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MOMENTA PHARMACEUTICALS INC - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations.(Edgar Glimpses Via Acquire Media NewsEdge) Our Management's Discussion and Analysis of Financial Condition and Results of Operations includes the identification of certain trends and other statements that may predict or anticipate future business or financial results. There are important factors that could cause our actual results to differ materially from those indicated. See "Risk Factors" in Item 1A of Part II of this Quarterly Report on Form 10-Q. Statements contained or incorporated by reference in this Quarterly Report on Form 10-Q that are not based on historical fact are "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These forward-looking statements regarding future events and our future results are based on current expectations, estimates, forecasts, projections, intentions, goals, strategies, plans, prospects and the beliefs and assumptions of our management including, without limitation, our expectations regarding results of operations, general and administrative expenses, research and development expenses, current and future development and manufacturing efforts, regulatory filings, nonclinical and clinical trial results, the outcome of litigation and the sufficiency of our cash for future operations. Forward-looking statements can be identified by terminology such as "anticipate," "believe," "could," "could increase the likelihood," "hope," "target," "project," "goals," "potential," "predict," "might," "estimate," "expect," "intend," "is planned," "may," "should," "will," "will enable," "would be expected," "look forward," "may provide," "would" or similar terms, variations of such terms or the negative of those terms. We cannot assure investors that our assumptions and expectations will prove to have been correct. Important factors could cause our actual results to differ materially from those indicated or implied by forward-looking statements. Such factors that could cause or contribute to such differences include those factors discussed below under "Risk Factors" in Item 1A of Part II of this Quarterly Report on Form 10-Q. We undertake no intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. Business Overview The Company We are a biotechnology company operating in three product areas: Complex Generics, Biosimilars and Novel Drugs. Our approach is built around a complex systems analysis platform that we use to obtain a detailed understanding of complex chemical and biologic systems, design product candidates based on this knowledge, analyze sets of biological data to evaluate the biological function of our products, and develop manufacturing processes that enable our products to be reliably produced. Our first commercial product, developed in collaboration with Sandoz, Enoxaparin Sodium Injection, a generic version of Lovenox®, was approved in July of 2010, validating the commercial value of our platform. In the period from commercial launch through September 2011, we capitalized on the advantage of having the only generic version of Lovenox in the marketplace and recognized over $340 million in revenue from this product. The core objective of our complex systems analysis platform is to resolve the complexity of molecular structures and related biologic systems. For the complex systems we seek to understand, we first map the key measurements needed to provide comprehensive data on the system. We then develop a set of analytic tools and methods that include a combination of standard analytics, modified analytic approaches and custom developed analytics and methods. The modified and custom analytics may be protected by trade secrets or patents. The analytic set we use for a development program is designed to provide comprehensive data on the complex molecular mixture and target biology, including providing multiple related and complementary, or orthogonal, measures of the system. We also may use computer software to mine and synthesize the data to yield insights that advance our development programs across all three product areas. As we expand our infrastructure, intellectual property and knowledge of complex biologies, we accrue advantages as well. For example, the process development and manufacturing expertise developed from our complex generic and biosimilars efforts can be directly used to advance our novel drug candidates. The investments in biocharacterization made for our biosimilars program provide a core of models and biologic data sets that can form the basis of inquiries in our novel drug research. And the analytic tools and methods and biologic models we develop help build a substantial toolset that can be used across our programs. As of June 30, 2014, we had an accumulated deficit of $324.0 million. To date, we have devoted substantially all of our capital resource expenditures to the research and development of our product candidates. We have been incurring operating losses and we expect to incur annual operating losses over the next several years as we advance our drug development portfolio. We expect that our return to profitability, if at all, will most likely come from the commercialization of the products in our drug development portfolio. Additionally, we plan to continue to evaluate possible acquisitions or licensing of rights to related technologies, products or assets that fit within our growth strategy. Accordingly, we will need to generate significant revenue to return to profitability. 24 -------------------------------------------------------------------------------- Table of Contents Our Product Areas In our Complex Generics product area, we develop generic versions of complex drugs that were originally approved by the United States Food and Drug Administration, or FDA, as New Drug Applications, or NDAs. Therefore, we have been able to access the existing 505(j) generic regulatory pathway and have submitted Abbreviated New Drug Applications, or ANDAs, for these products. Enoxaparin Sodium Injection, our first product to receive FDA marketing approval under an ANDA, is a generic version of Lovenox (enoxaparin sodium injection) and has been developed and commercialized in collaboration with Sandoz Inc. and Sandoz AG, collectively Sandoz, affiliates of Novartis AG. Lovenox is a complex drug consisting of a mixture of polysaccharide chains and is a widely-prescribed low molecular weight heparin, or LMWH, used for the prevention and treatment of deep vein thrombosis, or DVT, and to support the treatment of acute coronary syndromes, or ACS. Our second complex generic product candidate, M356, is designed to be a generic version of Copaxone® (glatiramer acetate injection), a complex drug consisting of a synthetic mixture of polypeptide chains. Copaxone is indicated for treatment of patients with relapsing-remitting multiple sclerosis, or RRMS, a chronic disease of the central nervous system characterized by inflammation and neurodegeneration. We are also collaborating with Sandoz to develop and commercialize M356, and the Sandoz ANDA for M356 is currently under FDA review. Most drugs approved as NDAs are simple small molecules that are easy to duplicate. However, products such as Lovenox and Copaxone are complex molecular mixtures that are difficult to analyze and therefore difficult to reproduce as generics. We use our complex systems analysis platform to define the detailed structures present in these complex drugs. Once the precise structures are identified, or characterized, this structural characterization of the brand product is used to guide the development of a precise manufacturing process to produce a generic version. Finally, to demonstrate that the biological function of our generic replicates that of the brand, we utilize our complex systems analysis platform to evaluate and compare multiple orthogonal sets of biologic data from in-vitro, in-vivo and ex-vivo models. Biosimilars Our second product area is biosimilars, which is targeted toward developing biosimilar versions of marketed therapeutic proteins, with a goal of obtaining FDA designation as interchangeable. The subset of biosimilars receiving an interchangeability designation are known as interchangeable biologics. In March 2010, an abbreviated regulatory process was codified in Section 351(k) of the Patient Protection and Affordable Care Act of 2010. This new pathway opened the market for biosimilar and interchangeable versions of a broad array of biologic therapeutics, including antibodies, cytokines, fusion proteins, hormones and blood factors. By 2015, sales of biosimilars are expected to reach between $1.9 billion to $2.6 billion. For biosimilars, we apply our complex systems analysis platform in two ways. First, we seek to better understand the complex systems within cells that are involved in the assembly of proteins. This knowledge enables us to select the appropriate cell line and to manipulate the cell's outputs using novel control strategies during the manufacturing with the goal of producing a biologic with structural similarity to the brand. Nevertheless, because of the complexity and variability of biologic manufacturing systems, it is important to evaluate whether any small differences between the biosimilar and the brand would be related to potential clinical differences. To