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MEDICINES CO /DE - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations(Edgar Glimpses Via Acquire Media NewsEdge) You should read the following discussion and analysis of our financial condition and results of operations together with our financial statements and accompanying notes included elsewhere in this quarterly report on Form 10-Q. In addition to the historical information, the discussion in this quarterly report on Form 10-Q contains certain forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated by the forward-looking statements due to our critical accounting estimates discussed below and important factors set forth in this quarterly report on Form 10-Q, including under "Risk Factors" in Part II, Item 1A of this quarterly report on Form 10-Q. Overview Our Business We are a global biopharmaceutical company focused on saving lives, alleviating suffering and contributing to the economics of healthcare by focusing on 3,000 leading acute and intensive care hospitals worldwide. We market Angiomax® (bivalirudin), Recothrom® Thrombin topical (Recombinant), Cleviprex® (clevidipine) injectable emulsion and Minocin® IV (Minocycline for Injection). We also have a pipeline of acute and intensive care hospital products in development, including five product candidates for which we have submitted applications for regulatory approval or plan to submit applications for regulatory approval in 2014. which we refer to as our registration stage product candidates, cangrelor, oritavancin, IONSYSTM (fentanyl iontophoretic transdermal system), FibrocapsTM and RPX-602, and three research and development product candidates, MDCO-216, CarbavanceTM and ALN-PCSsc. We believe that these marketed products and products in development possess favorable attributes that competitive products do not provide, can satisfy unmet medical needs in the acute and intensive care hospital product market and offer, or, in the case of our products in development, have the potential to offer, improved performance to hospital businesses. In addition to these products and product candidates, we sell a ready-to-use formulation of Argatroban and have a portfolio of ten generic drugs, which we refer to as our acute care generic products, that we have the non-exclusive right to market in the United States. We are currently selling three of our acute care generic products, midazolam, ondansetron and rocuronium. We also co-promote the oral tablet antiplatelet medicine BRILINTA® (ticagrelor) in the United States as part of our global collaboration agreement with AstraZeneca LP, or AstraZeneca, and the Boston Scientific Promus PREMIERTM Everolimus-Eluting Platinum Chromium Coronary Stent System, or Promus PREMIER Stent System, in the United States under our co-promotion agreement with Boston Scientific Corporation, or BSX. In addition, on May 1, 2014, we acquired Tenaxis Medical, Inc., or Tenaxis. As a result of the acquisition of Tenaxis, we acquired Tenaxis's sole product, which we refer to as the Tenaxis product. The Tenaxis product mechanically seals both human tissue and artificial grafts. In the United States, the Tenaxis product received premarket approval from the U.S. Food and Drug Administration, or FDA, in March 2013 for use as a vascular sealant, but Tenaxis has not yet commercialized the Tenaxis product in the United States. We expect to begin selling the Tenaxis product in the United States in the fourth quarter of 2014. In the European Union, the Tenaxis product is approved for sale as a surgical sealant applicable to cardiovascular, general, urological, and thoracic and has a European CE Mark. Pursuant to this approval, Tenaxis has been selling the product in the European Union since September 2008. The following chart identifies, as of March 31, 2014, each of our marketed products and our products in development, their stage of development, their mechanism of action and the indications for which they have been approved for use or which they are intended to address. The following chart also identifies each of our acute care generic products and the therapeutic areas which they are intended to address. All of our marketed products and products in development, except for Recothrom, IONSYS, ALN-PCSsc and Fibrocaps, are administered intravenously. Recothrom is, and Fibrocaps is being developed as, a topical hemostat, IONSYS is being developed to be administered transdermally and ALN-PCSsc is being developed as a subcutaneous injectable. All of our acute care generic products are injectable products. Product or Product Development Stage Mechanism/Target Clinical in Development Indication(s)/Therapeutic Areas Marketed Products 22-------------------------------------------------------------------------------- Angiomax Marketed Direct thrombin U.S. - for use as inhibitor an anticoagulant in combination with aspirin in patients with unstable angina undergoing percutaneous transluminal coronary angioplasty, or PTCA, and for use in patients undergoing percutaneous coronary intervention, or PCI, including patients with or at risk of heparin induced thrombocytopenia and thrombosis syndrome, or HIT/HITTS Europe - for use as an anticoagulant in patients undergoing PCI, adult patients with acute coronary syndrome, or ACS, and for the treatment of patients with ST-segment elevation myocardial infarction, or STEMI, undergoing primary PCI Recothrom Marketed in the Recombinant human For use as an aid United States and thrombin to hemostasis to Canada help control oozing blood and mild bleeding during surgical procedures Cleviprex Marketed in the Calcium channel U.S. - Blood United States and blocker pressure reduction Switzerland when oral therapy is not feasible or Approved in not desirable Australia, Austria, Switzerland - with Belgium, Canada, indications for France, Germany, blood pressure Luxembourg, the control in Netherlands, New perioperative Zealand, Spain and settings the United Kingdom Ex-U.S. - with indications for MAA submitted for blood pressure other European control in Union countries perioperative settings Minocin IV Marketed in the Tetracycline-class Treatment of United States antibiotic bacterial infections caused by Acinetobacter species Ready-to-use Marketed in the Direct thrombin Approved for Argatroban United States inhibitor prophylaxis or treatment of thrombosis in adult patients with HIT and for use as an anticoagulant in adult patients with or at risk for HIT undergoing PCI Acute care generic Approved in the Various Acute products: Adenosine, United States cardiovascular Amiodarone, Esmolol and Milrinone Acute care generic Approved in the Various Serious infectious products: United States disease Azithromycin and Clindamycin Acute care generic Approved in the Various Surgery and products: United States; perioperative Haloperidol, Midazolam, Midazolam, Ondansetron and Ondansteron and Rocuronium marketed Rocuronium in the United States Registration Stage 23-------------------------------------------------------------------------------- Cangrelor NDA in the United Antiplatelet agent Prevention of States accepted for platelet activation filing by the FDA and aggregation when in the third oral therapy is not quarter of 2013; feasible or not MAA accepted for desirable review in the European Union in the fourth quarter of 2013 Oritavancin NDA in the United Antibiotic Treatment of serious States accepted for gram-positive filing by the FDA bacterial in the first infections, quarter of 2014; including acute MAA accepted for bacterial skin and review in the skin structure European Union in infections, or the first quarter ABSSSI, and of 2014 including infections that are resistant to conventional treatment IONSYS Supplemental New Patient-controlled Short-term Drug Application, analgesia system management of acute or sNDA, submission postoperative pain planned for the first half of 2014; MAA submission in European Union planned for the middle of 2014 Fibrocaps Phase 3 completed; Dry powder topical For use as an aid to Biologics License formulation of stop bleeding during Application, or fibrinogen and surgery BLA, submitted in thrombin the United States in the first quarter of 2014 and accepted for filing by the FDA in April 2014; MAA submission in the European Union accepted for review by the EMA in the fourth quarter of 2013 Treatment of NDA submission in Improved infections caused by the United States formulation of Acinetobacter RPX-602 planned for 2014 Minocin IV species Research and Development Stage MDCO-216 Phase 1 Naturally occurring Reversal cholesterol variant of a transport agent to protein found in reduce high-density atherosclerotic lipoprotein, or HDL plaque burden development and thereby reduce the risk of adverse thrombotic events Carbavance Phase I completed, Combination of Treatment of expect to enter RPX-7009, a hospitalized Phase 3 clinical proprietary, novel patients with study in the second beta-lactamase serious half of 2014 inhibitor, with a gram-negative carbapenem infections antibiotic ALN-PCSsc Phase 1 PCSK-9 gene Treatment of antagonist hypercholesterolemia addressing low-density lipoprotein, or LDL, cholesterol disease modification Our revenues to date have been generated primarily from sales of Angiomax in the United States. In the three months ended March 31, 2014, we had net revenue from sales of Angiomax of approximately $155.7 million, net revenue from sales of Recothrom of approximately $13.5 million and net revenue from sales of Cleviprex, ready-to-use Argatroban and Minocin IV of approximately $8.0 million in the aggregate. 