
|
|
$
|
11.16
|
|
The Company granted 1,373,187, 1,167,750 and 930,900 stock
options for the years ended December 31, 2006, 2005 and
2004, respectively. The weighted average fair value of options
granted during the years ended December 31, 2006, 2005 and
2004 was $8.38, $13.96 and $8.06, respectively. The total
intrinsic value of options exercised during the year ended
December 31, 2006 was $2,816,000. The intrinsic value was
calculated as the difference between the market value and the
exercise price of the shares at the date of exercise. The
aggregate
89
IDENIX
PHARMACEUTICALS, INC.
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
intrinsic value of stock options outstanding at
December 31, 2006 was $4,288,000. The aggregate intrinsic
value of stock options exercisable at December 31, 2006 was
$4,263,000.
The Company adopted SFAS No. 123(R) on January 1,
2006. The Company applied the modified prospective method at
adoption in which stock compensation expense was determined
based on fair value using the Black-Scholes method at grant
dates for stock options. Accordingly, financial statement
amounts for the periods prior to the adoption of
SFAS No. 123(R), including the years ended
December 31, 2005 and 2004, have not been restated to
reflect the fair value method of expensing. Prior to
January 1, 2006, the Company accounted for its stock-based
awards to employees and directors using the intrinsic method
prescribed in APB No. 25 and related interpretations. As a
result of adopting SFAS No. 123(R) on January 1, 2006,
the Companys net loss for the year ended December 31,
2006 is $8,393,000 or $0.15 per share on a basic and
diluted basis and higher than if the Company had continued to
account for employee stock-based compensation expense under APB
No. 25.
The following table shows stock-based compensation expense as
reflected in the Companys consolidated statements of
operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
(In thousands)
|
|
|
Research and development
|
|
$
|
2,892
|
|
|
$
|
722
|
|
|
$
|
1,191
|
|
Selling, general and administrative
|
|
|
5,745
|
|
|
|
666
|
|
|
|
909
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stock-based compensation
expense
|
|
$
|
8,637
|
|
|
$
|
1,388
|
|
|
$
|
2,100
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company has an aggregate of $17,030,000 of stock
compensation as of December 31, 2006 remaining to be
amortized over a weighted average life of 2.72 years.
The assumptions used are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Expected dividend yield
|
|
|
|
|
|
|
|
|
|
|
|
|
Risk-free interest rate
|
|
|
4.78
|
%
|
|
|
3.94
|
%
|
|
|
3.26
|
%
|
Expected option term (in years)
|
|
|
5.0
|
|
|
|
5.0
|
|
|
|
5.0
|
|
Expected volatility
|
|
|
63
|
%
|
|
|
83
|
%
|
|
|
28
|
%
|
No dividend yield was assumed as the Company does not pay
dividends on its common stock. The risk-free interest rate is
based on the yield of U.S. Treasury securities consistent
with the expected life of the option. The expected option term
and expected volatility were determined by examining the
expected option term and expected volatility of the
Companys stock as well as the expected terms and expected
volatilities of similarly sized biotechnology companies.
As share-based compensation expense recognized in the
consolidated statements of operations for the year ended
December 31, 2006 is based on awards ultimately expected to
vest and is reduced for estimated forfeitures.
SFAS No. 123(R) requires forfeitures to be estimated
at the time of grant and revised, if necessary, in subsequent
periods as options vest, if actual forfeitures differ from those
estimates. During the year ended December 31, 2006, because
substantially all of the Companys stock option grants vest
monthly, stock-based employee compensation expense includes the
actual impact of forfeitures. In the Companys pro forma
information required under SFAS No. 123 for the
periods prior to fiscal 2006, the Company accounted for
forfeitures as they occurred.
90
IDENIX
PHARMACEUTICALS, INC.
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following table illustrates the effect on net loss and net
loss per share as if the Company had applied the fair value
recognition provisions of SFAS No. 123 to stock
options for employees for the years ended December 31, 2005
and 2004:
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
|
(In thousands, except per share data)
|
|
|
Net loss as reported
|
|
$
|
(50,777
|
)
|
|
$
|
(6,244
|
)
|
Add stock-based employee
compensation expense included in reported net loss
|
|
|
1,388
|
|
|
|
2,091
|
|
Deduct stock-based compensation
expense determined under fair value based method
|
|
|
(7,216
|
)
|
|
|
(3,058
|
)
|
|
|
|
|
|
|
|
|
|
Net loss pro forma
|
|
$
|
(56,605
|
)
|
|
$
|
(7,211
|
)
|
|
|
|
|
|
|
|
|
|
Net loss per common share (basic
and diluted)
|
|
|
|
|
|
|
|
|
As reported
|
|
$
|
(1.03
|
)
|
|
$
|
(0.15
|
)
|
Pro forma
|
|
$
|
(1.15
|
)
|
|
$
|
(0.17
|
)
|
|
|
12.
|
Commitments
and Contingencies
|
Lease
Arrangements
The Company leases its facilities and certain equipment under
operating leases. The Companys lease arrangements have
terms through the year 2017. Total rent expense under operating
leases was approximately $2,688,000, $1,905,000 and $1,759,000
for the years ended December 31, 2006, 2005 and 2004,
respectively. Future minimum payments under lease arrangements
at December 31, 2006 are as follows:
|
|
|
|
|
|
|
Operating
|
|
Year Ending December 31,
|
|
Leases
|
|
|
|
(In thousands)
|
|
|
2007
|
|
$
|
3,376
|
|
2008
|
|
|
3,140
|
|
2009
|
|
|
3,256
|
|
2010
|
|
|
2,313
|
|
2011 and thereafter
|
|
|
7,996
|
|
|
|
|
|
|
Total
|
|
$
|
20,081
|
|
|
|
|
|
|
In October 2003, the Company entered into an operating lease
commitment for office and laboratory space in Cambridge,
Massachusetts. The term of the lease is for ten years, expiring
in December 2013. The lease agreement provided for a landlord
allowance of $1,560,560 to be paid to the Company to finance a
portion of capital improvements to the facility. This landlord
allowance was recorded as deferred rent which is being amortized
as a reduction of rent over the ten-year lease term. In
connection with this operating lease commitment, a commercial
bank issued a letter of credit in October 2003 for $750,000
collateralized by cash held with that bank. The letter of credit
expires in December 2013.
In April 2005, the Company entered into a lease agreement for
office and laboratory space in Montpellier, France. The term of
the lease is for 12 years, expiring in April 2017 but is
cancellable by either party after six years. The lease agreement
also includes an option entitling the Company to purchase the
building at any time after April 16, 2011. The purchase
option extends until the expiration of the lease term.
91
IDENIX
PHARMACEUTICALS, INC.
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
In June 2005, the Company entered into a lease agreement for
additional office space in Cambridge, Massachusetts. The Company
entered into amendments to this lease agreement in July 2006 and
September 2006 to lease additional office space in the same
building. The term of the lease for all office space being
rented under this lease agreement and its amendments expires in
March 2010. The lease agreement also includes an option,
exercisable by the Company not later than nine months prior to
the expiration of the initial term, to extend the term of the
lease for one additional
48-month
period and with rights of first offer with respect to certain
expansion space on two of the floors that the Company occupies.
The Company also has been provided allowances totaling
$1,211,000 to finance a portion of capital improvements to the
facility. These allowances have been recorded as deferred rent
which is being amortized as a reduction of rent over the lease
term. In connection with this operating lease commitment, a
commercial bank issued a letter of credit in May 2005 for
$411,000 collateralized by cash we have on deposit with that
bank. The letter of credit expires in May 2007.