minimize this residual uncertainty, we evaluate orthogonal sets of both structural and biologic data (biocharacterization) from in-vitro, in-vivo and ex-vivo models to compare the function of the brand product and our product. We believe that our complex systems analysis approaches, including these characterization methods, can significantly reduce residual uncertainty and may enable a relative reduction or even elimination of certain clinical trial requirements. In February 2012, FDA released three documents containing their preliminary guidelines for applications under the Section 351(k) pathway. These guidelines state that FDA will use a step-wise review that considers the totality-of-the-evidence in determining extent of the clinical development program. This approach puts a substantial emphasis on structural and functional characterization data in evaluating biosimilar products for approval. We believe that our strategy for the development of biosimilars aligns well with the framework that the FDA has outlined in the draft guidance documents. In December 2011, we and Baxter International, Inc., Baxter Healthcare Corporation and Baxter Healthcare SA, collectively, Baxter, entered into a global collaboration and license agreement, or the Baxter Agreement, to develop and commercialize biosimilars. The Baxter Agreement became effective in February 2012. Baxter is an established healthcare company with global product development, manufacturing and commercial capabilities. Novel Drugs We believe that applying our complex systems analysis platform to the discovery and development of novel medicines can enhance our probability of success in a number of ways. As with our complex generics and biosimilars, our platform gives us a detailed understanding of the complex structures of our novel product candidates, their associated manufacturing processes and controls, and the targeted biologic systems. Our most advanced novel candidate, necuparanib (formerly M402), is in a Phase 1/2 clinical study as a potential anti-cancer agent. Necuparanib binds to multiple growth factors, adhesion molecules and chemokines to inhibit tumor angiogenesis, progression, and metastasis. We are also applying our complex systems analysis platform to identify potential improvements we can design into presently marketed complex mixture drugs. By evaluating their interaction with biologic systems, we can obtain an enhanced understanding of their function to identify biological activities we can exploit. This is the approach behind our research efforts to exploit the sialylation of intravenous immunoglobulin, or IVIg, and our program to develop a recombinant Fc version of IVIg. 25 -------------------------------------------------------------------------------- Table of Contents Our Collaborations In 2003, we entered into a collaboration and license agreement, or the 2003 Sandoz Collaboration, with Sandoz N.V. and Sandoz Inc. to jointly develop, manufacture and commercialize Enoxaparin Sodium Injection in the United States. Sandoz N.V. later assigned its rights in the 2003 Sandoz Collaboration to Sandoz AG, an affiliate of Novartis Pharma AG. In 2006 and 2007, we entered into a series of agreements, including a Stock Purchase Agreement and an Investor Rights Agreement, with Novartis Pharma AG, and a collaboration and license agreement, as amended, or the Second Sandoz Collaboration Agreement, with Sandoz AG. Together, this series of agreements is referred to as the 2006 Sandoz Collaboration. Under the Second Sandoz Collaboration Agreement, we and Sandoz AG expanded the geographic markets for Enoxaparin Sodium Injection covered by the 2003 Sandoz Collaboration to include the European Union. Further, under the Second Sandoz Collaboration Agreement, we and Sandoz AG agreed to exclusively collaborate on the development and commercialization of M356, among other products. In connection with the 2006 Sandoz Collaboration, we sold 4,708,679 shares of common stock to Novartis Pharma AG at a per share price of $15.93 (the closing price of our common stock on the NASDAQ Global Market was $13.05 on the date of purchase) for an aggregate purchase price of $75.0 million, resulting in an equity premium of $13.6 million. As of June 30, 2014, Novartis AG owns approximately 9% of our outstanding common stock. In July 2010, Sandoz began the commercial sale of Enoxaparin Sodium Injection. The profit-share or royalties Sandoz is obligated to pay us under the 2003 Sandoz Collaboration differ depending on whether (i) there are no third-party competitors marketing an interchangeable generic version of Lovenox, or Lovenox-Equivalent Product (as defined in the 2003 Sandoz Collaboration), (ii) a Lovenox-Equivalent Product is being marketed by Sanofi-Aventis, which distributes the brand name Lovenox, or licensed by Sanofi-Aventis to another company to be sold as a generic drug, both known as authorized generics, or (iii) there are one or more third-party competitors which are not Sanofi-Aventis marketing a Lovenox-Equivalent Product. From July 2010 through September 2011, no third-party competitor was marketing a Lovenox-Equivalent Product; therefore, during that period, Sandoz paid us 45% of the contractual profits from the sale of Enoxaparin Sodium Injection. In September 2011, FDA approved the ANDA for the enoxaparin product of Amphastar Pharmaceuticals, Inc. or Amphastar. In October 2011, Sandoz confirmed that an authorized generic Lovenox-Equivalent Product was being marketed by Sanofi-Aventis. In January 2012, following the Court of Appeals for the Federal Circuit granting a stay of the preliminary injunction previously issued against them by the United States District Court, Watson Pharmaceuticals, Inc. (now Actavis, Inc., or Actavis) and Amphastar launched their third-party competitor enoxaparin product. Consequently, in each product year, for net sales of Enoxaparin Sodium Injection up to a pre-defined sales threshold, Sandoz is obligated to pay us a royalty on net sales payable at a 10% rate, and for net sales above the sales threshold, payable at a 12% rate. Certain development and legal expenses may reduce the amount of profit-share, royalty and milestone payments paid to us by Sandoz. Any product liability costs and certain other expenses arising from patent litigation may also reduce the amount of profit-share, royalty and milestone payments paid to us by Sandoz, but only up to 50% of these amounts due to us from Sandoz each quarter. Our contractual share of these development and legal expenses is subject to an annual adjustment at the end of each product year, and ends with the product year ending June 2015. The annual adjustment of $2.2 million for the product year ending June 30, 2014 was decreased by $2.1 million to reflect an adjustment to royalties earned in the product year ended June 30, 2012. The annual adjustment was $3.8 million for the product year ended June 30, 2013. Annual adjustments are recorded as a reduction in product revenue. In December 2011, we and Baxter entered into the Baxter Agreement under which we agreed to collaborate, on a world-wide basis, on the development and commercialization of biosimilars. The Baxter Agreement became effective in February 2012. To accelerate efforts in the biosimilars space and address this growing global market, we significantly increased the headcount and related operating expenses dedicated to our biosimilars program in 2012 and 2013. We expect that any increase in operating expenses in future years will be partially offset in those years by revenues from option fees and milestone payments under the Baxter Agreement, subject to achievement of technical and regulatory criteria. Under the Baxter Agreement, we and Baxter agreed to collaborate, on a world-wide basis, on the development and commercialization of two biosimilars, M923 and M834, which are: † M923, a biosimilar for a branded biologic indicated for certain autoimmune and inflammatory diseases, is our most advanced biosimilar. We are working towards progressing this program through submission of a clinical trial application in the second half of 2014 to support the initiation of a Phase 1 clinical trial in the European Union. † M834, a biosimilar also indicated for certain autoimmune and inflammatory diseases. We are working toward achievement of a pre-defined "minimum development criteria" license payment in 2014. In July 2012, Baxter selected a third product for inclusion in the collaboration, a monoclonal antibody for oncology designated as M511. In December 2013, Baxter terminated its option to license M511 under the Baxter Agreement following an internal portfolio review. Baxter has the right, until February 2015, to select up to three additional biosimilars to be included in the collaboration. We may also consent, at our option, to allow Baxter to name a replacement product for M511, if Baxter requests such replacement. 