24-------------------------------------------------------------------------------- We continue to expand our sales and marketing efforts outside the United States. We believe that by establishing operations outside the United States, we can increase our sales of Angiomax outside of the United States and be positioned to commercialize Cleviprex, Recothrom and Minocin IV and our products in development, if and when they are approved and ready to be marketed outside of the United States. Cost of revenue represents expenses in connection with contract manufacture of our products sold and logistics, product costs, royalty expenses and amortization of the costs of license agreements, amortization of product rights and other identifiable intangible assets, from product and business acquisitions. Research and development expenses represent costs incurred for licenses of rights to products, clinical trials, nonclinical and preclinical studies, regulatory filings and manufacturing development efforts. We outsource much of our clinical trials, nonclinical and preclinical studies and all of our manufacturing development activities to third parties to maximize efficiency and minimize our internal overhead. We expense our research and development costs as they are incurred. Selling, general and administrative expenses consist primarily of salaries and related expenses, costs associated with general corporate activities and costs associated with marketing and promotional activities. Research and development expense, selling, general and administrative expense and cost of revenue also include share-based compensation expense, which we allocate based on the responsibilities of the recipients of the share-based compensation. Angiomax Patent Litigation The principal U.S. patents covering Angiomax include U.S. Patent No. 5,196,404, or the '404 patent, U.S. Patent No. 7,582,727, or the '727 patent, and U.S. Patent No. 7,598,343, or the '343 patent. In the second half of 2009, the U.S. Patent and Trademark Office, or PTO, issued to us the '727 patent and the '343 patent, covering a more consistent and improved Angiomax drug product and the processes by which it is made. The '727 patent and the '343 patent are set to expire in July 2028. In response to Paragraph IV Certification Notice letters we received with respect to abbreviated new drug applications, or ANDAs, filed by a number of parties with the FDA seeking approval to market generic versions of Angiomax, we have filed lawsuits against the ANDA filers alleging patent infringement of the '727 patent and '343 patent. On September 30, 2011, we settled our '727 patent and '343 patent infringement litigation with Teva Pharmaceuticals USA, Inc. and its affiliates, which we collectively refer to as Teva. In connection with the Teva settlement, we entered into a license agreement with Teva under which we granted Teva a non-exclusive license under the '727 patent and '343 patent to sell a generic bivalirudin for injection product under a Teva ANDA in the United States beginning June 30, 2019 or earlier under certain conditions. The license agreement also contains a grant by Teva to us of an exclusive (except as to Teva) license under Teva's bivalirudin patents and right to enforce Teva's bivalirudin patents. On January 22, 2012, we settled our patent litigation with APP Pharmaceuticals LLC, or APP, including our litigation with respect to the extension of the patent term of the '404 patent and our patent infringement litigation with respect to the '727 patent and the '343 patent. In connection with the APP settlement, we entered into a license agreement with APP under which we granted APP a non-exclusive license under the '727 patent and '343 patent to sell a generic bivalirudin for injection product under an APP ANDA in the United States beginning on May 1, 2019. In certain limited circumstances, the license to APP could become effective prior to May 1, 2019. In addition, in certain limited circumstances, this license to APP could include the right to sell a generic bivalirudin product under our NDA for Angiomax in the United States beginning on May 1, 2019 or, in certain limited circumstances, on June 30, 2019 or on a date prior to May 1, 2019. In September 2013, a three day bench trial was held regarding our patent infringement litigation with Hospira, Inc., or Hospira, with respect to the '727 patent and '343 patent, and a post-trial briefing was completed in December 2013. On March 31, 2014, the court issued its trial opinion on the matter. With respect to patent validity, the court held that the '727 and '343 patents were valid on all grounds. Specifically, the court found that Hospira had failed to prove that the patents were either anticipated and/or obvious. The court further held that the patents satisfied the written description requirement, were enabled and were not indefinite. With respect to infringement, based on its July 2013 Markman decision, the court found that Hospira's ANDAs did not meet the "efficient mixing" claim limitation and thus did not infringe the asserted claims of the '727 and '343 patents. The court found that the other claim limitations in dispute were present in Hospira's ANDA products. The court entered a final judgment on April 15, 2014. On May 9, 2014, a Notice of Appeal to the United States Court of Appeals for the Federal Circuit was filed with the Delaware Court. If the appeal is not successful, then Angiomax could be subject to generic competition earlier than anticipated, including from Hospira's generic bivalirudin, as well as potentially Teva's and APP's generic bivalirudin products. 25-------------------------------------------------------------------------------- We remain in patent infringement litigation involving the '727 patent and '343 patent with other ANDA filers, as described in Part II, Item 1, Legal Proceedings, of this quarterly report on Form 10-Q. If we are unable to maintain our market exclusivity for Angiomax in the United States through enforcement of our U.S. patents covering Angiomax, then Angiomax could be subject to generic competition earlier than May 1, 2019 and as early as June 15, 2015, the date of expiration of the patent term of the '404 patent and the six month pediatric exclusivity. Cangrelor Regulatory Review In February 2014, the FDA Cardiovascular and Renal Drugs Advisory Committee advised against approval of cangrelor for use in patients undergoing PCI or those that require bridging for oral antiplatelet therapy to surgery. On April 30, 2014, the FDA issued a Complete Response Letter for our NDA for cangrelor. For the PCI indication, the FDA stated that the NDA cannot be approved at the present time and the FDA suggested that we perform a series of clinical data analyses of the CHAMPION PHOENIX study, review certain processes regarding data management, and provide bioequivalence information on the clopidogrel clinical supplies for the CHAMPION trials. For the BRIDGE indication, the FDA concluded that a prospective, adequate and well-controlled study in which outcomes such as bleeding are studied, can result in the clinical data necessary to assess the benefit-risk relationship in this indication. The FDA also provided additional comments for us to address, stating that the comments are not currently approvability issues, but could affect labeling. We are focused on the additional analyses in response to the FDA and are working with the FDA to accommodate its review process in a timely manner. Business Development Activity Tenaxis Medical, Inc. In April 2014, we entered into an Agreement and Plan of Merger with Tenaxis, Napa Acquisition Corp., our wholly owned subsidiary, and Fortis Advisors LLC, a Delaware limited liability company, solely in its capacity as the representative and agent of the stockholders and optionholders of Tenaxis. On May 1, 2014, we completed our acquisition of Tenaxis and Tenaxis became our wholly owned subsidiary. The Tenaxis product mechanically seals both human tissue and artificial grafts. In the United States, the Tenaxis product received a premarket approval from the FDA in March 2013 for use as a vascular sealant, but Tenaxis has not yet commercialized the Tenaxis product in the United States. We expect to begin selling the Tenaxis product in the United States in the fourth quarter of 2014. In the European Union, the Tenaxis product is approved for sale as a surgical sealant applicable to cardiovascular, general, urological, and thoracic surgery with a European CE Mark. Pursuant to this approval, Tenaxis has been selling the product in the European Union since September 2008. Under the merger agreement, we paid to the holders of Tenaxis's capital stock, the holders of options to purchase shares of Tenaxis's capital stock (whether or not such capital stock or options were vested or unvested as of immediately prior to the closing) and the holders of certain warrants and side letters, which we refer to collectively as the Tenaxis equityholders, an aggregate of $58.0 million in cash, subject to customary adjustments at and after the closing. At the closing, we also deposited $5.4 million of the purchase price into an escrow fund for the purposes of securing the indemnification obligations of the Tenaxis equityholders to us for any and all losses for which we are entitled to indemnification pursuant to the merger agreement and to provide the source of recovery for any amounts payable to us as a result of the post-closing purchase price adjustment process. To the extent that any amounts remain in the escrow fund after October 1, 2015 and not subject to claims by us, such amounts will be released to the Tenaxis equityholders, subject to certain conditions set forth in the merger agreement. In addition, we have agreed to pay to the Tenaxis equityholders milestone payments subsequent to the closing, if we achieve certain regulatory approval milestones and commercial net sales milestones with respect to the Tenaxis product, at the times and on the conditions set forth in the merger agreement. In the event that all of the milestones set forth in the merger agreement are achieved in accordance with the terms of the merger agreement, we will pay the Tenaxis equityholders up to an additional $112.0 million in cash in the aggregate. Promus PREMIER Stent System Co-Promotion. In December 2013, we entered into a co-promotion agreement with BSX for the Promus PREMIER Stent System. Under the terms of the co-promotion agreement, in January 2014, our acute cardiovascular care sales force began a collaboration with the BSX Interventional Cardiology sales force to provide promotional support for the Promus PREMIER Stent System in U.S. hospitals. The Promus PREMIER Stent System combines a platinum chromium alloy stent, everolimus drug (manufactured by Novartis) and polymer coating, and a stent delivery system. Under the terms of the agreement, BSX paid us $2.5 million in December 2013 upon completion of certain training activities and has agreed to pay quarterly, performance-based payments if BSX's drug-eluting stent sales in the U.S. exceed certain targets as specified in the agreement. In addition, under the terms of the agreement, BSX has agreed to pay us an additional fee if yearly sales exceed a certain amount specified in the agreement and a fee if the agreement is still in effect at a certain date as specified in the agreement. 