Legal
Contingencies
Hepatitis
C Product Candidates
In May 2004, the Company and, in an individual capacity, its
Chief Executive Officer (CEO), entered into a
settlement agreement with the University of Alabama at
Birmingham (UAB) and its affiliate, the UAB Research
Foundation (UABRF), to resolve a dispute among these
parties. In March 2004, the Company and, in an individual
capacity, its CEO, filed a lawsuit against UABRF in the United
States District Court, District of Massachusetts, seeking
declaratory judgment regarding the Companys ownership of
inventions and discoveries made during the period from November
1999 to November 2002 (Leave Period) by the CEO and
the Companys ownership of patents and patent applications
related to such inventions and discoveries. During the Leave
Period, while acting in the capacity as the Companys Chief
Scientific Officer, the CEO was on sabbatical from November 1999
to November 2000 (Sabbatical Period) and then unpaid
leave prior to resigning in November 2002 from his position as a
professor at UAB.
As a part of the settlement agreement, UAB and UABRF agreed that
neither UAB nor UABRF have any right, title or ownership
interest in the inventions and discoveries made or reduced to
practice during the Leave Period or the related patents and
patent applications. In exchange, the Company made a $2,000,000
payment to UABRF in May 2004. The Company also dismissed the
pending litigation and agreed to make certain future payments to
UABRF. These future payments consist of (i) a $1,000,000
payment upon the receipt of regulatory approval to market and
sell in the U.S. a product which relates to inventions and
discoveries made by the CEO during the Sabbatical Period and
(ii) payments in an amount equal to 0.5% of worldwide net
sales of such products with a minimum sales based payment to
equal $12,000,000. The sales based payments (including the
minimum amount) are contingent upon the commercial launch of
products that relate to inventions and discoveries made by the
CEO during the Sabbatical Period. The minimum amount is due
within seven years after the later of the commercial launch in
the United States or any of the United Kingdom, France, Germany,
Italy or Spain, of a product that (i) has within its
approved product label a use for the treatment of hepatitis C
infection, and (ii) relate to inventions and discoveries
made by the CEO during the Sabbatical Period, if sales based
payments for such product have not then exceeded $12,000,000. At
that time, the Company will be obligated to pay to UABRF the
difference between the sales based payments then paid to date
for such product and $12,000,000. The Company has no amounts
accrued or payable under this settlement agreement at
December 31, 2006.
Hepatitis
B Product Candidates
In addition to the Leave Period matter noted above, UABRF
notified the Company in January 2004, February 2005 and June
2005, that UABRF believes that patent applications which the
Company has licensed from UABRF (Note 18) can be
amended to obtain broad patent claims that would generally cover
the method of using telbivudine to treat HBV. In July 2005,
UABRF filed this continuation patent application.
92
IDENIX
PHARMACEUTICALS, INC.
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
In February 2006, UABRF notified the Company that it and Emory
University were asserting a claim that, as a result of filing a
continuation patent application in July 2005 by UABRF, the UAB
license agreement covers the Companys telbivudine
technology and that the Company is obligated to pay to UABRF,
Emory University and Le Centre Nationale de la Recherhe
Scientifique (CNRS) (collectively, the 1998
licensors) an aggregate of $15.3 million comprised of
20% of the $75 million license fee we received from
Novartis in May 2003 in connection with the license of its
hepatitis B product candidates and a $0.3 million payment
in connection with the submission to the FDA of the IND pursuant
to which the Company has conducted its clinical trials of
telbivudine. The Company disagrees with the assertion made by
UABRF and Emory University and intends to dispute these
assertions. Under the terms of the license agreement, the
dispute will be resolved by arbitration under the rule of the
American Arbitration Association before a panel of three
arbitrators if the parties are unable to reach agreement after a
period of negotiation and mediation. The Company does not
believe that the matters disputed by UABRF and Emory University
regarding the UAB license agreement will have any effect on
either the cooperative agreement with CNRS and the University of
Montpellier or the technology licenses, including a license to
telbivudine, which have been granted to the Company pursuant to
the cooperative agreement.
However, if it is determined that the license agreement does
cover the Companys telbivudine technology, the Company
will become obligated to make payments to the 1998 licensors in
the amounts and manner specified in the license agreement. While
the Company disputes the demands made by UABRF, even if
liability were found to exist, UABRFs claims, in addition
to those described above would likely include payments in the
aggregate amount of $1.0 million due upon achievement of
certain regulatory milestones, a 6% royalty on annual sales up
to $50 million and a 3% royalty on annual sales greater
than $50 million made by the Company or any affiliate of
the Company. Additionally, if the Company sublicenses its rights
to any entity other than one which holds or controls at least
50% of its capital stock, or if Novartis ownership
interest in the Company declines below 50% of the Companys
outstanding shares of capital stock, UABRF would likely contend
that the Company is obligated to pay to the 1998 licensors 30%
of all royalties received on sales by the sublicensee of
telbivudine and 20% of all fees, milestone payments and other
cash consideration received from the sublicensee with respect to
telbivudine. The Company does not believe that it is probable
that UABRFs position will be upheld and as such, the
Company has not recorded a liability at December 31, 2006.
In January 2007, the Board of Trustees of the University of
Alabama and related entities filed a complaint in the United
States District Court for the Northern District of Alabama
Southern Division against the Company, CNRS and the University
of Montpellier. The complaint alleges that a former employee of
the UAB is a co-inventor of certain patents related to the use
of ß-L-2-deoxy-nucleosides for the treatment of HBV
assigned to one or more of the Company, CNRS and the University
of Montpellier and which cover the use of
Tyzeka®/Sebivo®,
our product for the treatment of HBV. The University of Alabama
has included a demand for damages under various theories in its
complaint, but did not specify the amount of damages that it
alleges to have been incurred. We have not yet been able to
determine whether the University of Alabama would be entitled to
damages or the extent thereof if it were successful on its
substantive claims. The Company intends to vigorously defend
this lawsuit.
Indemnification
The Company has agreed to indemnify Novartis and its affiliates
against losses suffered as a result of any breach of
representations and warranties in the Development Agreement.
Under the Development Agreement and stock purchase agreement,
the Company made numerous representations and warranties to
Novartis regarding its HBV and HCV product candidates, including
representations regarding the Companys 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, the Company would be in breach of one or
both of these agreements. In the event of a breach by the
Company, Novartis has the right to seek indemnification from the
Company and, under certain circumstances, the Company and its
stockholders who sold shares to Novartis, which include many of
its directors and officers, for damages suffered by Novartis as
a result of such breach. While it is possible that the Company
may be required to make payments pursuant to the indemnification
obligations it has under the Development Agreement,
93
IDENIX
PHARMACEUTICALS, INC.
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
the Company cannot reasonably estimate the amount of such
payments or the likelihood that such payments will be required.
The components of loss before income taxes and of income tax
benefit for the years ending December 31, 2006, 2005 and
2004 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
(In thousands)
|
|
|
Income (loss) before income taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
|
|
$
|
(61,877
|
)
|
|
$
|
(26,400
|
)
|
|
$
|
(14,054
|
)
|
Foreign
|
|
|
(14,355
|
)
|
|
|
(25,091
|
)
|
|
|
7,244
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(76,232
|
)
|
|
$
|
(51,491
|
)
|
|
$
|
(6,810
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax (benefit) expense
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal U.S.
|
|
$
|
(48
|
)
|
|
$
|
|
|
|
$
|
(5
|
)
|
State U.S.
|
|
|
135
|
|
|
|
51
|
|
|
|
(1
|
)
|
Foreign
|
|
|
(1,232
|
)
|
|
|
(765
|
)
|
|
|
(560
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,145
|
)
|
|
|
(714
|
)
|
|
|
(566
|
)
|
Deferred
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal U.S.