26 -------------------------------------------------------------------------------- Table of Contents Financial Operations Overview Revenue Our revenue has been primarily derived from our 2003 Sandoz Collaboration and 2006 Sandoz Collaboration. In 2012, we began recognizing revenue under the Baxter Agreement as we deliver product licenses and research and development services under that collaboration. In the near term, our current and future revenues are dependent upon the continued successful commercialization of Enoxaparin Sodium Injection, license fees and milestone payments earned under the Baxter Agreement and potential profit share payments and milestones from our 2006 Sandoz Collaboration. In the longer term, our revenue growth will depend upon the successful clinical development, regulatory approval and launch of new commercial products and the pursuit of external business development opportunities. We expect that any revenue we generate will fluctuate from quarter to quarter as a result of the amount and timing of revenue we earn under our collaborative or strategic relationships. Research and Development Research and development expenses consist of costs incurred in identifying, developing and testing product candidates. These expenses consist primarily of salaries and related expenses for personnel, license fees, consulting fees, nonclinical and clinical trial costs, contract research and manufacturing costs, and the costs of laboratory equipment and facilities. We expense research and development costs as incurred. Due to the variability in the length of time necessary to develop a product, the uncertainties related to the estimated cost of the projects and ultimate ability to obtain governmental approval for commercialization, accurate and meaningful estimates of the ultimate cost to bring our product candidates to market are not available. Product Areas Complex Generics Enoxaparin Sodium Injection-Generic Lovenox® Enoxaparin Sodium Injection, our first product to receive marketing approval under an ANDA, is a generic version of Lovenox. Lovenox is a complex drug consisting of a mixture of polysaccharide chains and is a widely-prescribed low molecular weight heparin, or LMWH, used for the prevention and treatment of deep vein thrombosis, or DVT, and to support the treatment of acute coronary syndromes, or ACS. Lovenox is distributed worldwide by Sanofi-Aventis U.S. LLC, or Sanofi-Aventis, and is also known outside the United States as Clexane® and Klexane®. Under our 2003 Sandoz Collaboration, we work with Sandoz exclusively to develop, manufacture and commercialize Enoxaparin Sodium Injection in the United States. Sandoz is responsible for funding substantially all of the United States-related Enoxaparin Sodium Injection development, regulatory, legal and commercialization costs, other than legal expenses incurred by each party in connection with the patent suits filed against Teva Pharmaceutical Industries Ltd., or Teva, in December 2010 and Amphastar Pharmaceuticals, Inc., or Amphastar, Actavis, Inc., or Actavis, and International Medical Systems, Ltd. (a wholly owned subsidiary of Amphastar) in September 2011. In these cases, Momenta and Sandoz each bear their own legal expenses. Sandoz submitted ANDAs in its name to the FDA for Enoxaparin Sodium Injection in syringe and vial forms, seeking approval to market Enoxaparin Sodium Injection in the United States. The ANDA for the syringe form of Enoxaparin Sodium Injection was approved in July 2010, making it the first ANDA for a generic Lovenox to be approved by FDA. The ANDA for the vial form of Enoxaparin Sodium Injection was approved in December 2011. In September 2011, we and Sandoz sued Amphastar, Actavis and International Medical Systems, Ltd. in the United States District Court for the District of Massachusetts for infringement of two of our patents. Also in September 2011, we filed a request for a temporary restraining order and preliminary injunction to prevent Amphastar, Actavis and International Medical Systems, Ltd. from selling their enoxaparin sodium product in the United States. In October 2011, the District Court granted our motion for a preliminary injunction and entered an order enjoining Amphastar, Actavis and International Medical Systems, Ltd. from advertising, offering for sale or selling their enoxaparin product in the United States until the conclusion of a trial on the merits and requiring us and Sandoz to post a security bond of $100 million in connection with the litigation. Amphastar, Actavis and International Medical Systems, Ltd. appealed the decision to the Court of Appeals for the Federal Circuit, or CAFC, and in January 2012, the CAFC stayed the preliminary injunction. Amphastar has filed motions to increase the amount of the security bond, which we and Sandoz have opposed. In August 2012, the CAFC issued a written opinion vacating the preliminary injunction and remanding the case to the District Court, holding that Amphastar's use of our patented method for processing Enoxaparin Sodium Injection was protected by the "safe harbor" from patent infringement under federal patent law, 35 U.S.C. Section 271(e)(1). In January 2013, Amphastar and Actavis filed a motion for summary judgment in the District Court following the decision from the CAFC and in July 2013, the District Court granted the motion for summary judgment. We have filed a notice of appeal of that decision to the CAFC. In February 2014, Amphastar filed a motion to the CAFC for summary affirmance of the District Court ruling. We opposed this motion and the Court denied the motion in May 2014. The CAFC has set a briefing schedule for the parties. A hearing could be expected in late 2014 or early 2015, and a decision could be expected in the first half of 2015. In December 2010, we sued Teva in the United States District Court for the District of Massachusetts for infringement of two of our patents related to Enoxaparin Sodium Injection. In January 2013, Teva filed a motion for summary judgment in the District Court following the decision from the CAFC in the aforementioned case and in July 2013, the District Court granted the motion for summary judgment. We have filed a notice of appeal of the decision to the CAFC, and in June 2014 filed our opening brief. We anticipate that this case will be heard in parallel with the suit against Amphastar and Actavis. 27 -------------------------------------------------------------------------------- Table of Contents M356-Generic Copaxone® (glatiramer acetate injection) Our second complex generic product candidate, M356, is designed to be a generic version of Copaxone (glatiramer acetate injection), a complex drug consisting of a synthetic mixture of polypeptide chains. Copaxone is indicated for treatment of patients with relapsing-remitting multiple sclerosis, or RRMS, a chronic disease of the central nervous system characterized by inflammation and neurodegeneration. In North America, Copaxone is marketed by Teva Neuroscience, Inc., which is a subsidiary of Teva. Under the Second Sandoz Collaboration Agreement, we and Sandoz AG agreed to exclusively collaborate on the development and commercialization of M356, among other products. Given its structure as a complex mixture of polypeptide chains of various lengths and sequences, there are significant technical challenges involved in thoroughly characterizing Copaxone and in manufacturing an equivalent version. We believe our technology can be applied to characterize glatiramer acetate and to develop a generic product that has the same active ingredient as Copaxone. We are continuing to expand our portfolio of pending patent applications related to glatiramer acetate injection. Under the Second Sandoz Collaboration Agreement, costs, including development costs and the costs of clinical studies, will be borne by the parties in varying proportions depending on the type of expense and the related product. For M356, we are generally responsible for all of the development costs in the United States. For M356 outside of the United States and for Enoxaparin Sodium Injection in the European Union, we share development costs in proportion to our profit sharing interest. All commercialization responsibilities will be borne by Sandoz AG worldwide as they are incurred for all products. Upon commercialization, we will earn a 50% contractual profit share on worldwide net sales of M356. Profits on net sales of M356 will be calculated by deducting from net sales the costs of goods sold and an allowance for selling, general and administrative costs, which is a contractual percentage of net sales. We are reimbursed at cost for any full-time equivalent employee expenses as well as any external costs incurred in the development of products to the extent development costs are born by Sandoz AG. Sandoz AG is responsible for funding all of the legal expenses incurred under the Second Sandoz Collaboration Agreement; however a portion of certain legal expenses, including any patent infringement damages, will be offset against the profit-sharing amounts in proportion to our profit sharing interest. The parties will share profits in varying proportions, depending on the product. In December 2007, Sandoz submitted to the FDA an ANDA seeking approval to market our joint product M356 in the United States containing a Paragraph IV certification. This is a certification by the ANDA applicant that the patent relating to the drug product that is the subject of the ANDA is invalid, unenforceable or will not be infringed. In July 2008, the FDA notified Sandoz that it had accepted the ANDA for review as of December 27, 2007. The Sandoz ANDA for M356 is currently under FDA review. Since 2008, Teva has filed seven Citizen Petitions with FDA requesting that FDA deny the approval of any ANDA filed for generic