26 -------------------------------------------------------------------------------- Rempex Pharmaceuticals, Inc. In December 2013, we acquired Rempex Pharmaceuticals, Inc., or Rempex, a company focused on the discovery and development of new antibacterial drugs to meet the growing clinical need created by multi-drug resistant bacterial pathogens. As a result of the transaction, we acquired Rempex's marketed product, Minocin IV, a broad-spectrum tetracycline antibiotic, and Rempex's portfolio of product candidates, including Rempex's RPX-602, a proprietary reformulation of Minocin IV utilizing magnesium sulfate, Rempex's Carbavance product candidate, an investigational agent that is a combination of RPX-7009, a proprietary, novel beta-lactamase inhibitor, with a carbapenem, and Rempex's other product candidates. Upon the completion of the acquisition, Rempex became our wholly owned subsidiary. Under the merger agreement for the acquisition, we paid to the holders of Rempex's capital stock, the holders of options to purchase shares of Rempex's capital stock and the holders of certain phantom stock units, which we collectively refer to as the Rempex equityholders, an aggregate of approximately $140.0 million in cash, plus approximately $0.3 million in purchase price adjustments. In addition, we agreed to pay to the Rempex equityholders milestone payments subsequent to the closing, if we achieve certain development and regulatory approval milestones and commercial sales milestones with respect to Minocin IV, RPX-602, Carbavance and Rempex's other product candidates, at the times and on the conditions set forth in the merger agreement. In the event that all of the milestones set forth in the merger agreement are achieved in accordance with the terms of the merger agreement, we will pay the Rempex equityholders an additional $214.0 million in cash in the aggregate for achieving development and regulatory milestones and an additional $120.0 million in cash in the aggregate for achieving commercial milestones, in each case, less certain transaction expenses and employer taxes owing because of the milestone payments. In the event that any milestone payments become due within eighteen months following the closing, we will enter into an escrow agreement and deposit the first $14.0 million of the aggregate milestone payments into an escrow fund. To the extent that any amounts remain in the escrow fund after June 3, 2015 and not subject to claims by us, such amounts will be released to the Rempex equityholders, subject to certain conditions set forth in the merger agreement. We accounted for the Rempex transaction as a business combination and the results of Rempex's operations have been included in the consolidated statements of income from the date of acquisition. ProFibrix B.V. On August 5, 2013, we completed our acquisition of all of the outstanding equity of ProFibrix B.V, or ProFibrix, pursuant to a share purchase agreement entered into with ProFibrix and its equityholders on June 4, 2013. Under the share purchase agreement, the closing of the transaction was subject to our satisfactory review of the then pending Phase 3 clinical trial results of ProFibrix's lead biologic, Fibrocaps. In connection with entering into the agreement, we paid ProFibrix a $10.0 million option payment. Upon the completion of the acquisition, ProFibrix became our wholly owned subsidiary. ProFibrix does not have any marketed products and has been engaged since its inception in developing fibrinogen based products for the hemostasis and regenerative medicine markets. Fibrocaps, the proposed name of ProFibrix's lead biologic, is a dry powder topical formulation of fibrinogen and thrombin being developed to help stop bleeding during surgery. On August 5, 2013, in connection with the closing, we announced that the Phase 3 clinical trial of Fibrocaps, FINISH-3, which studied 719 surgical patients with mild to moderate surgical bleeding, met all primary and secondary hemostasis efficacy endpoints in four distinct surgical indications of spinal surgery, hepatic resection, soft tissue dissection and vascular surgery. Following our review of the Phase 3 trial results, on August 2, 2013, we notified ProFibrix that we wished to proceed with the consummation of the transaction. At the closing, we paid an aggregate purchase price of $90.9 million in cash. We deposited $9.0 million of the purchase price into an escrow fund for the purpose of (i) securing the indemnification obligations of the ProFibrix equityholders and optionholders to us for any and all losses for which we are entitled to indemnification under the share purchase agreement, and (ii) providing the source of recovery for any amounts payable to us as a result of the post-closing purchase price adjustment process. To the extent that any amounts remain in the escrow fund after December 4, 2015 and not subject to claims by us, such amounts will be released to the ProFibrix equityholders, subject to certain conditions set forth in the merger agreement. Under the terms of the share purchase agreement, we are also obligated to pay up to an aggregate of $140.0 million in cash to the ProFibrix equityholders and optionholders upon the achievement of certain U.S. and European regulatory approvals prior to January 1, 2016 and certain U.S. and European sales milestones during the 24-month period that follows the initial commercial sale of Fibrocaps. As a result of our acquisition of ProFibrix, we acquired a portfolio of patents and patent applications, including patents licensed from Quadrant Drug Delivery Limited, or Quadrant, which included the U.S. patent directed to the composition of matter of Fibrocaps. Under the terms of a license agreement between ProFibrix and Quadrant, we are required to pay low single digit percentage royalties based on annual worldwide net sales of licensed products, including Fibrocaps, by us or our affiliates and sublicensees. The royalties are subject to reduction in specified circumstances. 27 --------------------------------------------------------------------------------We accounted for the ProFibrix transaction as a business combination and the results of ProFibrix's operations have been included in the consolidated statements of income from the date of acquisition. ALN-PCS Program. In February 2013, we entered into a license and collaboration agreement with Alnylam Pharmaceuticals, Inc., or Alnylam, to develop, manufacture and commercialize therapeutic products targeting the human PCSK-9 gene based on certain of Alnylam's RNAi technology. Under the terms of the agreement, we obtained the exclusive, worldwide right under Alnylam's technology to develop, manufacture and commercialize PCSK-9 products for the treatment, palliation and/or prevention of all human diseases. We paid Alnylam $25.0 million in an initial license payment and agreed to pay up to $180.0 million in cash to Alnylam upon the achievement of certain milestones, including up to $30.0 million in cash upon the achievement of specified development milestones, up to $50.0 million in cash upon the achievement of specified regulatory milestones and up to $100.0 million in cash upon the achievement of specified commercialization milestones. In addition, Alnylam will be eligible to receive scaled double-digit royalties based on annual worldwide net sales of PCSK-9 products by us or our affiliates and sublicensees. Royalties to Alnylam are payable on a product-by-product and country-by-country basis until the last to occur of the expiration of patent rights in the applicable country that cover the applicable product, the expiration of non-patent regulatory exclusivities for such product in such country, and the twelfth anniversary of the first commercial sale of the product in such country. The royalties are subject to reduction in specified circumstances. We are also responsible for paying royalties, and in some cases milestone payments, owed by Alnylam to its licensors with respect to intellectual property covering these products. Recothrom. In February 2013, pursuant to a master transaction agreement with Bristol-Myers Squibb Company, or BMS, we acquired the right to sell, distribute and market Recothrom on a global basis for a two-year period, which we refer to as the collaboration term, and certain limited assets exclusively related to Recothrom, primarily the biologics license application for Recothrom and certain related regulatory assets. BMS also granted to us, under the master transaction agreement, an option to purchase from BMS and its affiliates, following the expiration or earlier termination of the collaboration term, certain other assets, including certain patent and trademark rights, contracts, inventory, equipment and related books and records, held by BMS which are exclusively related to Recothrom. Under the master transaction agreement, we paid to BMS a one-time collaboration fee equal to $105.0 million and a one-time option fee equal to $10.0 million. We did not assume, and if we exercise the option, we will not assume, any pre-existing liabilities related to the Recothrom business, contingent or otherwise, arising prior to the collaboration period, and we did not acquire, and if we exercise the option, we will not acquire, any significant tangible assets related to the Recothrom business. Under the master transaction agreement, we agreed to pay to BMS quarterly tiered royalty payments during the two-year collaboration term equal to a percentage of worldwide net sales of Recothrom. If we exercise the option, we would acquire such assets and assume certain liabilities of BMS and its affiliates related to those assets and to pay to BMS a purchase price equal to the net book value of inventory included in the acquired assets, plus either: • a multiple of average net sales over each of the two 12-month periods preceding the closing of the purchase of the assets to be acquired in connection with exercising the option (unless such closing occurs less than 24 months after February 8, 2013, in which case the measurement period would be the 12-month period preceding such closing); or • if BMS has delivered a valid notice terminating the collaboration term early as a result of a material breach by us under the master transaction agreement, the amount described above plus an amount intended to give BMS the economic benefit of having received royalty fees for a 24-month collaboration term. We accounted for the Recothrom transaction as a business combination and the results of Recothrom's operations have been included in the consolidated statements of income from the date of acquisition. Incline Therapeutics, Inc. In January 2013, we acquired Incline Therapeutics, Inc., or Incline, a company focused on the development of IONSYS, a compact, disposable, needleless patient-controlled system for the short-term management of acute postoperative pain in the hospital setting. Under the terms of our agreement with Incline, we paid to the holders of Incline's capital stock and the holders of options to purchase shares of Incline's capital stock, or collectively, the Incline equityholders, an aggregate of approximately $155.2 million in cash. In addition, we also paid $13.0 million to Cadence Pharmaceuticals, Inc., or Cadence, to terminate Cadence's option to acquire Incline pursuant to an agreement between Cadence and Incline and deposited $18.5 million in cash into an escrow fund for the purposes of securing the indemnification obligations of the Incline equityholders to us for any and all losses for which we are entitled to indemnification pursuant to the merger agreement and to provide the source of recovery for any amounts payable to us as a result of the post-closing purchase price adjustment process. 