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
State U.S.
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total income tax (benefit) expense
|
|
$
|
(1,145
|
)
|
|
$
|
(714
|
)
|
|
$
|
(566
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Companys recognized income tax benefit consists of tax
benefits incurred by the Company and its U.S. and various
foreign subsidiaries. The foreign income tax benefits were due
to amounts that the Companys French subsidiary has
received or is expected to receive for certain research and
development credits. Foreign subsidiaries performed services for
the Company and are reimbursed for these costs, plus a profit
margin. Under current laws of the Cayman Islands, there are no
income or other Cayman Island taxes payable by the Company, its
Cayman Island subsidiary or the Companys stockholders and
therefore there are no Cayman Island loss carryforwards
available to offset future taxes. Since the domestication of the
Company to the U.S. in May 2002, losses incurred by the Company
have been shared between the Company and its Cayman subsidiary,
with losses incurred in the U.S. available to offset future
taxes. As a result of an election to treat the Cayman subsidiary
as part of the U.S. tax group, all losses incurred by the Cayman
subsidiary after July 31, 2006 will be attributed to the
United States.
94
IDENIX
PHARMACEUTICALS, INC.
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The components of the Companys net deferred taxes were as
follows at December 31:
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
|
(In thousands)
|
|
|
Depreciation
|
|
$
|
(337
|
)
|
|
$
|
(8
|
)
|
Development Contracts
|
|
|
2,740
|
|
|
|
999
|
|
Nonqualified Stock Options
|
|
|
1,788
|
|
|
|
185
|
|
Deferred licensing income
|
|
|
10,644
|
|
|
|
5,799
|
|
Accrued expenses and other
|
|
|
1,244
|
|
|
|
633
|
|
Capitalized research costs
|
|
|
32,986
|
|
|
|
3,069
|
|
Research and development credits
|
|
|
5,555
|
|
|
|
3,515
|
|
Foreign tax credit carryforward
|
|
|
877
|
|
|
|
|
|
Net operating carryforwards
|
|
|
41,045
|
|
|
|
27,589
|
|
Valuation allowance
|
|
|
(96,542
|
)
|
|
|
(41,781
|
)
|
|
|
|
|
|
|
|
|
|
Deferred tax asset
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
The Companys effective income tax rate differs from the
statutory federal income tax rate as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Federal statutory rate benefit
|
|
|
(34
|
)%
|
|
|
(34
|
)%
|
|
|
(34
|
)%
|
French research tax credits
|
|
|
(1
|
)
|
|
|
(2
|
)
|
|
|
(8
|
)
|
State tax benefit, net of federal
benefit
|
|
|
(10
|
)
|
|
|
(6
|
)
|
|
|
0
|
|
Permanent items
|
|
|
(35
|
)
|
|
|
(13
|
)
|
|
|
27
|
|
Foreign rate differentials
|
|
|
7
|
|
|
|
17
|
|
|
|
(34
|
)
|
Valuation allowance
|
|
|
72
|
|
|
|
37
|
|
|
|
41
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective income tax rate
|
|
|
(1
|
)%
|
|
|
(1
|
)%
|
|
|
(8
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2006, the Company had U.S. federal and
state net operating loss carry forwards of approximately
$94,000,000 and $124,647,000, respectively, which may be
available to offset future federal and state income tax
liabilities. The federal net operating loss carryforwards begin
to expire in 2022 and the state net operating loss carryforwards
begin to expire in 2007. The Company has foreign net operating
loss carry forwards of $4,300,000 which have no expiration date.
Approximately $7,400,000 of the net operating loss carry
forwards available for federal and state income tax purposes
relate to exercises of employee stock options, the tax benefit
of which, if realized, will be credited to additional paid-in
capital. The Company has federal and state research and
development credits of approximately $3,817,000 and $1,738,000,
respectively. The federal research and development credits begin
to expire in 2022, and the state credits begin to expire in
2016. The Company also has foreign tax credit carryforwards of
$877,000 which expire in 2016. The change in the valuation
allowance was $54,761,000, $19,296,000 and $7,003,000 for the
years ended December 31, 2006, 2005 and 2004, respectively.
During the year ended December 31, 2005, the Company filed
elections with the Internal Revenue Service to capitalize
various research and development expenses incurred by the
Company prior to its domestication in the United States for tax
years ending December 31, 1998 through May 30, 2002.
The effect of these elections is that the Company inherited tax
basis as a result of our domestication transaction in May 2002
and is required to amortize these costs over a ten year period.
Included in the companys net deferred tax assets is
$6,017,000 relating to these costs.
During the year ended December 31, 2006, the Company filed
an election with the Internal Revenue Service to treat the
Cayman Island subsidiary as a disregarded entity for tax
purposes. The result of this election produced a taxable
dividend in the amount of $31,963,000. Due to the size of the
taxable loss in the current year, this dividend
95
IDENIX
PHARMACEUTICALS, INC.
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
did not create a tax liability for tax purposes. As a result of
the election, approximately, $80,000,000 of tax basis relating
to previously capitalized research costs carried over into the
U.S. tax group. This increase is reflected in the capitalized
research costs line of the net deferred taxes schedule.
As required by SFAS No. 109, Accounting for
Income Taxes, management of the Company has evaluated
the positive and negative evidence bearing upon the
realizability of its deferred tax assets, which are comprised
principally of net operating loss carry forwards, deferred
licensing income, capitalized research costs and research and
development credit carry forwards. Management has determined
that it is more likely than not that the Company will not
realize the benefits of federal, state and foreign deferred tax
assets and, as a result, a valuation allowance of $96,542,000
has been established at December 31, 2006.
Due to the extent of international transactions in which the
Company is engaged, there is a risk that tax authorities in the
United States or other jurisdictions in which the Company
conducts business could challenge the nature of these
transactions. Income taxes reflected in the financial statements
of the Company reflect managements best estimates of taxes
payable and liabilities for tax contingencies that management
believes are probable of occurring and which can be reasonably
estimated. The ultimate resolution of tax matters is
unpredictable and could result in tax liabilities that differ
significantly than the amounts which have been provided by the
Company.
Ownership changes, as defined in the Internal Revenue Code, may
limit the amount of net operating loss carry forwards that can
be utilized annually to offset future taxable income. Subsequent
ownership changes could further affect the limitation in future
years.
|
|
14.
|
Employee
Benefit Plans
|
The Company maintains a retirement savings plan under
Section 401(k) of the Internal Revenue Code (401(k)
Plan). The 401(k) Plan allows participants to defer a
portion of their annual compensation on a pre-tax basis and
covers substantially all U.S. employees of the Company who meet
minimum age and service requirements.
Contributions to the 401(k) Plan may be made by the Company at
the discretion of the Board of Directors. In December 2006, the
Board of Directors authorized a resolution requiring the Company
to match 25% of employee contributions up to 6% of
participants annual compensation beginning in 2007. The
Company has not made any contributions to the 401(k) Plan
through December 31, 2006.