Copaxone. The FDA has denied five of the Citizen Petitions filed by Teva, Teva withdrew one and one is pending. Teva filed suit against the FDA in the United States District Court for the District of Columbia in May 2014, seeking a court order granting the relief sought in the Citizen Petitions. Momenta and Sandoz intervened in the suit, and following a hearing on a motion for the preliminary injunction, the Court dismissed the case for lack of jurisdiction prior to approval of the ANDA. We anticipate Teva will continue to engage in activities that seek to challenge the approval of our M356 ANDA. Subsequent to FDA's acceptance of the M356 ANDA for review, in August 2008, Teva and related entities and Yeda Research and Development Co., Ltd., filed suit against us and Sandoz in the United States Federal District Court in the Southern District of New York. The suit alleged infringement related to four of the seven Orange Book-listed patents for Copaxone. The Orange Book is a publication of the FDA that identifies drug products approved on the basis of safety and effectiveness by the FDA under the Federal Food, Drug, and Cosmetic Act and includes patents that are purported by the drug application owner to protect each drug. If there is a patent listed for the branded drug in the Orange Book at the time of submission of an ANDA, or at any time before an ANDA is approved, a generic manufacturer's ANDA must include one of four types of patent certification with respect to each listed patent. See "Part I, Item 1. Business - Regulatory and Legal Matters" in our Annual Report on Form 10-K for the year ended December 31, 2013, filed with the Securities and Exchange Commission on February 28, 2014. We and Sandoz asserted various defenses and filed counterclaims for declaratory judgments to have all seven of the Orange Book-listed patents, as well as two additional patents, in the same patent family adjudicated in that lawsuit. Another company, Mylan Inc., or Mylan, also has an ANDA for generic Copaxone under FDA review. In October 2009, Teva sued Mylan for patent infringement related to the Orange Book-listed patents for Copaxone, and in October 2010, the court consolidated the Mylan case with the case against us and Sandoz. A trial on the issue of inequitable conduct occurred in July 2011 and the trial on the remaining issues occurred in September 2011 in the consolidated case. In June 2012, the Court issued its opinion and found all of the claims in the patents to be valid, enforceable and infringed. In July 2012, the Court issued a final order and permanent injunction prohibiting Sandoz and Mylan from infringing all of the patents in the suit. The Orange Book-listed patents and one non-Orange Book-listed patent expire on May 24, 2014 and one non-Orange Book-listed patent expires on September 1, 2015. In addition, the permanent injunction further restricts the FDA, pursuant to 35 U.S.C. Section 271(e)(4)(A), from making the effective date of any final approval of the Sandoz ANDA or Mylan ANDA prior to the expiration of the Orange Book-listed patents. In July 2012, we appealed the decision to the CAFC, and in July 2013, the CAFC issued a written opinion invalidating several of the patents, including the one patent set to expire in 2015. The other patents expired on May 24, 2014. The CAFC remanded the case to the District Court to modify the injunction in light of the CAFC decision. In September 2013, Teva filed a petition for rehearing of the CAFC decision, and in October 2013 the CAFC denied the petition. Teva filed a petition for review by the Supreme Court of the United States in January 2014 and in March 2014 the Supreme Court granted certiorari in the case in order to review the appropriate standard for deference to district court findings in claim construction. Briefing is expected to occur over the 28 -------------------------------------------------------------------------------- Table of Contents summer of 2014, and oral argument is scheduled for October 2014. The Supreme Court could render a decision by the end of the year or during the first half of 2015. While we believe the Supreme Court should affirm the CAFC decision, it could rule otherwise and, among other things, remand the case to a lower court for additional findings to determine the validity of the relevant patent claims that had previously been determined to be invalid. During the pendency of this litigation any launch of the generic Copaxone product would be a launch at risk of infringement. On April 18, 2014, the Supreme Court denied Teva's request for a stay of the CAFC ruling. Teva had sought to prohibit the introduction of an FDA-approved generic Copaxone until the Supreme Court resolution of the case. Biosimilars We are also applying our complex systems analysis platform to the development of biosimilar versions of marketed therapeutic proteins, with a goal of obtaining FDA designation as interchangeable. In March 2010, an abbreviated regulatory process was codified in Section 351(k) of the Patient Protection and Affordable Care Act of 2010. This new pathway opened the market for biosimilar and interchangeable versions of a broad array of biologic therapeutics, including antibodies, cytokines, fusion proteins, hormones and blood factors. By 2015, sales of biosimilars are expected to reach between $1.9 billion to $2.6 billion. In February 2012, FDA released three documents containing their preliminary guidelines for applications under the Section 351(k) pathway. These guidelines state that FDA will use a step-wise review that considers the totality-of-the-evidence in determining extent of the clinical development program. This approach puts a substantial emphasis on structural and functional characterization data in evaluating biosimilar products for approval. We believe that our strategy for the development of biosimilars aligns well with the framework that the FDA has outlined in the draft guidance documents. Given the inadequacies of standard technology available at the time of original review and approval, many of these therapeutic proteins have not been thoroughly characterized. Most of these products are complex glycoprotein mixtures, consisting of proteins that contain branched sugars, various cross linkages, and backbone modifications that vary from molecule to molecule. These variations can impart specific biological properties to the therapeutic protein. We believe our approach to thoroughly understand these variations and engineer a highly similar biologic has the potential to drive regulatory advantages such as a reduction in the level of clinical data required for approval, or the achievement of a designation of interchangeability, which would allow our products to be directly substituted for brand products at the pharmacy. In December 2011, we and Baxter International, Inc., Baxter Healthcare Corporation and Baxter Healthcare SA, collectively, Baxter, entered into a global collaboration and license agreement, or the Baxter Agreement, to develop and commercialize biosimilars. The Baxter Agreement became effective in February 2012. Baxter is an established healthcare company with global product development, manufacturing and commercial capabilities. Under the Baxter Agreement, we and Baxter agreed to collaborate, on a world-wide basis, on the development and commercialization of two biosimilars, M923 and M834. For our lead biosimilar M923, we are expecting to achieve two milestones in the second half of 2014 for achievement of technical development criteria and the submission of a clinical trial application to support the initiation of a Phase 1 clinical trial in the European Union. Upon achievement of the two M923 milestones we would earn $12.0 million. For our M834 biosimilar, we are expecting to achieve pre-defined "minimum development" criteria in 2014 that would generate a $7.0 million milestone payment for M834. In July 2012, Baxter selected a third product for inclusion in the collaboration, a monoclonal antibody for oncology designated as M511. In December 2013, Baxter terminated its option to license M511 under the Baxter Agreement following an internal portfolio review. We continue to collaborate with Baxter on M923 and M834 and evaluate additional products for development. Baxter has the right, until February 2015, to select up to three additional biosimilars to be included in the collaboration. We may also consent, at our option, to allow Baxter to name a replacement product for M511, if Baxter requests such replacement. We have made the decision to discontinue development efforts on our M511 program. We have reallocated a portion of the headcount and cash resources from the M511 program to a set of earlier stage biosimilar programs that will allow us to broaden our biosimilars technology base. Most protein drugs have been approved by the FDA under the Biologics License Application, or BLA, regulatory pathway. The BLA pathway was created to review and approve applications for biologic drugs that are typically produced from living systems. Until 2010, there was no abbreviated regulatory pathway for the approval of interchangeable or biosimilar versions of BLA-approved products in the United States; however, there have been guidelines for biosimilar products in the European Union for several years. In March 2010, with the enactment of the Biologics Price Competition