XNAS:AMAG AMAG Pharmaceuticals Inc Quarterly Report 10-Q Filing - 3/31/2012

Effective Date 3/31/2012

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Table of Contents

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 


 

FORM 10-Q

 

(Mark One)

 

x

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended March 31, 2012

 

OR

 

o

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from              to              

 

Commission file number 001-10865

 

AMAG Pharmaceuticals, Inc.

(Exact Name of Registrant as Specified in Its Charter)

 

Delaware

 

04-2742593

(State or Other Jurisdiction of

 

(I.R.S. Employer

Incorporation or Organization)

 

Identification No.)

 

100 Hayden Avenue

 

 

Lexington, Massachusetts

 

02421

(Address of Principal Executive Offices)

 

(Zip Code)

 

(617) 498-3300

(Registrant’s Telephone Number, Including Area Code)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes x  No o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes x  No o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “accelerated filer,” “large accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer o

 

Accelerated filer x

 

 

 

Non-accelerated filer o

 

Smaller Reporting Company o

(Do not check if a smaller reporting company)

 

 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).  Yes o  No x

 

As of April 27, 2012, there were 21,358,395 shares of the registrant’s common stock, par value $0.01 per share, outstanding.

 

 

 



Table of Contents

 

AMAG PHARMACEUTICALS, INC.
FORM 10-Q

 

TABLE OF CONTENTS

 

PART I.

FINANCIAL INFORMATION (Unaudited)

 

Item 1.

Financial Statements

 

 

 

Condensed Consolidated Balance Sheets as of March 31, 2012 and December 31, 2011

4

 

 

Condensed Consolidated Statements of Operations for the three months ended March 31, 2012 and 2011

5

 

 

Condensed Consolidated Statements of Comprehensive Loss for the three months ended March 31, 2012 and 2011

6

 

 

Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2012 and 2011

7

 

 

Notes to Condensed Consolidated Financial Statements

8

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

25

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

43

Item 4.

Controls and Procedures

44

 

 

 

PART II.

OTHER INFORMATION

 

Item 1.

Legal Proceedings

44

Item 1A.

Risk Factors

45

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

72

Item 6.

Exhibits

73

 

 

SIGNATURES

 

 

 

CERTIFICATIONS

 

 

 

2



Table of Contents

 

PART I.                 FINANCIAL INFORMATION

 

Item 1.  Financial Statements

 

3



Table of Contents

 

AMAG PHARMACEUTICALS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS

(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

(Unaudited)

 

 

 

March 31, 2012

 

December 31, 2011

 

ASSETS

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

37,619

 

$

63,474

 

Short-term investments

 

162,833

 

148,703

 

Accounts receivable, net

 

6,278

 

5,932

 

Inventories

 

14,255

 

15,206

 

Receivable from collaboration

 

370

 

428

 

Prepaid and other current assets

 

5,740

 

6,288

 

Total current assets

 

227,095

 

240,031

 

Property, plant and equipment, net

 

8,702

 

9,206

 

Long-term investments

 

17,409

 

17,527

 

Restricted cash

 

460

 

460

 

Total assets

 

$

253,666

 

$

267,224

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Accounts payable

 

$

3,398

 

$

3,732

 

Accrued expenses

 

27,986

 

28,916

 

Deferred revenues

 

6,346

 

6,346

 

Total current liabilities

 

37,730

 

38,994

 

Long-term liabilities:

 

 

 

 

 

Deferred revenues

 

43,672

 

45,196

 

Other long-term liabilities

 

2,341

 

2,438

 

Total liabilities

 

83,743

 

86,628

 

Commitments and contingencies (Notes I & J)

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

Preferred stock, par value $0.01 per share, 2,000,000 shares authorized; none issued

 

 

 

Common stock, par value $0.01 per share, 58,750,000 shares authorized; 21,358,395 and 21,306,413 shares issued and outstanding at March 31, 2012 and December 31, 2011, respectively

 

213

 

213

 

Additional paid-in capital

 

626,799

 

625,133

 

Accumulated other comprehensive loss

 

(4,765

)

(4,842

)

Accumulated deficit

 

(452,324

)

(439,908

)

Total stockholders’ equity

 

169,923

 

180,596

 

Total liabilities and stockholders’ equity

 

$

253,666

 

$

267,224

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

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AMAG PHARMACEUTICALS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

(Unaudited)

 

 

 

Three Months Ended March 31,

 

 

 

2012

 

2011

 

Revenues:

 

 

 

 

 

Product sales, net

 

$

13,708

 

$

11,022

 

License fee and other collaboration revenues

 

1,753

 

2,327

 

Royalties

 

19

 

36

 

Total revenues

 

15,480

 

13,385

 

Costs and expenses:

 

 

 

 

 

Cost of product sales

 

2,646

 

3,041

 

Research and development expenses

 

12,462

 

13,566

 

Selling, general and administrative expenses

 

13,181

 

19,634

 

Total costs and expenses

 

28,289

 

36,241

 

Other income (expense):

 

 

 

 

 

Interest and dividend income, net

 

393

 

560

 

Gains on investments, net

 

 

1

 

Total other income (expense)

 

393

 