The Company is required by statute to maintain a defined benefit
plan for its employees in France. The Company has recorded
$156,000 in long-term obligations for the liability associated
with this benefit plan.
|
|
15.
|
Related
Party Transactions
|
In connection with the development agreement entered into
between the Company and Novartis, the Company has generated
revenues from Novartis from license payments and reimbursements
of certain research and development expenses in the amount of
$66,724,000, $64,418,000 and $95,004,000 for the years ended
December 31, 2006, 2005 and 2004, respectively. All amounts
included in receivables from related party at December 31,
2006 and 2005 are due from Novartis. The amount included in
payables to related party of $939,000 at December 31, 2006
represents amounts owing to Novartis for marketing costs and
profit-sharing arrangements in connection with the
Companys collaboration with Novartis. The Company also
included $53,961,000, $38,784,000 and $48,474,000 in deferred
revenue as of December 31, 2006, 2005 and 2004,
respectively, relating to license fees received from Novartis.
Effective May 31, 2004 to June 7, 2005, the Company
had on its board of directors a partner in the law firm of
Wilmer Cutler Pickering Hale and Dorr LLP. The Company retains
Wilmer Cutler Pickering Hale and Dorr LLP as its corporate
counsel. The Company incurred legal expenses of $120,000 and
$642,000 during the year ended December 31, 2005 and 2004,
respectively, for services rendered by Wilmer Cutler Pickering
Hale and Dorr LLP
96
IDENIX
PHARMACEUTICALS, INC.
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
during the period in which such law firm partner was on the
Companys Board of Directors. The partner is no longer on
the Companys Board of Directors.
The Company operates in a single segment and has no
organizational structure dictated by product lines, geography or
customer type. The following table presents total long-lived
assets by geographic area as of December 31, 2006 and 2005:
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
|
(In thousands)
|
|
|
United States
|
|
$
|
14,198
|
|
|
$
|
8,678
|
|
Europe
|
|
|
3,250
|
|
|
|
2,373
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
17,448
|
|
|
$
|
11,051
|
|
|
|
|
|
|
|
|
|
|
17. Licensing
Agreements
UAB
Research Foundation
In June 1998, the Company entered into an exclusive license
agreement with UABRF pursuant to which the Company acquired the
rights to use and commercialize, including by means of
sublicense, certain technology and to make, use or sell licensed
products. The agreement was subsequently amended in June 1998
and July 1999. The Company made a nonrefundable $100,000 license
fee payment to UABRF in 1998 which was recorded as research and
development expense.
The agreement requires the Company to make, for each significant
disease indication for which licensed technology is used,
payments aggregating $1,300,000 if certain regulatory milestones
are met. Of such amount, two-thirds is payable in cash and
one-third is payable in shares of the Companys common
stock. Additionally, if commercialization is achieved for a
licensed product, the Company will be required to pay a royalty
with respect to annual net sales of licensed products by the
Company or an affiliate of the Company at the rate of 6% for net
sales up to $50,000,000 and at the rate of 3% for net sales in
excess of $50,000,000. If the Company enters into a sublicense
arrangement with an entity other than one which controls at
least 50% of the Companys capital stock, the Company would
be required to remit to UABRF 30% of all royalties received by
the Company on sales of the licensed product by the sublicensee.
The Company is also required to pay to UABRF 20% of all license
fees, milestone payments and other cash consideration the
Company receives from the sublicensee with respect to the
licensed products. The Company is required to reimburse UABRF
for costs UABRF incurs in connection with the prosecution,
maintenance and protection of patent applications and patents
associated with the licensed technology.
18. Collaborative
Agreements and Contracts
Le
Centre National de la Recherche Scientifique and
LUniversite Montpellier II
Effective January 1, 1999, the Company entered into a
Cooperative Agreement with Le Centre National de la Recherche
Scientifique (CNRS) and LUniversite
Montpellier II (University of Montpellier) pursuant
to which the Company acquired a license to certain antiviral
technology. The Company is required to make royalty payments to
the University of Montpellier upon commercialization of any
products resulting from the licensed technology which technology
covers telbivudine among other things. The Company was also
required to provide personnel and required to make payments to
the University of Montpellier for supplies and improvement and
use of the facilities. The Company incurred expenses of
approximately $215,000, $221,000 and $187,000 for the years
ended December 31, 2006, 2005 and 2004, respectively, in
connection with this agreement. This agreement expired in
December 2006.
97
IDENIX
PHARMACEUTICALS, INC.
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Universita
di Cagliari
In January 1999, the Company entered into a Cooperative
Antiviral Research Activity Agreement, as amended with the
Dipartimento di Biologia Sperimentale Bernardo Loddo
dellUniversita di Cagliari (University of
Cagliari) pursuant to which the Company acquired an
exclusive license to certain antiviral technology. The Company
is required to make royalty payments to the University of
Cagliari upon commercialization of any products resulting from
the licensed technology. The Company is also required to provide
personnel and to make payments to the University of Cagliari for
services rendered by the University of Cagliari and for use of
its facility. The term of this agreement extends through January
2011. The Company incurred expenses of approximately $267,000,
$122,000 and $181,000 for the years ended December 31,
2006, 2005 and 2004, respectively, in connection with this
agreement.
In December 2000, the Company and University of Cagliari also
entered into a license agreement pursuant to which the Company
was granted an exclusive license under certain patent rights
resulting from specified research activities. In May 2003, the
Company, the University of Cagliari and Novartis entered into an
amendment of these agreements, pursuant to which Novartis was
granted the right, under certain circumstances, to prosecute and
enforce patents resulting from the research activities, and to
assume the Companys rights under the agreement if the
agreement terminates due to an uncured breach of the agreement
by the Company. In October 2005, the Company and the University
of Cagliari amended such agreements in a manner that will
require certain payments to the University of Cagliari if the
Company receives license fees or milestone payments in
connection with a sublicense by the Company of technology
covered by the agreements between the University of Cagliari and
the Company. As a result of the license by Novartis of
valopicitabine and the payment of a $25,000,000 license fee to
the Company (Note 3), the Company made a payment to the
University of Cagliari in the amount of $250,000 in the quarter
ended June 30, 2006.
Sumitomo
Pharmaceuticals Co., Ltd.
The Company entered into collaborative agreements with Sumitomo
Pharmaceuticals Co., Ltd. (Sumitomo) in 2001, in
connection with the development and commercialization in the
territories of Japan, the Peoples Republic of China
(China), the Republic of China (Taiwan)
and the Republic of Korea (South Korea) of
telbivudine, a product candidate for the treatment of HBV
infection. In connection with this arrangement, the Company and
Sumitomo agreed to share certain direct third-party expenses of
development of telbivudine.
In March 2003, the Company 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 the
Company. This agreement with Sumitomo became effective upon
consummation of the Companys collaboration with Novartis
in May 2003. The Company repurchased these product rights for
$5,000,000 and as a result of this payment the Company reversed
approximately $4,571,000 of revenue previously recognized in
original arrangements with Sumitomo with the remaining amount
recorded as a reduction of deferred revenue.
The Company also has recorded $4,272,000 included in deferred
revenue on its consolidated balance sheet at each of
December 31, 2006 and 2005 representing amounts received
from Sumitomo that have not been included in revenue to date.
The Company must pay an additional $5,000,000 to Sumitomo upon
the first commercial sale of telbivudine in Japan. This payment
will be recorded first as a reduction of the remaining
$4,272,000 of deferred revenue, with the excess recorded as an
expense. If and when the Company determines that it will not
seek regulatory approval for telbivudine in Japan, the Company
would have no further obligations under the settlement agreement
with Sumitomo and, therefore, the $4,272,000 of remaining
deferred revenue would be recognized as revenue at that time.