and Innovation Act of 2009, or BPCI, an abbreviated pathway for the approval of biosimilars and interchangeable biologics was created. The new abbreviated regulatory pathway established legal authority for the FDA to review and approve biosimilar biologics, including the possible designation of a biosimilar as "interchangeable," based on its similarity to an existing brand product. Under the BPCI, an application for a biosimilar product cannot be approved by the FDA until 12 years after the original brand product was approved under a BLA. There are many biologics at this time for which this 12-year period has expired or is nearing expiration. We believe that scientific progress in the analysis and characterization of complex mixture drugs is likely to play a significant role in FDA's approval of biosimilar (including interchangeable) biologics in the years to come. 29 -------------------------------------------------------------------------------- Table of Contents In 2012, the FDA implemented its proposed biosimilar user fee program which includes a fee-based meeting process for consultation between applicants and the division of FDA responsible for reviewing biosimilar and interchangeable biologics applications under the new approval pathway. It contemplates well-defined meetings where the applicant can propose and submit analytic, physicochemical and biologic characterization data along with a proposed development plan. The proposed development plan may have a reduced scope of clinical development based on the nature and extent of the characterization data. There are defined time periods for meetings and written advice. In February 2012, the FDA published draft guidance documents for the development and registration of biosimilars and interchangeable biologics. The draft guidance documents indicate that the FDA will consider the totality-of-the-evidence developed by an applicant in determining the nature and extent of the nonclinical and clinical requirements for a biosimilar or interchangeable biologic product. The new law is complex and is in the initial stages of being interpreted and implemented by the FDA. As a result, we expect that its ultimate impact, implementation and meaning will be subject to uncertainty for years to come. Novel Drugs Overview Our novel drugs program uses the established characterization and process engineering capabilities from our complex generics and biosimilars programs-with a focus on polysaccharides and therapeutic proteins. Necuparanib Necuparanib is a novel oncology drug candidate engineered to have a broad range of effects on tumor cells. The use of heparins to treat venous thrombosis in cancer patients has generated numerous reports of antitumor activity; however, the dose of these products has been limited by their anticoagulant activity. Necuparanib, which is derived from unfractionated heparin, has been engineered to have significantly reduced anticoagulant activity while preserving the relevant antitumor properties of heparin. In June 2014, necuparanib received Orphan Drug Designation from the U.S. FDA for the treatment of pancreatic cancer. The FDA's Orphan Drug Designation program provides orphan status to drugs and biologics intended to treat, diagnose or prevent rare diseases/disorders, defined as affecting fewer than 200,000 people in the U.S. This designation provides certain incentives, including federal grants, tax credits, and waiver of Prescription Drug User Fee Act, or PDUFA, filing fees. A product with orphan drug status also has the potential to receive a seven-year orphan drug exclusivity once approved. Researchers have conducted a series of nonclinical experiments using different pancreatic cancer models to test the hypothesis that necuparanib can modulate tumor progression and metastasis and enhance the efficacy of gemcitabine, a first-line standard of care chemotherapy treatment for pancreatic cancer. The nonclinical results showed potent binding of necuparanib to multiple growth factors, adhesion molecules, and chemokines to inhibit tumor progression, metastasis, and angiogenesis. Additionally, the nonclinical data showed that necuparanib in combination with gemcitabine prolonged survival and substantially lowered the incidence of metastasis, suggesting that necuparanib has the potential to complement conventional chemotherapy. We believe that necuparanib's mechanism of action, by binding to multiple heparin binding factors involved in tumor growth and metastasis, creates the potential for necuparanib to contribute to efficacy in a broad range of cancers. In 2012, we initiated a Phase 1/2 proof-of-concept clinical study in patients with advanced metastatic pancreatic cancer. The trial consists of two parts and will evaluate the safety, potential efficacy, pharmacokinetics and pharmacodynamics of necuparanib in combination with nab-paclitaxel and gemcitabine. Part A is an open-label, multiple ascending dose escalation study. We are enrolling our seventh cohort in Part A of the trial and we expect to report clinical data from Part A in the second half of 2014. Pending successful completion of the Part A dose escalation component of the Phase 1/2 trial, we plan to initiate Part B of the study, which will be a randomized, controlled, proof of concept study to evaluate the antitumor activity of necuparanib in combination with nab-paclitaxel and gemcitabine, compared with nab-paclitaxel and gemcitabine alone. Discovery Research Program The majority of human diseases result from the interaction of a complex web of biologic systems. We believe our core analytical tools and approach may enable new insights into the complex biology underlying diseases. This enhanced understanding should help us establish the relative role of different biological targets and related cell-to-cell signaling pathways in contributing to the disease process. Our goal is to leverage this knowledge to identify novel targets, novel combinations of therapies, and possibly exploit the multi-targeting nature of complex mixture molecules to develop novel products which may positively modulate multiple pathways in a disease. IVIg is a mixture of human immunoglobulin G, or IgG, antibodies. IVIg is approved in several inflammatory disease indications including idiopathic thrombocytopenic purpura, Kawasaki disease, chronic inflammatory demyelinating polyneuropathy, and multifocal motor neuropathy. Currently, IVIg is manufactured from large pools of human plasma, resulting in a high cost supply chain with limited supply. IVIg is also approved to treat primary immunodeficiency for diseases such as AIDS. While not a focus of our research, this indication further limits available supply of IVIg. Increasing demand for IVIg products already exceeds available supply worldwide thus limiting broader clinical applications. Our research program seeks to better understand the complex biology underlying the anti-inflammatory effects of IVIg and use this understanding to develop enhanced versions of IVIg or alternative recombinant molecules with improved efficacy. In 2013, we advanced our understanding of the biologic impact of sialylation, a method to add sialic acid to proteins, on the activity of IVIg as well as the behavior of 30 -------------------------------------------------------------------------------- Table of Contents recombinant molecules engineered from the Fc region of IgG. Through our testing in various models of inflammation, we have gained a deeper understanding of the basic biologic pathways by which these molecules mediate their therapeutic effects. We are turning our efforts to developing recombinant product candidates to take advantage of this understanding. This approach will give us an opportunity to more carefully design a product candidate to target the specific biologic effects we have observed as well as give us the opportunity to take advantage of a recombinantly produced product. General and Administrative General and administrative expenses consist primarily of salaries and other related costs for personnel in executive, finance, legal, accounting, investor relations, information technology, business development and human resource functions. Other costs include royalty and license fees, facility and insurance costs not otherwise included in research and development expenses and professional fees for legal and accounting services and other general expenses. Results of Operations Three Months Ended June 30, 2014 and 2013 Collaboration Revenue Collaboration revenue includes product revenue and research and development revenue earned under our collaborative arrangements. Product revenue consists of profit share, royalties and commercial milestones earned from Sandoz on sales of Enoxaparin Sodium Injection following its commercial launch in July 2010. A portion of Enoxaparin Sodium Injection development expenses and certain legal expenses, which in the aggregate have exceeded a specified amount, are offset against profit-sharing amounts, royalties and milestone payments. The contractual share of these development and other expenses is subject to an annual claw-back adjustment at the end of each product year, and ends with the product year ending June 2015. During the three months ended June 30, 2014, we earned $5.7 million in product revenue, which includes $5.8 million in royalties on Sandoz's reported net sales