28 -------------------------------------------------------------------------------- Under the terms of our agreement with Incline, we agreed to pay up to $205.0 million in cash in the aggregate, less certain transaction expenses and taxes, to the former Incline equityholders upon our entering into a license agreement in Japan and achieving certain regulatory approval and certain sales milestones with respect to IONSYS. We accounted for the Incline transaction as a business combination, and the results of Incline's operations have been included in the consolidated statements of income from the date of acquisition. Collaboration with AstraZeneca. On April 25, 2012, we entered into a global collaboration agreement with AstraZeneca, LP, or AstraZeneca, pursuant to which we and AstraZeneca agreed to collaborate globally to develop and commercialize certain acute ischemic heart disease compounds. Under the terms of the collaboration agreement, a joint development and research committee and a joint commercialization committee have been established to prepare and deliver a global development plan and a country-by-country collaboration and commercialization plan, respectively, related to BRILINTA and Angiomax and cangrelor. Implementation of these plans is subject to agreement between both parties. The first joint activity agreed upon by the parties under the global collaboration is a four-year co-promotion arrangement for BRILINTA in the United States. Pursuant to the agreement, our sales force began supporting promotion activities for BRILINTA in May 2012. Under the terms of the agreement, AstraZeneca paid us $2.5 million for conducting BRILINTA co-promotion activities in the second quarter of 2012. In addition, under the terms of the agreement, AstraZeneca paid us $7.5 million in base consideration for conducting BRILINTA co-promotion activities during the period from July 1, 2012 to December 31, 2012 and agreed to pay us $15.0 million in base consideration per year from 2013 through 2015 for conducting BRILINTA co-promotion activities, plus up to an additional $5.0 million per year from 2013 to 2015 if certain performance targets with respect to new prescriptions are achieved and $7.5 million in base consideration for conducting BRILINTA co-promotion activities during the period from January 1, 2016 until June 30, 2016, plus up to an additional $2.5 million in additional consideration for the same period if certain performance targets with respect to new prescriptions are achieved. In the first three months of 2014, AstraZeneca has paid us $4.4 million under the agreement. Targanta Therapeutics Corporation. In February 2009, we acquired Targanta Therapeutics Corporation, or Targanta, a biopharmaceutical company focused on developing and commercializing innovative antibiotics to treat serious infections in the hospital and other institutional settings. Under the terms of our agreement with Targanta, we paid Targanta shareholders an aggregate of approximately $42.0 million in cash at closing. In addition, we originally agreed to pay contingent cash payments up to an additional $90.4 million in the aggregate. This amount has been reduced to $49.4 million as certain milestones have not been achieved by specified dates. We will owe $49.4 million if aggregate net sales of oritavancin in four consecutive calendar quarters ending on or before December 31, 2021 reach or exceed $400.0 million, and up to an additional $40.0 million in additional payments to other third parties. BARDA Agreement In February 2014, our subsidiary Rempex entered into an agreement with the Biomedical Advanced Research and Development Authority, or BARDA, of the U.S. Department of Health and Human Services, under which Rempex has the potential to receive up to $89.8 million in funding to support the development of Carbavance. The BARDA agreement is a cost-sharing arrangement that consists of an initial base period and seven option periods that BARDA may exercise in its sole discretion pursuant to the BARDA agreement. The BARDA agreement provides for an initial commitment by BARDA of an aggregate of $19.8 million for the initial base period and the first option period, and up to an additional $70.0 million if the remaining six option periods are exercised by BARDA. Under the cost-sharing arrangement, Rempex will be responsible for a designated portion of the costs associated with each period of work. If all option periods are exercised by BARDA, the estimated period of performance would be extended until approximately July 31, 2019. BARDA is entitled to terminate the agreement, including the projects under the BARDA agreement for convenience, in whole or in part, at any time and is not obligated to provide continued funding beyond current year amounts from Congressionally approved annual appropriations. We expect to use the total award under the BARDA agreement to support non-clinical development activities, clinical studies, manufacturing and associated regulatory activities designed to obtain marketing approval of Carbavance in the United States for treatment of serious gram-negative infections. The BARDA agreement also covers initial non-clinical studies to assess the potential usefulness of Carbavance for treatment of certain gram-negative bioterrorism agents. 29--------------------------------------------------------------------------------Shelf Registration Statement and Equity Financing On August 12, 2013, we filed a shelf registration statement on Form S-3 with the SEC, which was automatically effective upon filing. This shelf registration statement permits us to offer, from time to time, an unspecified amount of debt securities, common stock, preferred stock, depositary shares, purchase contracts, purchase units and warrants. On August 19, 2013, we sold an aggregate of 6,652,891 shares of our common stock in an underwritten public offering at a price to the public of $30.25 per share. We received net proceeds of approximately $189.6 million from the sale of shares in the offering, including the net proceeds from the exercise in full by the underwriters of an option to purchase additional shares of common stock, and after deducting underwriting discounts and commissions and offering expenses payable by us. Convertible Senior Note Offering On June 11, 2012, we completed our private offering of $275.0 million aggregate principal amount of our 1.375% convertible senior notes due 2017, or the Notes, and entered into an indenture with Wells Fargo Bank, National Association, a national banking association, as trustee, or the Trustee, governing the Notes, which we refer to as the Indenture. The net proceeds from the offering were $266.2 million, after deducting the initial purchasers' discounts and commissions and our offering expenses. The Notes bear cash interest at a rate of 1.375% per year, payable semi-annually on June 1 and December 1 of each year. The Notes will mature on June 1, 2017. The Notes do not contain any financial or operating covenants or any restrictions on the payment of dividends, the incurrence of other indebtedness, or the issuance or repurchase of securities by us. The Notes are our senior unsecured obligations and will rank senior in right of payment to our future indebtedness, if any, that is expressly subordinated in right of payment to the Notes and equal in right of payment to our existing and future unsecured indebtedness that is not so subordinated. The Notes are effectively junior in right of payment to any of our secured indebtedness to the extent of the value of the assets securing such indebtedness and are structurally junior to all existing and future indebtedness and other liabilities, including trade payables, incurred by our subsidiaries. Holders may convert their Notes at their option at any time prior to the close of business on the business day immediately preceding March 1, 2017 only under certain specified circumstances which are set forth in the Indenture. Pursuant to the terms of the Indenture, holders of the Notes were able to elect to convert their notes during the first quarter of 2014 as a result of the price of our common stock during the fourth quarter of 2013. On or after March 1, 2017, until the close of business on the second scheduled trading day immediately preceding the maturity date, holders may convert their Notes at any time, regardless of the foregoing circumstances. Upon conversion, we will pay cash up to the aggregate principal amount of the Notes to be converted and deliver shares of our common stock in respect of the remainder, if any, of our conversion obligation in excess of the aggregate principal amount of the Notes being converted, subject to a daily share cap, as described in the Indenture. Holders of Notes will not receive any additional cash payment or additional shares representing accrued and unpaid interest, if any, upon conversion of a note, except in limited circumstances. Instead, accrued but unpaid interest will be deemed to be paid by the cash and shares, in any, of our common stock, together with any cash payment for any fractional share, paid or delivered, as the case may