98
IDENIX
PHARMACEUTICALS, INC.
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Microbiologica
Quimica E Farmaceutica Ltda
In May 2003, the Company finalized an agreement with
Microbiologica Quimica E Farmaceutica Ltda.
(Microbiologica) in which Microbiologica granted to
the Company a license to use certain of Microbiologicas
manufacturing technology and patents for the treatment of
hepatitis B infection. The Company is obligated to pay
Microbiologica $7,000,000 in total for this license. The Company
is required to pay the license fee over a five-year period
commencing in January 2004 with a payment of $2,000,000 and
continuing each year thereafter through January 2009 with annual
payments each in the amount of $1,000,000. Since there was no
alternative use for this technology, the net present value of
these payments using an implied interest rate of 3.63% was
approximately $6,300,000 and was recorded as research and
development expense during the year ended December 31,
2003. The Company has a liability of $2,895,000 and $3,792,000
under this agreement as of December 31, 2006 and 2005,
respectively.
Metabasis
Therapeutics, Inc.
In October 2006, the Company entered into a two-year research
collaboration agreement with Metabasis Therapeutics, Inc.
(Metabasis). Under the terms of the agreement,
Metabasis proprietary liver-targeted technology will be
applied to certain of the Companys compounds to develop
second-generation nucleoside analog product candidates for the
treatment of HCV. As part of the agreement, the Company provided
a $2,000,000 upfront payment to Metabasis in November 2006 and
would provide certain amounts of development funding. Including
the upfront payment, the Company has incurred $2,110,000 in
research and development expenses related to this collaboration
during the year ended December 31, 2006. If a lead
candidate is identified, the Company will assume development
responsibility and Metabasis will be eligible to receive
payments upon achievement of predetermined clinical development
and regulatory milestones. For any resulting marketed products,
the Company will retain full commercial rights and pay Metabasis
a royalty based on net sales of the product.
|
|
19.
|
Quarterly
Financial Data (Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First
|
|
|
Second
|
|
|
Third
|
|
|
Fourth
|
|
|
Total
|
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Year
|
|
|
|
(In thousands, except per share amounts)
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
$
|
13,111
|
|
|
$
|
19,313
|
|
|
$
|
19,645
|
|
|
$
|
15,308
|
|
|
$
|
67,377
|
|
Total operating expenses
|
|
|
32,708
|
|
|
|
37,025
|
|
|
|
42,007
|
|
|
|
41,356
|
|
|
|
153,096
|
|
Net loss
|
|
|
(17,182
|
)
|
|
|
(14,609
|
)
|
|
|
(19,715
|
)
|
|
|
(23,581
|
)
|
|
|
(75,087
|
)
|
Basic and diluted net loss per
common share
|
|
|
(0.31
|
)
|
|
|
(0.26
|
)
|
|
|
(0.35
|
)
|
|
|
(0.42
|
)
|
|
|
(1.34
|
)
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
$
|
14,903
|
|
|
$
|
16,082
|
|
|
$
|
15,630
|
|
|
$
|
18,103
|
|
|
$
|
64,718
|
|
Total operating expenses
|
|
|
25,077
|
|
|
|
30,353
|
|
|
|
30,510
|
|
|
|
34,307
|
|
|
|
120,247
|
|
Net loss
|
|
|
(9,266
|
)
|
|
|
(13,433
|
)
|
|
|
(13,698
|
)
|
|
|
(14,380
|
)
|
|
|
(50,777
|
)
|
Basic and diluted net loss per
common share
|
|
|
(0.19
|
)
|
|
|
(0.28
|
)
|
|
|
(0.28
|
)
|
|
|
(0.27
|
)
|
|
|
(1.03
|
)
|
|
|
20.
|
Recent
Accounting Pronouncements
|
In June 2006, the FASB published FASB Interpretation
(FIN) No. 48, Accounting for Uncertain
Tax Positions, or FIN No. 48. This
interpretation seeks to reduce the significant diversity in
practice associated with recognition and measurement in the
accounting for income taxes. It would apply to all tax positions
accounted for in accordance with SFAS No. 109,
Accounting for Income Taxes.
FIN No. 48 requires that a tax position meet
a more likely than not threshold for the
benefit of the uncertain tax position to be recognized in the
financial statements. This threshold is to be met assuming that
the tax authorities will examine the uncertain tax position.
FIN No. 48 contains guidance with respect to the
measurement of the benefit that is recognized for an uncertain
tax
99
IDENIX
PHARMACEUTICALS, INC.
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
position, when that benefit should be derecognized, and other
matters. FIN No. 48 should clarify the accounting for
uncertain tax positions in accordance with
SFAS No. 109. FIN No. 48 is effective for
fiscal years beginning after December 15, 2006. The Company
is currently evaluating the impact, if any, that this
interpretation will have on its financial statements.
In September 2006, FASB Statement No. 157, Fair
Value Measurements, or SFAS 157, was issued. This
statement defines fair value, establishes a framework for
measuring fair value in generally accepted accounting
principles, or GAAP, and expands disclosures about fair value
measurements. This statement applies under other accounting
pronouncements that require or permit fair value measurements,
the FASB having previously concluded in those accounting
pronouncements that fair value is the relevant measurement
attribute. Accordingly, this statement does not require any new
fair value measurements. However, for some entities, the
application of this Statement will change current practice. The
statement is effective for financial statements issued for
fiscal years beginning after November 15, 2007, and interim
periods within those fiscal years. The Company is currently
evaluating the impact, if any, that this standard will have on
its financial statements.
In September 2006, the Securities and Exchange Commission
(SEC) issued Staff Accounting Bulletin, or SAB,
No. 108, Considering the Effects of Prior Year
Misstatements when Quantifying Misstatements in Current Year
Financial Statements, or SAB 108, which is
effective for fiscal years ending after November 15, 2006.
SAB 108 provides interpretive guidance on the consideration
of the effects of prior year misstatements in quantifying
current year misstatements for the purpose of a materiality
assessment. The adoption of SAB 108 did not have a material
impact on the Companys financial statements.
In September 2006, the FASB issued FASB Statement No 158,
Employers Accounting for Defined Benefit Pension
and Other Postretirement Plans an amendment of SASB
Statements No. 87, 88, 106, and 132(R), or
SFAS No. 158. This Statement improves financial
reporting by requiring an employer to recognize the overfunded
or underfunded status of a defined benefit postretirement plan
(other than a multiemployer plan) as an asset or liability in
its statement of financial position and to recognize changes in
that funded status in the year in which the changes occur
through comprehensive income of a business entity or changes in
unrestricted net assets of a
not-for-profit
organization. The Company adopted SFAS No. 158
effective December 31, 2006 and the adoption did not have a
material impact on the Companys financial statements.