of Enoxaparin Sodium Injection of $54.2 million, offset by $2.2 million of our contractual share of development and other expenses for the product year ending June 30, 2014, and increased by $2.1 million to reflect an adjustment to royalties earned in the product year ended June 30, 2012. During the three months ended June 30, 2013, we earned $1.6 million in product revenue, which includes $5.4 million in royalties on Sandoz's reported net sales of Enoxaparin Sodium Injection of $57 million less our contractual share of development and other expenses for the product year ending June 30, 2013 of $3.8 million. Research and development revenue generally consists of amounts earned by us: † under the 2003 Sandoz Collaboration and 2006 Sandoz Collaboration for reimbursement of research and development services and reimbursement of development costs; † under the 2006 Sandoz Collaboration for amortization of the equity premium; † under the Baxter Agreement for reimbursement of research and development services and reimbursement of development costs; and † under the Baxter Agreement for amortization of the $33 million upfront payment. Research and development revenue was $5.3 million and $2.7 million for the three months ended June 30, 2014 and 2013, respectively. The increase in research and development revenue of $2.6 million, or 96%, from the 2013 period to the 2014 period is due to reimbursable M923 research and development services and expenses incurred in connection with the Baxter Agreement. We expect collaborative research and development revenue earned by us related to expense reimbursement from Baxter and Sandoz will fluctuate from quarter to quarter in 2014 depending on our research and development activities. We expect to continue to amortize the $33.0 million upfront payment from Baxter as we deliver research and development services under the Baxter Agreement, with 2014 quarterly amortization of approximately $0.8 million related to the two licensed biosimilars. There are a number of factors that make it difficult for us to predict the magnitude of future Enoxaparin Sodium Injection product revenue, including the impact of generic competition on the Sandoz market share; the pricing of products that compete with Enoxaparin Sodium Injection and other actions taken by our competitors; the inventory levels of Enoxaparin Sodium Injection maintained by wholesalers, distributors and other customers; the frequency of re-orders by existing customers and the change in estimates for product reserves. Accordingly, our Enoxaparin Sodium Injection product revenue in previous quarters may not be indicative of future Enoxaparin Sodium Injection product revenue. The change in Sandoz contractual payment terms, along with additional generic competition, has caused, and we expect will continue to cause, our future product revenue from Enoxaparin Sodium Injection to be significantly reduced compared to revenues earned during the product's exclusivity period. 31 -------------------------------------------------------------------------------- Table of Contents Research and Development Expense Research and development expense for the three months ended June 30, 2014 was $26.1 million, compared with $22.0 million for the three months ended June 30, 2013. The increase of $4.1 million, or 19%, from the 2013 period to the 2014 period resulted from increases of: $2.5 million in process development and third-party contract research costs related to our biosimilars and novel drugs programs; $1.2 million in facility related costs due to additional subleased laboratory and office space; and $0.8 million in personnel and related costs associated with our headcount growth to support our programs. These increases were offset by a $0.5 million decrease in biosimilars consulting fees. The lengthy process of securing FDA approval for new drugs requires the expenditure of substantial resources. Any failure by us to obtain, or any delay in obtaining, regulatory approvals would materially adversely affect our product development efforts and our business overall. Accordingly, we cannot currently estimate with any degree of certainty the amount of time or money that we will be required to expend in the future on our product candidates prior to their regulatory approval, if such approval is ever granted. As a result of these uncertainties surrounding the timing and outcome of any approvals, we are currently unable to estimate when, if ever, our product candidates will generate revenues and cash flows. The following table sets forth the primary components of our research and development external expenditures, including amortization of an intangible asset, for each of our principal development programs for the three months ended June 30, 2014 and 2013. The figures in the table include project expenditures incurred by us and reimbursed by our collaborators, but exclude project expenditures incurred by our collaborators. Although we track and accumulate personnel effort by percentage of time spent on our programs, a significant portion of our internal research and development costs, including salaries and benefits, share-based compensation, facilities, depreciation and laboratory supplies are not directly charged to programs. Therefore, our methods for accounting for internal research and development costs preclude us from reporting these costs on a project-by-project basis. Certain prior period amounts have been reclassified to conform to the current period presentation. Research andDevelopment Expense (in thousands) Three Months Three Months Ended Ended Project Inception to Development Programs (Status) June 30, 2014 June 30, 2013 June 30, 2014 M356 (ANDA Filed) $ 233 $ 247 $ 47,616 Necuparanib (Phase 1/2) 1,359 768 20,788 Biosimilars (Development) 4,326 3,723 46,080 Discovery programs 1,252 381 Research and development internal costs 18,919 16,875 Total research and development expense $ 26,089 $ 21,994 M356 external spend remained consistent from the 2013 period to the 2014 period due to timing of contract manufacturing and third-party research activities. The increase of $0.6 million in necuparanib external expenditures from the 2013 period to the 2014 period was due to additional work necessary for the completion of the Part A dose escalation component of the Phase 1/2 trial. The increase of $0.6 million in biosimilars external expenditures from the 2013 period to the 2014 period was due to process development and third-party contract research costs to advance our biosimilars in development. The increase of $0.9 million in discovery program external expenditures from the 2013 period to the 2014 period was primarily due to research collaborations we entered into to support our novel drugs program. Research and development internal costs consist of compensation and other expense for research and development personnel, supplies and materials, facility costs and depreciation. The increase of $2.0 million from the 2013 period to the 2014 period was due to additional research and development headcount and related costs in support of our development programs. General and Administrative General and administrative expense for the three months ended June 30, 2014 was $11.2 million, compared to $11.5 million for the three months ended June 30, 2013. General and administrative expense decreased by $0.3 million, or 3%, from the 2013 period to the 2014 period primarily due to a decrease in professional legal fees. Interest Income Interest income on available-for-sale marketable securities was $0.1 million and $0.2 million for the three months ended June 30, 2014 and 2013, respectively. The decrease of $0.1 million from the 2013 period to the 2014 period was due to lower average cash and marketable securities investment balances. Other Income Other income was $0.1 million for each of the three months ended June 30, 2014 and 2013 and represents income recognition related to a job creation tax awarded to us in the fourth quarter of 2012. 