be, upon conversion of a Note. The conversion rate for the Notes was initially, and remains, 35.8038 shares of our common stock per $1,000 principal amount of Notes, which is equivalent to an initial conversion price of $27.93 per share of our common stock. The conversion rate and the conversion price are subject to customary adjustments for certain events, including, but not limited to, the issuance of certain stock dividends on our common stock, the issuance of certain rights or warrants, subdivisions, combinations, distributions of capital stock, indebtedness, or assets, cash dividends and certain issuer tender or exchange offers, as described in the Indenture. We may not redeem the Notes prior to maturity and are not required to redeem or retire the Notes periodically. However, upon the occurrence of a "fundamental change", as defined in the Indenture, subject to certain conditions, in lieu of converting their Notes, holders may require us to repurchase for cash all or part of their Notes at a repurchase price equal to 100% of the principal amount of the Notes to be repurchased, plus accrued and unpaid interest to, but excluding, the fundamental change repurchase date. Following certain corporate transactions that constitute a change of control, we will increase the conversion rate for a holder who elects to convert the Notes in connection with such change of control in certain circumstances. The Indenture contains customary events of default with respect to the Notes, including that upon certain events of default, including our failure to make any payment of principal or interest on the Notes when due and payable, occurring and continuing, the Trustee by notice to us, or the holders of at least 25% in principal amount of the outstanding Notes by notice to us and the Trustee, may, and the Trustee at the request of such holders, subject to the provisions of the Indenture, shall, declare 100% of the principal of and accrued and unpaid interest, if any, on all the Notes to be due and payable. In case of an event of default involving certain events of bankruptcy, insolvency or reorganization, involving us or a significant subsidiary of ours, 100% of the principal of and accrued and unpaid interest on the Notes will automatically become due and payable. Upon a declaration of acceleration, such principal and accrued and unpaid interest, if any, will be due and payable immediately 30 -------------------------------------------------------------------------------- Convertible Note Hedge and Warrant Transactions On June 5, 2012, we entered into convertible note hedge transactions and warrant transactions with several of the initial purchasers of the Notes, their respective affiliates and other financial institutions, which we refer to as the Hedge Counterparties. We used approximately $19.8 million of the net proceeds from the offering of the Notes to pay the cost of the convertible note hedge transactions, after such cost was partially offset by the proceeds to us from the sale of warrants in the warrant transactions. We expect the convertible note hedge transactions to reduce the potential dilution with respect to shares of our common stock upon any conversion of the Notes in the event that the market price per share of our common stock, as measured under the terms of the convertible note hedge transactions, is greater than the strike price of the convertible note hedge transactions, which initially corresponds to the conversion price of the Notes and is subject to anti-dilution adjustments substantially similar to those applicable to the conversion rate of the Notes. The warrant transactions will have a dilutive effect with respect to our common stock to the extent that the market price per share of our common stock, as measured under the terms of the warrant transactions, exceeds the applicable strike price of the warrants. However, subject to certain conditions, we may elect to settle all of the warrants in cash. Biogen Letter Agreement On August 7, 2012, we and Biogen Idec MA Inc., or Biogen, entered into a letter agreement resolving a disagreement between the parties as to the calculation and amount of the royalties required to be paid to Biogen by us under our license agreement with Biogen. The letter agreement amends the license agreement providing, among other things, that effective solely for the period from January 1, 2013 through and including December 15, 2014, each of the royalty rate percentages payable by us as set forth in the license agreement shall be increased by one percentage point. U.S. Health Care Reform In March 2010, President Obama signed into law the Patient Protection and Affordable Care Act, or PPACA, which was amended by the Health Care and Education Reconciliation Act of 2010. The PPACA, as amended, contains numerous provisions that impact the pharmaceutical and healthcare industries that are expected to be implemented over the next several years. We are continually evaluating the impact of the PPACA on our business. As of the date of this quarterly report on Form 10-Q, we have not identified any provisions that currently materially impact our business or results of operations. However, we believe that the Biologics Price Competition and Innovation Act, or BPCIA, provisions of PPACA could impact our business or results of operations. Under the BPCIA, the FDA has the authority to approve biosimilar interchangeable versions of biological products through an abbreviated pathway following periods of data and marketing exclusivity. However, the potential impact of the PPACA and the BPCIA on our business and results of operations is inherently difficult to predict because many of the details regarding the implementation of this legislation have not been determined. In addition, the impact on our business and results of operations may change as and if our business evolves. On July 9, 2012, President Obama signed the Food and Drug Administration Safety and Innovation Act, or FDASIA. Under the "Generating Antibiotic Incentives Now," or GAIN, provisions of FDASIA, the FDA may designate a product as a qualified infectious disease product, or QIDP. A QIDP is defined as an antibacterial or antifungal drug for human use intended to treat serious or life-threatening infections, including those caused by either an antibacterial or antifungal resistant pathogen, including novel or emerging infectious pathogens or a so-called "qualifying pathogen" found on a list of potentially dangerous, drug-resistant organisms to be established and maintained by the FDA under the new law. The GAIN provisions describe several examples of "qualifying pathogens," including methicillin-resistant Staphylococcus aureus, or MRSA, and Clostridium difficile. Upon the designation of a drug by the FDA as a QIDP, any non-patent exclusivity period awarded to the drug will be extended by an additional five years. This extension is in addition to any pediatric exclusivity extension awarded. We are developing oritavancin for the treatment of ABSSSI, including infections caused by MRSA, and are exploring the development of oritavancin for other indications, including for the treatment of Clostridium difficile, prosthetic joint infections, anthrax and other Gram-positive bacterial infections. We are also developing Carbavance for the treatment of hospitalized patients with serious gram-negative bacterial infections. In November 2013, the FDA designated oritavancin a QIDP, and in January 2014, the FDA designated Carbavance a QIDP. As a result, we expect the non-patent exclusivity that would be awarded to oritavancin and Carbavance if their respective NDAs were approved would be extended by an additional five years. 31-------------------------------------------------------------------------------- Results of Operations Net Revenue: Net revenue increased 13.8% to $177.2 million for the three months ended March 31, 2014 as compared to $155.8 million for the three months ended March 31, 2013. The following tables reflect the components of net revenue for the three months ended March 31, 2014 and 2013: Net Revenue Three Months Ended March 31, Change Change 2014 2013 $ % (in thousands) Angiomax $ 155,704 $ 142,885 $ 12,819 9.0 % Recothrom 13,494 8,622 4,872 56.5 % Cleviprex/Ready-to-Use Argatroban/Minocin IV 8,037 4,246 3,791 89.3 % Total net revenue $ 177,235 $ 155,753 $ 21,482 13.8 % Net revenue increased by $21.5 million, or 13.8%, to $177.2 million in the three months ended March 31, 2014 compared to $155.8 million in the three months ended March 31, 2013, reflecting an increase of $23.3 million, or 16.1%, in the United States and a decrease of $1.8 million, or 15.6%, in international markets. The net revenue increase for Angiomax was $12.8 million, which was comprised of net volume increases of $10.1 million due to increased unit shipments to customers of Angiomax, price increases of $2.4 million, principally due to a price increase for Angiomax effective as of January 1, 2014 and a favorable impact from foreign exchange of $0.3 million. In addition, net revenue increased by $4.9 million for Recothrom due to the full quarter effect of sales during the first quarter of 2014, as we first began selling Recothrom in the United States in February 2013. Angiomax. Net revenue from sales of Angiomax increased by $12.8 million, or 9.0%, to $155.7 million in the three months ended March 31, 2014 compared to $142.9 million in the three months ended March 31, 2013, primarily due to volume increases in the United States. Net revenue in the United States in both the three months ended March 31, 2014 and 2013 reflect chargebacks related to the 340B Drug Pricing Program and rebates related to the PPACA. Under the 340B Drug Pricing Program, we offer qualifying entities a discount off the commercial price of Angiomax for patients undergoing PCI on an outpatient basis. Chargebacks related to the 340B Drug Pricing Program increased by $2.8 million to $13.5 million in the three months ended March 31, 2014 compared to $10.7 million in the three months ended March 31, 2013, primarily due to higher amounts paid to eligible hospital customers. Rebates related to the PPACA increased by $0.4 million to $0.7 million in the three months ended March 31, 2014 compared to $0.3 million in the three months ended March 31, 2013. Recothrom. Net revenue from Recothrom increased by $4.9 million, or 56.5%, to $13.5 million in the three months ended March 31, 2014 compared to $8.6 million in the three