100
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
IDENIX PHARMACEUTICALS, INC.
|
|
|
|
|
/s/ Jean-Pierre
Sommadossi
|
Jean-Pierre Sommadossi
Chairman and Chief Executive Officer
Date: March 14, 2007
Pursuant to the requirements of the Securities Act of 1934, this
report has been signed below by the following persons on behalf
of the registrant and in the capacities and on the dates
indicated.
|
|
|
|
|
|
|
Name
|
|
Title
|
|
Date
|
|
/s/ Jean-Pierre
Sommadossi
Jean-Pierre
Sommadossi
|
|
Chairman, Chief Executive
Officer and Director
(Principal Executive Officer)
|
|
March 14, 2007
|
|
|
|
|
|
/s/ David
A. Arkowitz
David
A. Arkowitz
|
|
Chief Financial Officer and
Treasurer
(Principal Financial and
Accounting Officer)
|
|
March 14, 2007
|
|
|
|
|
|
/s/ Charles
Cramb
Charles
Cramb
|
|
Director
|
|
March 14, 2007
|
|
|
|
|
|
/s/ Thomas
Ebeling
Thomas
Ebeling
|
|
Director
|
|
March 14, 2007
|
|
|
|
|
|
/s/ Wayne
Hockmeyer
Wayne
Hockmeyer
|
|
Director
|
|
March 14, 2007
|
|
|
|
|
|
/s/ Thomas
Hodgson
Thomas
Hodgson
|
|
Director
|
|
March 14, 2007
|
|
|
|
|
|
/s/ Robert
Pelzer
Robert
Pelzer
|
|
Director
|
|
March 14, 2007
|
|
|
|
|
|
/s/ Denise
Pollard-Knight
Denise
Pollard-Knight
|
|
Director
|
|
March 14, 2007
|
|
|
|
|
|
/s/ Pamela
Thomas-Graham
Pamela
Thomas-Graham
|
|
Director
|
|
March 14, 2007
|
|
|
|
|
|
/s/ Norman
Payson
Norman
Payson
|
|
Director
|
|
March 14, 2007
|
101
EXHIBIT INDEX
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Incorporated by Reference to
|
|
|
|
|
|
|
|
|
|
|
SEC
|
Exhibit
|
|
|
|
|
|
Exhibit
|
|
Filing
|
|
File
|
Number
|
|
Description
|
|
Form
|
|
No.
|
|
Date
|
|
Number
|
|
|
|
Articles of Incorporation
and By-Laws
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3.1
|
|
Restated Certificate of
Incorporation of the Registrant
|
|
S-1
|
|
|
3
|
.1
|
|
|
12/15/2003
|
|
|
|
333-111157
|
|
3.2
|
|
Certificate of Amendment of
Restated Certificate of Incorporation
|
|
10-Q
for 6/30/2004
|
|
|
3
|
.1
|
|
|
8/26/2004
|
|
|
|
000-49839
|
|
3.3
|
|
Certificate of Amendment of
Restated Certificate of Incorporation
|
|
10-K
for
12/31/2005
|
|
|
3
|
.3
|
|
|
3/16/2006
|
|
|
|
000-49839
|
|
3.4
|
|
Amended and Restated By-Laws
|
|
10-Q
for 6/30/2004
|
|
|
3
|
.2
|
|
|
8/26/2004
|
|
|
|
000-49839
|
|
4.1
|
|
Specimen Certificate evidencing
the Common Stock, $.001 par value
|
|
S-1
Amendment 2
|
|
|
4
|
.1
|
|
|
1/27/2004
|
|
|
|
333-111157
|
|
|
|
Material
contracts real estate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10.1
|
|
Lease Agreement, dated as of
October 15, 1998, by and between Idenix (Massachusetts)
Inc. and CambridgePark One Limited Partnership, as amended by
the First Amendment to Lease dated as of September 1, 2001
|
|
S-1
|
|
|
10
|
.2
|
|
|
12/15/2003
|
|
|
|
333-111157
|
|
10.2
|
|
Lease Agreement, dated as of
August 22, 2001, by and between Idenix (Massachusetts) Inc.
and West Cambridge Sciences Park
|
|
S-1
|
|
|
10
|
.3
|
|
|
12/15/2003
|
|
|
|
333-111157
|
|
10.3
|
|
Amended and Restated Lease of
Premises at 60 Hampshire Street, Cambridge, Massachusetts, dated
as of October 28, 2003, by and between Idenix
(Massachusetts) Inc. and BHX, LLC, as trustee of 205 Broadway
Realty Trust
|
|
S-1
|
|
|
10
|
.4
|
|
|
12/15/2003
|
|
|
|
333-111157
|
|
10.4
|
|
Administrative Lease Hotel
DEnterprises Cap Gamma dated April 18, 2005 by and
among Idenix SARL, Societe DEquipment de la Region
Montpellieraine and the Communate DAgglomeration de
Montpellier (English Translation)
|
|
8-K
|
|
|
10
|
.1
|
|
|
4/20/2005
|
|
|
|
000-49839
|
|
10.5+
|
|
Offer of Sale Hotel
|
|
8-K
|
|
|
10
|
.2
|
|
|
4/20/2005
|
|
|
|
000-49839
|
|
10.6
|
|
Joint Guarantee made as of
December 15, 2005 between the Registrant and Societe
DEquipment de la Region Montpellieraine
|
|
8-K
|
|
|
10
|
.3
|
|
|
4/20/2005
|
|
|
|
000-49839
|
|
10.7
|
|
Indenture of Lease, dated
June 8, 2005, by and between the Registrant and One Kendall
Square Associates LLC
|
|
8-K
|
|
|
10
|
.1
|
|
|
6/13/2005
|
|
|
|
000-49839
|
|
10.8
|
|
First Amendment of Lease dated
July 24, 2006 by and between the Registrant and RB Kendall
Fee, LLC
|
|
10-Q
for
6/30/2006
|
|
|
10
|
.3
|
|
|
8/8/2006
|
|
|
|
000-49839
|
|
102
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Incorporated by Reference to
|
|
|
|
|
|
|
|
|
|
|
SEC
|
Exhibit
|
|
|
|
|
|
Exhibit
|
|
Filing
|
|
File
|
Number
|
|
Description
|
|
Form
|
|
No.
|
|
Date
|
|
Number
|
|
10.9
|
|
Second Amendment of Lease dated
September 7, 2006 by and between the Registrant and RB
Kendall Fee, LLC
|
|
10-Q
for
9/30/2006
|
|
|
10
|
.1
|
|
|
11/8/2006
|
|
|
|
000-49839
|
|
|
|
Material contracts
Novartis
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10.10
|
|
Letter Agreement, dated as of
March 21, 2003, by and between the Registrant and Novartis
Pharma AG
|
|
S-1
Amendment 3
|
|
|
10
|
.28
|
|
|
7/6/2004
|
|
|
|
333-111157
|
|
10.11+
|
|
Restated and Amended Cooperative
Agreement dated as of May 8, 2003, by among Idenix SARL and
Le Centre National de la Recherche Scientifique,
LUniversite Montpellier II and Novartis Pharma AG
|
|
S-1
|
|
|
10
|
.14
|
|
|
12/15/2003
|
|
|
|
333-111157
|
|
10.12+
|
|
Letter Agreement, dated
May 8, 2003, by and among the Registrant, Idenix SARL,
Novartis Pharma AG and the University of Cagliari, amending the
Cooperative Agreement and License Agreement
|
|
S-1
|
|
|
10
|
.18
|
|
|
12/15/2003
|
|
|
|
333-111157
|
|
10.13+
|
|
Development, License and
Commercialization Agreement, dated as of May 8, 2003, by
and among the Registrant, Idenix (Cayman) Limited and Novartis
Pharma AG, as amended on April 30, 2004
|
|
S-1
|
|
|
10
|
.24
|
|
|
12/15/2003
|
|
|
|
333-111157
|
|
10.14+
|
|
Master Manufacturing and Supply
Agreement, dated as of May 8, 2003, by and between Idenix
(Cayman) Limited and Novartis Pharma AG
|
|
S-1
|
|
|
10
|
.25
|
|
|
12/15/2003
|
|
|
|
333-111157
|
|
10.15+
|
|
Second Amendment, dated as of
December 21, 2004, to the Development, License and
Commercialization Agreement, by and among the Registrant, Idenix
(Cayman) Limited and Novartis Pharma AG, as amended on
April 30, 2004
|
|
10-K
for
12/31/2004
|
|
|
10
|
.16
|
|
|
3/17/2005
|
|
|
|
000-49839
|
|
10.16+
|
|
Amendment No. 3 to the
Development, License and Commercialization Agreement, effective
as of February 27, 2006, by and among the Registrant, Idenix
(Cayman) Limited and Novartis Pharma AG
|
|
10-K
for
12/31/2005
|
|
|
10
|
.14
|
|
|
3/16/2006
|
|
|
|
000-49839
|
|
10.17
|
|
Amended and Restated
Stockholders Agreement, dated July 27, 2004, by and
among the Registrant, Novartis and the stockholders identified
on the signature pages thereto
|
|
10-K
for
12/31/2004
|
|
|
10
|
.20
|
|
|
3/17/2005
|
|
|
|
000-49839
|
|
10.18
|
|
Par Value Stock Purchase
Agreement, dated July 27, 2004, by and between the
Registrant and Novartis Pharma AG
|
|
10-K
for
12/31/2004
|
|
|
10
|
.21
|
|
|
3/17/2005
|
|
|
|
000-49839
|
|
103
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Incorporated by Reference to
|
|
|
|
|
|
|
|
|
|
|
SEC
|
Exhibit
|
|
|
|
|
|
Exhibit
|
|
Filing
|
|
File
|
Number
|
|
Description
|
|
Form
|
|
No.