32 -------------------------------------------------------------------------------- Table of Contents Six Months Ended June 30, 2014 and 2013 Collaboration Revenue During the six months ended June 30, 2014, we earned $10.5 million in product revenue, which includes $10.6 million in royalties on Sandoz's reported net sales of Enoxaparin Sodium Injection of $102 million, offset by $2.2 million of our contractual share of development and other expenses for the product year ending June 30, 2014, and increased by $2.1 million to reflect an adjustment to royalties earned in the product year ended June 30, 2012. During the six months ended June 30, 2013, we earned $7.0 million in product revenue, which includes $10.8 million in royalties on Sandoz's reported net sales of Enoxaparin Sodium Injection of $104 million less our contractual share of development and other expenses for the product year ending June 30, 2013 of $3.8 million. Research and development revenue generally consists of amounts earned by us: † under the 2003 Sandoz Collaboration and 2006 Sandoz Collaboration for reimbursement of research and development services and reimbursement of development costs; † under the 2006 Sandoz Collaboration for amortization of the equity premium; † under the Baxter Agreement for reimbursement of research and development services and reimbursement of development costs; and † under the Baxter Agreement for amortization of the $33 million upfront payment. Research and development revenue was $11.2 million and $4.9 million for the six months ended June 30, 2014 and 2013, respectively. The increase in research and development revenue of $6.3 million, or 129%, from the 2013 period to the 2014 period is due to reimbursable M923 research and development services and expenses incurred in connection with the Baxter Agreement. There are a number of factors that make it difficult for us to predict the magnitude of future Enoxaparin Sodium Injection product revenue, including the impact of generic competition on the Sandoz market share; the pricing of products that compete with Enoxaparin Sodium Injection and other actions taken by our competitors; the inventory levels of Enoxaparin Sodium Injection maintained by wholesalers, distributors and other customers; the frequency of re-orders by existing customers and the change in estimates for product reserves. Accordingly, our Enoxaparin Sodium Injection product revenue in previous quarters may not be indicative of future Enoxaparin Sodium Injection product revenue. The change in Sandoz contractual payment terms, along with additional generic competition, has caused, and we expect will continue to cause, our future product revenue from Enoxaparin Sodium Injection to be significantly reduced compared to revenues earned during the product's exclusivity period. Research and Development Expense Research and development expense for the six months ended June 30, 2014 was $52.8 million, compared with $44.3 million for the six months ended June 30, 2013. The increase of $8.5 million, or 19%, from the 2013 period to the 2014 period resulted from increases of: $4.8 million in process development and third-party contract research costs primarily related to our biosimilars and novel drugs programs; $2.1 million in facility related costs due to additional subleased laboratory and office space; $1.4 million in personnel and related costs associated with our headcount growth to support our programs; $0.7 million in laboratory supplies to support our programs; and $0.6 million in share-based compensation due to additional headcount and the annual merit grant of plan-based awards. These increases were offset by a $1.2 million decrease in biosimilars consulting fees. The lengthy process of securing FDA approval for new drugs requires the expenditure of substantial resources. Any failure by us to obtain, or any delay in obtaining, regulatory approvals would materially adversely affect our product development efforts and our business overall. Accordingly, we cannot currently estimate with any degree of certainty the amount of time or money that we will be required to expend in the future on our product candidates prior to their regulatory approval, if such approval is ever granted. As a result of these uncertainties surrounding the timing and outcome of any approvals, we are currently unable to estimate when, if ever, our product candidates will generate revenues and cash flows. 33 -------------------------------------------------------------------------------- Table of Contents The following table sets forth the primary components of our research and development external expenditures, including amortization of an intangible asset, for each of our principal development programs for the six months ended June 30, 2014 and 2013. The figures in the table include project expenditures incurred by us and reimbursed by our collaborators, but exclude project expenditures incurred by our collaborators. Although we track and accumulate personnel effort by percentage of time spent on our programs, a significant portion of our internal research and development costs, including salaries and benefits, share-based compensation, facilities, depreciation and laboratory supplies are not directly charged to programs. Therefore, our methods for accounting for internal research and development costs preclude us from reporting these costs on a project-by-project basis. Certain prior period amounts have been reclassified to conform to the current period presentation. Research andDevelopment Expense (in thousands) Six Months Six Months Ended Ended Project Inception to Development Programs (Status) June 30, 2014 June 30, 2013 June 30, 2014 M356 (ANDA Filed) $ 529 $ 876 $ 47,616 Necuparanib (Phase 1/2) 2,453 1,803 20,788 Biosimilars (Development) 10,140 7,257 46,080 Discovery programs 1,497 773 Research and development internal costs 38,162 33,617 Total research and development expense $ 52,781 $ 44,326 The decrease of $0.3 million in M356 external expenditures from the 2013 period to the 2014 period was primarily due to reduced contract manufacturing and third-party research costs. The increase of $0.6 million in necuparanib external expenditures from the 2013 period to the 2014 period was due to additional work necessary for the completion of the Part A dose escalation component of the Phase 1/2 trial. The increase of $2.9 million in biosimilars external expenditures from the 2013 period to the 2014 period was due to process development and third-party contract research costs to advance our biosimilars in development. The increase of $0.7 million in discovery program external expenditures from the 2013 period to the 2014 period was primarily due to research collaborations we entered into to support our novel drugs program. Research and development internal costs consist of compensation and other expense for research and development personnel, supplies and materials, facility costs and depreciation. The increase of $4.5 million from the 2013 period to the 2014 period was due to additional research and development headcount and related costs in support of our development programs. General and Administrative General and administrative expense for the six months ended June 30, 2014 was $22.9 million, compared to $21.2 million for the six months ended June 30, 2013. General and administrative expense increased by $1.7 million, or 8%, from the 2013 period to the 2014 period due to increases of: $0.9 million in personnel and related costs associated with our headcount growth; $0.4 million in allocated facility related costs due to additional subleased laboratory and office space; and $0.4 million in share-based compensation expense principally associated with increased headcount. Interest Income Interest income on available-for-sale marketable securities was $0.3 million and $0.5 million for the six months ended June 30, 2014 and 2013, respectively. The decrease of $0.2 million from the 2013 period to the 2014 period was due to lower average cash and marketable securities investment balances. Other Income Other income was $0.1 million for each of the six months ended June 30, 2014 and 2013 and represents income recognition related to a job creation tax awarded to us in the fourth quarter of 2012. Liquidity and Capital Resources We have financed our operations since inception primarily through the sale of equity securities and payments from our 2003 Sandoz Collaboration and 2006 Sandoz Collaboration, including profit share/royalty payments related to sales of Enoxaparin Sodium Injection. Since our inception, we have received $406 million through private and public issuance of equity securities. As of June 30, 2014, we had received a cumulative total of $586 million from our 2003 Sandoz Collaboration and 2006 Sandoz Collaboration, a $33.0 million upfront payment and $17 million in reimbursement of research and development services and external costs under the Baxter Agreement. From July 2010 through September 2011, our Enoxaparin Sodium Injection product was the sole generic Lovenox, and Sandoz paid us a 45% profit share of contractual net sales. During this time, we recorded $340 million in Enoxaparin Sodium Injection product revenues, making us profitable in those two fiscal years. Under the terms of our agreement with Sandoz, the October 2011 launch of an authorized generic Lovenox triggered a change in the basis of our product revenue from profit share to a hybrid profit share / royalty on Sandoz's net sales of Enoxaparin Sodium Injection. In January 2012, the launch of a third-party competitor's generic Lovenox product changed the basis of our product revenue from hybrid profit share / royalty to straight royalty on Sandoz's net sales of Enoxaparin Sodium Injection. This competition and the resulting contractual changes significantly reduced product revenues and for 2013, we recorded a net loss. We have been incurring operating losses and we expect to incur annual operating losses over the next several years as we advance our drug development portfolio. We expect that our return to profitability, if at all, will most likely come from the commercialization of the products in our drug development portfolio. Our generic Copaxone application is pending FDA approval and is subject to patent litigation. The multiple sclerosis market is evolving rapidly with the introduction of Teva's three-times a week formulation of Copaxone, which received FDA marketing approval in January 2014, and the success of oral therapies. This competition may reduce potential sales of our generic Copaxone product. Due to the uncertain outcome of pending patent litigation, Sandoz is currently evaluating the potential to launch prior to the Supreme Court's decision