months ended March 31, 2013 due to full quarter of sales during the first quarter of 2014. We commenced sales of Recothrom on February 8, 2013 pursuant to the master transaction agreement with BMS. Cleviprex/Ready-to-Use Argatroban/Minocin IV. Net revenue from sales of Cleviprex, ready-to-use Argatroban and Minocin IV increased by $3.8 million, or 89.3%, to $8.0 million in the three months ended March 31, 2014 from $4.2 million in the three months ended March 31, 2013, primarily due to the change in our revenue recognition method for Cleviprex and ready-to-use Argatroban in the first quarter of 2014. Under our revised revenue recognition policy, beginning with the first quarter for 2014, we recognize revenue for Cleviprex and ready-to-use Argatroban as product is sold to Integrated Commercialization Solutions, or ICS. For periods prior to the first quarter of 2014, we recognized revenue for Cleviprex and ready-to-use Argatroban using the deferred revenue model. For the three months ended March 31, 2014, we recognized one-time increases of $0.7 million in net sales of Cleviprex and $1.6 million in net sales of ready-to-use Argatroban, representing product sales previously deferred as of December 31, 2013, net of chargebacks and other discounts or accruals for product returns, rebates and fee-for-service charges. Net revenue from sales of Cleviprex was $2.6 million in the three months ended March 31, 2014, compared to $1.1 million in the three months ended March 31, 2013. Net revenue from sales of ready-to-use Argatroban was $5.0 million in the three months ended March 31, 2014, compared to $3.1 million in the three months ended March 31, 2013. Net revenue from sales of Minocin IV was $0.4 million in the three months ended March 31, 2014. We commenced sales of Minocin IV in December 2013 after the acquisition of Rempex. 32 -------------------------------------------------------------------------------- Cost of Revenue: Cost of revenue in the three months ended March 31, 2014 was $66.9 million, or 37.7% of net revenue, compared to $56.7 million, or 36.4% of net revenue, in the three months ended March 31, 2013. Cost of revenue during these periods consisted of: • expenses in connection with the manufacture of our products sold; • royalty expenses under our agreements with Biogen and Health Research Inc. related to Angiomax, our agreement with AstraZeneca related to Cleviprex and our agreement with Eagle Pharmaceuticals, Inc., or Eagle, related to ready-to-use Argatroban; • amortization of the costs of license agreements, product rights and other identifiable intangible assets, which result from product and business acquisitions; • logistics costs related to Angiomax, Cleviprex, Minocin IV and ready-to-use Argatroban, including distribution, storage, and handling costs; and • expenses related to our license agreement with BMS for Recothrom and expenses related to our supply agreement for Recothrom with BMS including product cost and logistics as well as royalties and amortization related to Recothrom. Cost of Revenue Three Months Ended March 31, 2014 % of Total 2013 % of Total (in thousands) (in thousands) Manufacturing/Logistics $ 21,291 31 % $ 18,651 33 % Royalties 40,493 61 % 34,262 60 % Amortization of product rights and intangible assets 5,083 8 % 3,801 7 % Total cost of revenue $ 66,867 100 % $ 56,714 100 % Cost of revenue increased by $10.2 million during the three months ended March 31, 2014 compared to the three months ended March 31, 2013 primarily due to an increase in royalty expense to Biogen and due to an increase in royalties to BMS in connection with our sales of Recothrom for a full quarter for the three months ended March 31, 2014 as compared to a partial quarter during 2013 as a result of our commencement of selling Recothrom in February 2013. Increased manufacturing and logistics costs were associated with our sales of Recothrom for the full quarter in 2014. The increase in amortization of product rights and intangible assets reflects the full quarter 2014 amortization of product rights and intangible assets associated with Recothrom. 33 --------------------------------------------------------------------------------Research and Development Expenses: Research and Development Spending Three Months Ended March 31, Change (in millions, except percentages ) 2014 2013 $ Change % Marketed products $ 4,919 $ 3,897 $ 1,022 26 % Registration stage products 16,353 23,299 (6,946 ) (30 )% Research and development stage products 9,824 31,000 (21,176 ) (68 )% Total research and development expenses $ 31,096 $ 58,196 $ (27,100 ) (47 )% Our marketed products consist of Angiomax, Cleviprex, Recothrom, Minocin IV, ready-to-use Argatroban and our acute care generic drugs. Registration stage products, for which we have submitted or will soon submit applications for regulatory approval, include cangrelor, oritavancin, IONSYS, Fibrocaps and RPX-602. Research and development stage products include MDCO-216, Carbavance, ALN-PCSsc and other early stage compounds. Research and development expenses decreased by $27.1 million during the three months ended March 31, 2014 compared to the three months ended March 31, 2013. The decrease is primarily due to an initial license payment of $25.0 million to Alnylam under our license and collaboration agreement in the first quarter of 2013. In addition, expenses associated with oritavancin decreased by $9.4 million primarily due to the completion of patient enrollment in SOLO II clinical trials in April 2013 and expenses associated with cangrelor decreased by $2.7 million due to the completion of our Phase 3 CHAMPION PHOENIX clinical trial. Additional decreases during the three months ended March 31, 2014 include $1.1 million due to a reduction-in-force during 2013 and a decrease in research and development costs of $0.8 million due to the termination of license agreement with CyDex Pharmaceuticals, Inc. in July of 2013. These decreases were partially offset by increases in expenses associated with Carbavance and Fibrocaps acquired during 2013 and our efforts to further develop Angiomax for use in additional patient populations globally. Clinical trial expenses and manufacturing development expenses associated with Carbavance increased by $6.1 million following our December 2013 acquisition of Rempex. Manufacturing development and regulatory filing related costs associated with Fibrocaps increased by $5.8 million following our August 2013 acquisition of ProFibrix. We expect to continue to invest in the development of all our products during the remainder of 2014 and that our research and development expenses will increase in 2014 from their levels in 2013. We expect research and development expenses in 2014 to include costs for global regulatory activities related to oritavancin and IONSYS in the United States and European Union, and for Cleviprex, cangrelor and Fibrocaps outside of the United States; manufacturing development activities for Carbavance, oritavancin, MDCO-216, and IONSYS, and our clinical trials of MDCO-216 preparation for a Phase 2 study initiation, initiation of a Phase 3 study for Carbavance and additional clinical studies for Angiomax, cangrelor and Cleviprex for use in additional patient populations and lifecycle management activities for all of our products. Our success in further developing Angiomax and obtaining marketing approvals for Angiomax in additional countries and for additional patient populations, developing and obtaining marketing approvals for Cleviprex outside the United States, and developing and obtaining marketing approvals for our products in development, is highly uncertain. We cannot predict expenses associated with ongoing data analysis or regulatory submissions, if any. In addition, we cannot reasonably estimate or know the nature, timing and estimated costs of the efforts necessary to continue the development of Angiomax, Cleviprex and our products in development, the period in which material net cash inflows are expected to commence from further developing Angiomax and Cleviprex, the timing and estimated costs of obtaining marketing approvals for Angiomax in additional countries and additional patient populations, the timing and estimated costs of obtaining marketing approvals for Cleviprex outside the United States, or the timing and estimated costs of developing and obtaining marketing approvals for our products in development, due to the numerous risks and uncertainties associated with developing and commercializing drugs, including the uncertainty of: • the scope, rate of progress and cost of our clinical trials and other research and development activities; • future clinical trial results; • the terms and timing of any collaborative, licensing and other arrangements that we may establish; • the cost and timing of regulatory approvals; • the cost and timing of establishing and maintaining sales, marketing and distribution capabilities; 34--------------------------------------------------------------------------------• the cost of establishing and maintaining clinical and commercial supplies of our products and product candidates; • the effect of competing technological and market developments; and • the cost of filing, prosecuting, defending and enforcing any patent claims and other intellectual property rights. Selling, General and Administrative Expenses: Three Months Ended March 31, 2014 2013 Change $ Change % (in thousands)Selling, general and administrative expenses $ 64,521 $ 63,482 $ 1,039 1.6 % The increase in selling, general and administrative expenses of approximately $1.0 million in the three months ended March 31, 2014 as compared to the three months ended March 31, 2013 reflects a $3.9 million increase in selling, marketing and promotional expense and a $2.9 million decrease in general corporate and administrative expenses. Selling, marketing and promotional expenses increased by $3.9 million, primarily due to increased promotional efforts for our commercial products and spending in preparation for the commercial sale of our late stage product candidates, if and when approved. General corporate and administrative expenses decreased by $2.9 million, primarily due to a reduction of one-time expenses incurred during the three months ended March 31, 2013 for our acquisitions of Incline and licensing of Recothrom which contributed an aggregate of $3.6 million and the 2013 reduction-in-force employee severance and other employee related termination costs