|
|
Date
|
|
Number
|
|
10.19+
|
|
Stock Purchase Agreement, dated as
of March 21, 2003, by and among the Registrant, Novartis
and the stockholders identified on the signature pages
|
|
S-1
Amendment 3
|
|
|
10
|
.27
|
|
|
7/6/2004
|
|
|
|
333-11115
|
|
10.20
|
|
Concurrent Private Placement Stock
Purchase Agreement, dated July 27, 2004, by and between the
Registrant and Novartis Pharma AG
|
|
10-K
for
12/31/2004
|
|
|
10
|
.22
|
|
|
3/17/2005
|
|
|
|
000-49839
|
|
10.21+
|
|
Commercial Manufacturing Agreement
dated as of June 22, 2006 by and between the Registrant and
Novartis Pharma AG
|
|
10-Q
for
6/30/2006
|
|
|
10
|
.1
|
|
|
8/8/2006
|
|
|
|
000-49839
|
|
10.22+
|
|
Packaging Agreement dated as of
June 22, 2006 by and between the Registrant and Novartis
Pharma AG
|
|
10-Q
for
6/30/2006
|
|
|
10
|
.2
|
|
|
8/8/2006
|
|
|
|
000-49839
|
|
|
|
University of
Cagliari
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10.23+
|
|
Cooperative Antiviral Research
Activity Agreement (the Cooperative Agreement),
dated January 4, 1999, by and between Idenix SARL and the
University of Cagliari
|
|
S-1
|
|
|
10
|
.16
|
|
|
12/15/2003
|
|
|
|
333-111157
|
|
10.24+
|
|
License Agreement, dated as of
December 14, 2000, between the Registrant and the
University of Cagliari
|
|
S-1
|
|
|
10
|
.17
|
|
|
12/15/2003
|
|
|
|
333-111157
|
|
10.25+
|
|
Letter Agreement, dated
April 10, 2002, by and between Idenix SARL and the
University of Cagliari, amending the Cooperative Agreement and
License Agreement
|
|
S-1
|
|
|
10
|
.18
|
|
|
12/15/2003
|
|
|
|
333-111157
|
|
10.26+
|
|
Agreement, dated June 30, 2004, by
and among the Registrant, Idenix SARL and the University of
Cagliari
|
|
S-1
Amendment 3
|
|
|
10
|
.18.1
|
|
|
7/6/2004
|
|
|
|
333-111157
|
|
10.27
|
|
Collaborative Activities
Agreement, dated March 22, 2004, by and between the
Registrant and the University of Cagliari, as amended
June 30, 2004 (English translation)
|
|
S-1
Amendment 3
|
|
|
10
|
.18.2
|
|
|
7/6/2004
|
|
|
|
333-111157
|
|
10.28+
|
|
Agreement, dated October 24,
2005, by and among the Registrant, Idenix SARL and the
Universita deqli Studi Cagliari,
|
|
10-Q
for
9/30/2005
|
|
|
10
|
.1
|
|
|
11/08/2005
|
|
|
|
000-49839
|
|
|
|
Miscellaneous
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10.29+
|
|
License Agreement dated as of
June 20, 1998 by and between the Registrant and the UAB
Research Foundation, as amended by that First Amendment
Agreement, dated as of June 20, 1998, and by that Second
Amendment Agreement, dated as of July 16, 1999
|
|
S-1
Amendment 2
|
|
|
10
|
.31
|
|
|
1/27/2004
|
|
|
|
333-111157
|
|
104
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Incorporated by Reference to
|
|
|
|
|
|
|
|
|
|
|
SEC
|
Exhibit
|
|
|
|
|
|
Exhibit
|
|
Filing
|
|
File
|
Number
|
|
Description
|
|
Form
|
|
No.
|
|
Date
|
|
Number
|
|
10.30
|
|
Master Services Agreement, dated
February 25, 2003, by and between the Registrant and
Quintiles, Inc.
|
|
S-1
|
|
|
10
|
.20
|
|
|
12/15/2003
|
|
|
|
333-111157
|
|
10.31+
|
|
Master Services Agreement, dated
May 27, 1999, between Idenix (Massachusetts), Inc. and
Quintiles Scotland Ltd
|
|
S-1
|
|
|
10
|
.21
|
|
|
12/15/2003
|
|
|
|
333-111157
|
|
10.32+
|
|
License Agreement, dated as of
June 20, 1998, by and among the Registrant, TherapX
Pharmaceuticals, L.L.C. and Raymond Schinazi
|
|
S-1
|
|
|
10
|
.15
|
|
|
12/15/2003
|
|
|
|
333-111157
|
|
10.33
|
|
Multiproject Development and
Supply Agreement, dated as of December 20, 2001, by and among
the Registrant, Idenix SARL and Clariant Life Science Molecules
(Missouri) Inc.
|
|
S-1
|
|
|
10
|
.22
|
|
|
12/15/2003
|
|
|
|
333-111157
|
|
10.34+
|
|
Agreement, dated as of May 1,
2003, between Idenix (Cayman Limited and Microbiologica Quimica
E Farmaceutica Ltda.
|
|
S-1
Amendment 3
|
|
|
10
|
.23
|
|
|
7/6/2004
|
|
|
|
333-111157
|
|
10.35
|
|
Final Settlement Agreement, dated
March 26, 2003, by and between the Registrant and Sumitomo
Pharmaceuticals Co., Ltd.