following FDA approval of our generic Copaxone. Even if Sandoz chooses to launch our generic Copaxone product upon approval by FDA, until the patent litigation is 34 -------------------------------------------------------------------------------- Table of Contents resolved we expect to segregate any M356 product revenue for payment of potential damages. At a minimum, if we and Sandoz become liable for damages due to an at-risk launch we are required to pay our contractual portion of the damage amount to Sandoz by deductions of up to 50% of our post-decision M356 revenue, on a quarterly basis, until we have paid our share of the damages. In order to preserve our ability to invest in our development pipeline during this time of financial uncertainty, in May 2014 we established an At-the-Market, or ATM, financing facility, pursuant to which we may sell up to $75 million of our common stock. We expect to finance our planned operating requirements principally through our current cash, cash equivalents and marketable securities and may utilize the ATM vehicle to raise capital. We believe that these funds will be sufficient to meet our operating requirements through at least the end of 2015. However, our forecast of the period of time through which our financial resources will be adequate to support our operations is a forward-looking statement that involves risks and uncertainties, and other important factors, and actual results could vary materially from our expectations. We may, from time to time, seek additional funding through a combination of new collaborative agreements, strategic alliances and additional equity and debt financings or from other sources. At June 30, 2014, we had $202.3 million in cash, cash equivalents and marketable securities and $8.6 million in accounts receivable. In addition, we also held $20.7 million in restricted cash, of which $17.5 million serves as collateral for a security bond posted in the litigation against Actavis, Amphastar and International Medical Systems, Ltd. Our funds at June 30, 2014 were primarily invested in senior debt of government-sponsored enterprises, commercial paper, asset-backed securities, corporate debt securities and United States money market funds, directly or through managed funds, with remaining maturities of 24 months or less. Our cash is deposited in and invested through highly rated financial institutions in North America. The composition and mix of cash, cash equivalents and marketable securities may change frequently as a result of our evaluation of conditions in the financial markets, the maturity of specific investments, and our near term liquidity needs. We do not believe that our cash equivalents and marketable securities were subject to significant market risk at June 30, 2014. During the six months ended June 30, 2014 and 2013, our operating activities used cash of $39.2 million and $36.3 million, respectively. The cash provided by or used for operating activities generally approximates our net loss adjusted for non-cash items and changes in operating assets and liabilities. For the six months ended June 30, 2014, our net loss adjusted for non-cash items was $40.8 million. For the six months ended June 30, 2014, non-cash items include share-based compensation of $7.1 million, depreciation and amortization of our property, equipment and intangible assets of $4.2 million and amortization of purchased premiums on our marketable securities of $1.4 million. The net change in our operating assets and liabilities provided cash of $1.6 million and resulted from: decreases in accounts receivable of $4.5 million and unbilled revenue of $0.9 million due to lower reimbursable M923 FTEs and expenses incurred in connection with the Baxter Agreement; a decrease in prepaid expenses and other current assets of $0.9 million, primarily due to lower interest receivable on lower average cash and marketable securities investment balances; a decrease in accounts payable of $2.3 million due to the payment of third-party contract expenses incurred for our biosimilars and M356 programs; a decrease in accrued expenses of $0.2 million consisting of a decrease in accrued compensation, as we paid 2013 employee bonuses in early 2014, and timing of M834 third-party contract expenses; a decrease in deferred revenue of $1.9 million, primarily due to the amortization of revenue related to the $33.0 million upfront payment made to us by Baxter in 2012 under our collaboration; and a decrease in other long-term liabilities of $0.2 million primarily due to the annual amortization of a job creation tax award. For the six months ended June 30, 2013, our net loss adjusted for non-cash items was $40.7 million. For the six months ended June 30, 2013, non-cash items include share-based compensation of $6.2 million, depreciation and amortization of our property, equipment and intangible assets of $4.1 million and amortization of purchased premiums on our marketable securities of $1.7 million. In addition, the net change in our operating assets and liabilities provided cash of $4.4 million and resulted from: a decrease in accounts receivable of $7.7 million due to lower Enoxaparin Sodium Injection prices in response to aggressive competitor pricing reductions; an increase in unbilled revenue of $0.7 million, primarily due to reimbursable activities for our biosimilars program; a decrease in prepaid expenses and other current assets of $0.6 million, primarily due to the receipt of a $1.1 million job creation tax award in the first quarter offset by advance payments made to contract research organizations for our necuparanib Phase 1/2 clinical study; a decrease in accounts payable of $0.8 million primarily due to timing of legal fees and process development activities for our biosimilars program; a decrease in deferred revenue of $2.0 million, primarily due to the amortization of revenue related to the $33.0 million upfront payment made to us by Baxter in 2012 under our collaboration; a decrease in other current liabilities of $0.2 million as we straight-line rental expense related to one of our facilities; and a decrease in other long-term liabilities of $0.1 million as we recognize other income related to a job creation tax award. During the six months ended June 30, 2014, our investing activities provided cash of $70.4 million. In the six months ended June 30, 2014, we received $139.4 million from maturities of marketable securities and we used $64.3 million of cash to purchase marketable securities. Additionally, during the six months ended June 30, 2014, we used $4.7 million of cash to purchase laboratory equipment and leasehold improvements. During the six months ended June 30, 2013, our investing activities provided cash of $8.5 million. In the six months ended June 30, 2013, we received $160.7 million from maturities of marketable securities and $3.8 million from sales of marketable securities. Additionally, during the first six months of 2013, we used $152.4 million of cash to purchase marketable securities and $3.6 million for the purchase of laboratory equipment and leasehold improvements. Net cash provided by financing activities was $1.9 million and $1.3 million for the six months ended June 30, 2014 and 2013, respectively, in the form of net proceeds from stock option exercises and purchases of shares of our common stock through our employee stock purchase plan. 35 -------------------------------------------------------------------------------- Table of Contents Contractual Obligations Our major outstanding contractual obligations relate to license maintenance obligations including royalties payable to third parties and operating lease obligations. The following table summarizes our contractual obligations and commercial commitments after giving effect to the sublease amendment entered into in July of 2014 (in thousands): July 1, 2014 2015 2017 to through through After Contractual Obligations Total December 31, 2014 2016 2018 2018 License maintenance obligations $ 330 $ - $ 165 $ 165 $ * License royalty obligations 300 60 120 120 * Operating lease obligations 32,429 5,531 20,366 6,532 - Total contractual obligations $ 33,059 $ 5,591 $ 20,651 $ 6,817 $ - -------------------------------------------------------------------------------- *After 2018, the annual obligations, which extend through the life of the patents, are approximately $0.1 million per year. Critical Accounting Policies and Estimates Our discussion and analysis of our financial condition and results of operations are based on our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of revenues and expenses during the reporting periods. Additionally, we are required to make estimates and judgments that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities as of the balance sheet dates. On an on-going basis, we evaluate our estimates and judgments, including those related to revenue recognition, accrued expenses and share-based payments. We base our estimates on historical experience, known trends and events and various other factors that are believed 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. Please read Part II, Item 7 "Management's Discussion and Analysis of Financial Condition and Results of Operations" of our Annual Report on Form 10-K for the year ended December 31, 2013 for a discussion of our critical accounting policies and estimates. |