of $4.4 million. These reductions were primarily offset by increases of $2.1 million in share-based compensation costs and $2.7 million in accretion costs associated with the fair value adjustments of the contingent consideration due to the former equityholders of Targanta Therapeutics Corporation, or Targanta, Incline, ProFibrix and Rempex. Co-promotion and Profit-Share Income: Three Months Ended March 31, 2014 2013 Change $ Change % (in thousands) Co-promotion and profit share income $ 6,020 $ 3,750 $ 2,270 60.5 % During the three months ended March 31, 2014 and March 31, 2013, we recorded co-promotion and profit share income of approximately $6.0 million and $3.75 million, respectively. Co-promotion and profit share income in the three months ended March 31, 2014 was higher due to increases in co-promotion of BRILINTA in the United States by approximately $0.6 million, profit share income from our license agreement with Eagle related to ready-to-use Argatroban of $1.3 million and co-promotion income from our agreement with BSX of $0.3 million. Interest Expense: Three Months Ended March 31, 2014 2013 Change $ Change % (in thousands) Interest expense $ (3,860 ) $ (3,674 ) $ (186 ) 5.1 % 35-------------------------------------------------------------------------------- During the three months ended March 31, 2014 and March 31, 2013, we recorded approximately $3.9 million and $3.7 million in interest expense related to the Notes. Other Income: Three Months Ended March 31, 2014 2013 Change $ Change % (in thousands) Other income $ 179 $ 198 $ (19 ) (9.6 )% Other income, which is comprised of interest income and gains and losses on foreign currency transactions remained unchanged for the three months ended March 31, 2014 and March 31, 2014. (Provision) benefit for Income Tax: Three Months Ended March 31, 2014 2013 Change $ Change % (in thousands) (Provision) for income tax $ (22,095 ) $10,759 $ (32,854 ) * *Represents a change in excess of 100%. We recorded a $22.1 million provision for income taxes and a $10.8 million benefit for income taxes for the three months ended March 31, 2014 and 2013, respectively, based on income before taxes of $17.1 million and a loss before taxes of $22.4 million for the same periods. Our effective income tax rates for the three months ended March 31, 2014 and 2013 were approximately 129.3% and 48.2%, respectively. These increases in effective tax rate were driven primarily by the non-cash tax impact arising from changes in contingent consideration related to our acquisitions of Targanta, Incline, ProFibrix and Rempex. The 2014 effective tax rate also reflects higher tax losses in foreign jurisdictions from which we are unable to record a benefit currently driven primarily by the acquisition of ProFibrix. The 2013 effective tax rate also reflects the one time income tax benefit arising from the retroactive reinstatement of the research and development credit included in the American Tax Relief Act of 2012 which was signed into law in January 2013 and which expired on December 31, 2013. We expect that our full year effective tax rate will be higher than 2013 due to an increase in nondeductible charges for changes in contingent consideration related to our acquisitions, higher anticipated tax losses in foreign jurisdictions from which we are unable to record a benefit currently, and the December 31, 2013 expiration of the U.S. federal research and development tax credit. It is also possible that our full-year effective tax rate could change because of other discrete events, our mix of U.S. to foreign earnings, specific transactions, or the receipt of new information affecting our current projections. We will continue to evaluate our future ability to realize our deferred tax assets on a periodic basis in light of changing facts and circumstances. These include but are not limited to projections of future taxable income, tax legislation, rulings by relevant tax authorities, the progress of ongoing tax audits, the regulatory approval of products currently under development and the ability to achieve future anticipated revenues. Liquidity and Capital Resources Sources of Liquidity Since our inception, we have financed our operations principally through revenues from sales of Angiomax, the sale of common stock, convertible promissory notes and warrants and interest income. 36--------------------------------------------------------------------------------Cash Flows As of March 31, 2014, we had $378.4 million in cash and cash equivalents, as compared to $376.7 million as of December 31, 2013. The increase in cash and cash equivalents in the three months ended March 31, 2014 was primarily due to $10.3 million of net cash provided by financing activities, partially offset by $5.1 million of net cash used in operating activities and $3.4 million of net cash used in investing activities. Net cash used in operating activities was $5.1 million in the three months ended March 31, 2014, compared to net cash used in operating activities of $48.0 million in the three months ended March 31, 2013. The cash used in operating activities in the three months ended March 31, 2014 included a net loss of $5.0 million and a $20.5 million decrease resulting from changes in working capital items. The changes in working capital items reflect a decrease in accounts payable and accrued expenses of $11.8 million primarily due to timing of payments of certain corporate expenses, a decrease of $4.1 million in deferred revenue, a decrease of $2.6 million in other liabilities and an increase of $2.8 million in accounts receivable, partially offset by a decrease of $1.1 million in inventory. These uses of cash were partially offset by non-cash items of $20.4 million, consisting primarily of depreciation and amortization, amortization of debt discount, share-based compensation expense, deferred tax provision and excess tax benefit from share-based compensation arrangements. Net cash used by operating activities in the three months ended March 31, 2013 included a net loss of $11.6 million, primarily due to an initial $25.0 million license payment to Alnylam, and a decrease of $40.1 million resulting from changes in working capital items, offset by non-cash items of $3.7 million consisting primarily of share-based compensation expense, deferred tax provision and depreciation and amortization. The changes in working capital items reflect a decrease in accounts payable and accrued expenses of $17.4 million primarily due to payments related to inventory of active pharmaceutical ingredient bivalirudin and payment of certain corporate expenses, an increase in accounts receivable of $4.9 million, which was due in part to the timing of receipts and related sales volume, an increase in inventory of $8.0 million due to purchases under our supply agreement with Teva API of certain minimum quantities of the active pharmaceutical ingredient bivalirudin for our commercial supply and an increase in prepaid and other current assets of $9.0 million primarily due to an increase in prepaid corporate income and ad valorem taxes. During the three months ended March 31, 2014, $3.4 million in net cash was used in investing activities, primarily for the purchase of fixed assets. During the three months ended March 31, 2013, $276.4 million in net cash was used in investing activities, which reflected $301.7 million incurred in connection with our Incline and Recothrom transactions, consisting of $186.7 million used in the acquisition of Incline and $115.0 million paid in the Recothrom transaction, and the purchase of fixed assets and additional investment in Annovation Biopharma Inc., offset by $27.1 million in proceeds from the maturity and sale of available for sale securities. Net cash provided by financing activities was $10.3 million in the three months ended March 31, 2014, which reflected $8.6 million of proceeds from option exercises and $1.7 million in excess tax benefits and purchases of stock under our employee stock purchase plan. We received $33.4 million in the three months ended March 31, 2013 in net cash provided by financing activities, which reflected $29.7 million of proceeds from option exercises and $3.6 million in excess tax benefits and purchases of stock under our employee stock purchase plan. 37 --------------------------------------------------------------------------------Funding Requirements We expect to devote substantial financial resources to our research and development efforts, clinical trials, nonclinical and preclinical studies and regulatory approvals and to our commercialization and manufacturing programs associated with our products and our products in development. We also will require cash to pay interest on the $275.0 million aggregate principal amount of Notes and to make principal payments on the Notes at maturity or upon conversion. In addition, we will require cash to make payments under the license agreements and other acquisition agreements to which we are a party, including potentially a payment to BMS, if we exercise the option granted to us, at a purchase price equal to the net book value of inventory included in the acquired assets. In addition, we may have to make contingent cash payments for our acquisitions and our licensing arrangements of up to $49.4 million due to the former equityholders of Targanta and up to $40.0 million in additional payments to other third parties for the Targanta transaction, up to $205.0 million due to the former equityholders of Incline and up to $115.5 million in additional payments to other third parties for the Incline transaction, up to $140.0 million for the ProFibrix transaction, up to $334.0 million for the Rempex transaction, up to $180.0 million for the license and collaboration agreement with Alnylam, up to $422.0 million due to our licensing of MDCO-216 from Pfizer, up to $54.5 million due to our licensing of cangrelor from AstraZeneca and up to $112.0 million for the Tenaxis transaction, in each case, upon the achievement of specified regulatory, sales and other milestones. Our future capital requirements will depend on many factors, including: • the extent to which Angiomax is commercially successful globally; • our ability to maintain market exclusivity for Angiomax in the United States through the enforcement of the '727 patent and the '343 patent during the period following the expiration of the patent term of the '404 patent on December 15, 2014 and the six month pediatric exclusivity