|
|
S-1
|
|
|
10
|
.13
|
|
|
12/15/2003
|
|
|
|
333-111157
|
|
10.36
|
|
Settlement Agreement, dated as of
May 28, 2004, by and between the Registrant, Jean-Pierre
Sommadossi, the University of Alabama at Birmingham and the
University of Alabama Research Foundation
|
|
S-1
Amendment 2
|
|
|
10
|
.34
|
|
|
5/28/2004
|
|
|
|
333-111157
|
|
|
|
Material
contracts management contracts and compensatory
plans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10.37#
|
|
Form of Incentive Stock
|
|
8-K
|
|
|
10
|
.2
|
|
|
6/13/2005
|
|
|
|
000-49839
|
|
10.38#
|
|
Form of Non-Statutory Stock Option
Agreement
|
|
8-K
|
|
|
10
|
.3
|
|
|
6/13/2005
|
|
|
|
000-49839
|
|
10.39#
|
|
Form of Incentive Stock Option
Agreement for awards granted pursuant to the 2004 Stock
Incentive Plan
|
|
10-K
for
12/31/2004
|
|
|
10
|
.28
|
|
|
3/17/2005
|
|
|
|
000-49839
|
|
10.40#
|
|
Form of Non-Statutory Stock Option
Agreement for awards granted pursuant to the 2004 Stock
Incentive Plan
|
|
10-K
for
12/31/2004
|
|
|
10
|
.29
|
|
|
3/17/2005
|
|
|
|
000-49839
|
|
10.41#
|
|
2005 Stock Incentive Plan
|
|
8-K
|
|
|
10
|
.4
|
|
|
6/13/2005
|
|
|
|
000-49839
|
|
10.42#
|
|
2004 Stock Incentive Plan
|
|
S-1
Amendment 2
|
|
|
10
|
.32
|
|
|
5/28/2004
|
|
|
|
333-111157
|
|
10.43#
|
|
Amended and Restated 1998 Equity
Incentive Plan
|
|
S-1
Amendment 2
|
|
|
10
|
.1
|
|
|
5/28/2004
|
|
|
|
333-111157
|
|
10.44#
|
|
Summary of Non-Employee Directors
Compensation Plan
|
|
10-Q
for
3/31/2006
|
|
|
10
|
.2
|
|
|
5/10/2006
|
|
|
|
000-49839
|
|
10.45#
|
|
Summary of Executive Bonus Plan
|
|
10-Q
for
3/31/2006
|
|
|
10
|
.1
|
|
|
5/10/2006
|
|
|
|
000-49839
|
|
105
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Incorporated by Reference to
|
|
|
|
|
|
|
|
|
|
|
SEC
|
Exhibit
|
|
|
|
|
|
Exhibit
|
|
Filing
|
|
File
|
Number
|
|
Description
|
|
Form
|
|
No.
|
|
Date
|
|
Number
|
|
10.46#
|
|
Employment Agreement, dated as of
May 6, 2003, by and between the Registrant and Jean-Pierre
Sommadossi
|
|
S-1
|
|
|
10
|
.5
|
|
|
12/15/2003
|
|
|
|
333-111157
|
|
10.47#
|
|
Employment Agreement, dated
May 8, 2003, by and between the Registrant and Andrea
Corcoran
|
|
S-1
|
|
|
10
|
.6
|
|
|
12/15/2003
|
|
|
|
333-111157
|
|
10.48#
|
|
Letter Agreement, dated
September 1, 2006, by and between the Registrant and Andrea
J. Corcoran
|
|
8-K
|
|
|
10
|
.2
|
|
|
9/8/2006
|
|
|
|
000-49839
|
|
10.49#
|
|
Employment Agreement, dated
May 8, 2003, by and between the Registrant and James Egan
|
|
S-1
|
|
|
10
|
.7
|
|
|
12/15/2003
|
|
|
|
333-111157
|
|
10.50#
|
|
Letter Agreement, dated
January 4, 2006, by and between the Registrant and James
Egan
|
|
8-K
|
|
|
10
|
.1
|
|
|
1/9/2006
|
|
|
|
000-49839
|
|
10.51#
|
|
Employment Agreement, dated
May 8, 2003, by and between the Registrant and Nathaniel
Brown
|
|
S-1
|
|
|
10
|
.8
|
|
|
12/15/2003
|
|
|
|
333-111157
|
|
10.52#
|
|
Letter Agreement, dated
January 12, 2007, by and between the Registrant and
Nathaniel Brown
|
|
8-K
|
|
|
10
|
.1
|
|
|
1/12/2007
|
|
|
|
000-49839
|
|
10.53#
|
|
Employment Agreement, dated
July 28, 2003, by and between the Registrant and Guy
Macdonald
|
|
S-1
|
|
|
10
|
.10
|
|
|
12/15/2003
|
|
|
|
333-111157
|
|
10.54#
|
|
Letter Agreement, dated
September 1, 2006, by and between the Registrant and Guy
Macdonald
|
|
8-K
|
|
|
10
|
.3
|
|
|
9/8/2006
|
|
|
|
000-49839
|
|
10.55#
|
|
Employment Agreement, dated
December 1, 2003, by and between the Registrant and David
Arkowitz
|
|
S-1
|
|
|
10
|
.11
|
|
|
12/15/2003
|
|
|
|
333-111157
|
|
10.56#
|
|
Summary of Relocation Adjustment,
effective as of December 8, 2005, between the Registrant
and each of David Arkowitz and Guy Macdonald
|
|
10-K
for
12/31/2005
|
|
|
10
|
.48
|
|
|
3/16/2006
|
|
|
|
000-49839
|
|
10.57#
|
|
Employment Agreement dated
November 2, 2004 by and between the Registrant and David
Shlaes
|
|
S-1
|
|
|
10
|
.20
|
|
|
12/15/2003
|
|
|
|
333-111157
|
|
10.58#
|
|
Employment Letter, dated
August 18, 2006, by and between the Registrant and John
Weidenbruch
|
|
8-K
|
|
|
10
|
.1
|
|
|
9/8/2006
|
|
|
|
000-49839
|
|
|
|
Additional
Exhibits
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
21.1
|
|
Subsidiaries of the Company
|
|
S-1
|
|
|
21
|
.1
|
|
|
12/15/2003
|
|
|
|
333-111157
|
|
23.1
|
|
Consent of PricewaterhouseCoopers
LLP, an independent registered public accounting firm
|
|
*
|
|
|
|
|
|
|
|
|
|
|
|
|
31.1
|
|
Certification of Chief Executive
Officer pursuant to
Rule 13a-14(a)/15d-14(a)
of the Securities Exchange Act of 1934, as amended
|
|
*
|
|
|
|
|
|
|
|
|
|
|
|
|
106
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Incorporated by Reference to
|
|
|
|
|
|
|
|
|
|
|
SEC
|
Exhibit
|
|
|
|
|
|
Exhibit
|
|
Filing
|
|
File
|
Number
|
|
Description
|
|
Form
|
|
No.
|
|
Date
|
|
Number
|
|
31.2
|
|
Certification of Chief Financial
Officer pursuant to
Rule 13a-14(a)/15d-14(a)
of the Securities Exchange Act of 1934, as amended
|
|
*
|
|
|
|
|
|
|
|
|
|
|
|
|
32.1
|
|
Certification of Chief Executive
Officer pursuant to 18 U.S.C. §1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
|
|
*
|
|
|
|
|
|
|
|
|
|
|
|
|
32.2
|
|
Certification of Chief Financial
Officer pursuant to 18 U.S.C. §1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
|
|
*
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
File herewith |
|
# |
|
Management contract or compensatory plan or arrangement filed as
an exhibit to this report pursuant to Items 15(a) and 15(c)
of
Form 10-K |
|
+ |
|
Confidential treatment requested as to certain portions, which
portions have been separately filed with the Securities and
Exchange Commission |
107