on June 15, 2015 through at least May 1, 2019, the date on which we agreed APP may sell a generic version of Angiomax; • the extent to which our submissions and planned submissions for regulatory approval of cangrelor, oritavancin, IONSYS, Fibrocaps and RPX-602 are approved on a timely basis, if at all; • the extent to which Recothrom, Cleviprex, ready-to-use Argatroban, Minocin IV, the Tenaxis product and the acute care generic products for which we acquired the non-exclusive right to sell and distribute from APP are commercially successful in the United States; • the extent to which our global collaboration with AstraZeneca, including our four-year co-promotion arrangement for BRILINTA in the United States, and our co-promotion agreement with BSX for its Promus PREMIER Stent System, are successful; • the extent to which we are successful in our efforts to further establish a commercial infrastructure outside the United States; • the consideration paid by us and to be paid by us in connection with acquisitions and licenses of development-stage compounds, clinical-stage product candidates, approved products, or businesses, and in connection with other strategic arrangements; • the progress, level, timing and cost of our research and development activities related to our clinical trials and non-clinical studies with respect to Angiomax, Cleviprex and our products in development; • the cost and outcomes of regulatory submissions and reviews for approval of Angiomax in additional countries and for additional indications, of Recothrom and Cleviprex outside the United States and of our other products in development globally; • the continuation or termination of third-party manufacturing, distribution and sales and marketing arrangements; • the size, cost and effectiveness of our sales and marketing programs globally; • the amounts of our payment obligations to third parties as to our products and products in development; and • our ability to defend and enforce our intellectual property rights. 38 -------------------------------------------------------------------------------- We believe that our cash on hand and the cash we generate from our operations will be sufficient to meet our ongoing funding requirements, including our obligations with respect to the Notes and under the license agreements and other acquisition agreements to which we are a party, but excluding any future material acquisition activity. If our existing cash resources, together with revenues that we generate from sales of our products and other sources, are insufficient to satisfy our funding requirements due to slower than anticipated sales of Angiomax, Recothrom, Cleviprex, ready-to-use Argatroban and the acute generic products for which we acquired the non-exclusive right to sell and distribute from APP or higher than anticipated costs globally, we may need to sell additional equity or debt securities or seek additional financing through other arrangements. Any sale of additional equity or debt securities may result in dilution to our stockholders. Debt financing may involve covenants limiting or restricting our ability to take specific actions, such as incurring additional debt or making capital expenditures. Moreover, our ability to obtain additional debt financing may be limited by the Notes. We cannot be certain that public or private financing will be available in amounts or on terms acceptable to us, if at all. Further, we may seek additional financing to fund our acquisitions of development stage compounds, clinical stage product candidates and approved products and/or the companies that have such products, and we may not be able to obtain such financing on terms acceptable to us or at all. If we seek to raise funds through collaboration or licensing arrangements with third parties, we may be required to relinquish rights to products, product candidates or technologies that we would not otherwise relinquish or grant licenses on terms that may not be favorable to us. If we are unable to obtain additional financing, we may be required to delay, reduce the scope of, or eliminate one or more of our planned research, development and commercialization activities, which could harm our financial condition and operating results. Certain Contingencies: We may be, from time to time, a party to various disputes and claims arising from normal business activities. We accrue for loss contingencies when information available indicates that it is probable that a liability has been incurred and the amount of such loss can be reasonably estimated. Currently, we are party to the legal proceedings described in Part II, Item 1, Legal Proceedings, of this quarterly report on Form 10-Q, which include both patent litigation matters and class action litigation. We have assessed such legal proceedings and do not believe that it is probable that a liability has been incurred and the amount of such liability can be reasonably estimated. As a result, we have not recorded a loss contingency related to these legal proceedings. Contractual Obligations Our long-term contractual obligations include commitments and estimated purchase obligations entered into in the normal course of business. These include commitments related to royalties, milestone payments, option exercise and other contingent payments due under our license and acquisition agreements, purchases of inventory of our products, research and development service agreements, income tax contingencies, operating leases, selling, general and administrative obligations and increases to our restricted cash in connection with our lease of our principal office space in Parsippany, New Jersey as of March 31, 2014. During the quarter ended March 31, 2014, there were no material changes outside the ordinary course of business to the specified contractual obligations set forth in the contractual obligations table included in our annual report on Form 10-K for the year ended December 31, 2013. Application of Critical Accounting Estimates The discussion and analysis of our financial condition and results of operations is based on our unaudited consolidated financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles, or GAAP, for interim financial information and with the instructions to Form 10-Q. Accordingly, they do not include all the information and footnotes required by GAAP for complete financial statements. The preparation of these financial statements requires us to make estimates and judgments that affect our reported assets and liabilities, revenues and expenses, and other financial information. Actual results may differ significantly from these estimates under different assumptions and conditions. In addition, our reported financial condition and results of operations could vary due to a change in the application of a particular accounting standard. We regard an accounting estimate or assumption underlying our financial statements as a "critical accounting estimate" where: • the nature of the estimate or assumption is material due to the level of subjectivity and judgment necessary to account for highly uncertain matters or the susceptibility of such matters to change; and • the impact of the estimates and assumptions on financial condition or operating performance is material. 39-------------------------------------------------------------------------------- Our significant accounting policies are more fully described in note 2 of our unaudited consolidated financial statements in this quarterly report on Form 10-Q and note 2 of our consolidated financial statements in our annual report on Form 10-K for the year ended December 31, 2013. Not all of these significant accounting policies, however, require that we make estimates and assumptions that we believe are "critical accounting estimates." We have discussed our accounting policies with the audit committee of our board of directors, and we believe that our estimates relating to revenue recognition, inventory, share-based compensation, income taxes, in-process research and development, contingent purchase price from business combinations and impairment of long-lived asset described under the caption "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - Application of Critical Accounting Estimates" in our annual report on Form 10-K for the year ended December 31, 2013 are "critical accounting estimates." Please refer to note 2, "Significant Accounting Policies," in the accompanying notes to the condensed consolidated financial statements for a discussion on changes to certain accounting policies during the three months ended March 31, 2014. Recent Accounting Pronouncements Refer to Note 2, "Significant Accounting Policies," in the accompanying notes to the condensed consolidated financial statements for a discussion of recent accounting pronouncements. There were no new accounting pronouncements adopted during the three months ended March, 2014 that had a material effect on our financial statements. Forward-Looking Information This quarterly report on Form 10-Q includes forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act. For this purpose, any statements contained herein regarding our strategy, future operations, financial position, future revenue, projected costs, prospects, plans and objectives of management, other than statements of historical facts, are forward-looking statements. The words "anticipates," "believes," "estimates," "expects," "intends," "may," "plans," "projects," "will," "would" and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words. We cannot guarantee that we actually will achieve the plans, intentions or expectations expressed or implied in our forward-looking statements. There are a number of important factors that could cause actual results, levels of activity, performance or events to differ materially from those expressed or implied in the forward-looking statements we make. These important factors include our "critical accounting estimates" described in Part I, Item 2 of this quarterly report on Form 10-Q and the factors set forth under the caption "Risk Factors" in Part II, Item 1A of this quarterly report on Form 10-Q. Although we may elect to update forward-looking statements in the future, we specifically disclaim any obligation to do so, even if our estimates change, and readers should not rely on those forward-looking statements as representing our views as of any date subsequent to the date of this quarterly report on Form 10-Q. |