561

 

Net loss

 

$

(12,416

)

$

(22,295

)

 

 

 

 

 

 

Net loss per share:

 

 

 

 

 

Basic and diluted

 

$

(0.58

)

$

(1.05

)

 

 

 

 

 

 

Weighted average shares outstanding used to compute net loss per share:

 

 

 

 

 

Basic and diluted

 

21,349

 

21,144

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

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Table of Contents

 

AMAG PHARMACEUTICALS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(IN THOUSANDS)

(Unaudited)

 

 

 

Three Months Ended March 31,

 

 

 

2012

 

2011

 

 

 

 

 

 

 

Net loss

 

$

(12,416

)

$

(22,295

)

Other comprehensive income (loss):

 

 

 

 

 

Unrealized gains (losses) on securities:

 

 

 

 

 

Holding gains (losses) arising during period, net of tax

 

77

 

(111

)

Reclassification adjustment for (gains) losses included in net loss

 

 

 

Net unrealized gains (losses) on securities

 

77

 

(111

)

Total comprehensive loss

 

$

(12,339

)

$

(22,406

)

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

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Table of Contents

 

AMAG PHARMACEUTICALS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(IN THOUSANDS)

(Unaudited)

 

 

 

Three Months Ended March 31,

 

 

 

2012

 

2011

 

Cash flows from operating activities:

 

 

 

 

 

Net loss

 

$

(12,416

)

$

(22,295

)

Adjustments to reconcile net loss to net cash used in operating activities:

 

 

 

 

 

Depreciation

 

551

 

642

 

Non-cash equity-based compensation expense

 

1,685

 

4,475

 

Amortization of premium/discount on purchased securities

 

766

 

868

 

Gains on investments, net

 

 

(1

)

Changes in operating assets and liabilities:

 

 

 

 

 

Accounts receivable, net

 

(346

)

(724

)

Inventories

 

2,131

 

313

 

Receivable from collaboration

 

58

 

(410

)

Prepaid and other current assets

 

548

 

1,208

 

Accounts payable and accrued expenses

 

(2,463

)

(3,508

)

Deferred revenues

 

(1,524

)

(1,710

)

Other long-term liabilities

 

(97

)

(83

)

Total adjustments

 

1,309

 

1,070

 

Net cash used in operating activities

 

(11,107

)

(21,225

)

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

Proceeds from sales or maturities of available-for-sale investments

 

37,504

 

35,327

 

Purchase of available-for-sale investments

 

(52,205

)

(49,364

)

Capital expenditures

 

(47

)

(76

)

Net cash used in investing activities

 

(14,748

)

(14,113

)

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

Proceeds from the exercise of stock options

 

 

10

 

Net cash provided by financing activities

 

 

10

 

 

 

 

 

 

 

Net decrease in cash and cash equivalents

 

(25,855

)

(35,328

)

Cash and cash equivalents at beginning of the period

 

63,474

 

112,646

 

Cash and cash equivalents at end of the period

 

$

37,619

 

$

77,318

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

7



Table of Contents

 

AMAG PHARMACEUTICALS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2012

(Unaudited)

 

A.               Description of Business

 

AMAG Pharmaceuticals, Inc., a Delaware corporation, was founded in 1981. We are a biopharmaceutical company focused on the development and commercialization of a therapeutic iron compound to treat iron deficiency anemia, or IDA. Our principal source of revenue is from the sale of Feraheme® (ferumoxytol) Injection for Intravenous, or IV, use, which was approved for marketing in the U.S. in June 2009 by the U.S. Food and Drug Administration, or the FDA, for use as an IV iron replacement therapy for the treatment of IDA in adult patients with chronic kidney disease, or CKD. We market and sell Feraheme in the U.S. through our own commercial organization and began shipping Feraheme to our customers in July 2009.

 

In December 2011, Feraheme was granted marketing approval in Canada for use as an IV iron replacement therapy for the treatment of IDA in adult patients with CKD. In April 2012, the Committee for Medicinal Products for Human Use of the European Medicines Agency issued a positive opinion for ferumoxytol for the treatment of IDA in adult patients with CKD. We expect a final decision on our Marketing Authorization Application by the European Commission in mid-2012. Under an agreement with Takeda Pharmaceutical Company Limited, or Takeda, Takeda has an exclusive license to market and sell Feraheme in Canada and the European Union, or EU. We expect Takeda to launch Feraheme in Canada in the second quarter of 2012 and in the EU, under the trade name Rienso™, in the second half of 2012. In addition, we are currently pursuing a marketing application with Takeda for Feraheme in Switzerland, under the trade name Rienso™, for the treatment of IDA in CKD patients.

 

GastroMARK®, which is marketed and sold under the trade name Lumirem® outside of the U.S, is our oral contrast agent used for delineating the bowel in magnetic resonance imaging, and is approved and marketed in the U.S., Europe and other countries through our licensees. In April 2012, we entered into an agreement with our U.S. licensee for GastroMARK to terminate that license effective immediately.

 

We are subject to risks common to companies in the pharmaceutical industry including, but not limited to, our sole dependence on the success of Feraheme, our potential inability to become profitable in the future, the potential development of significant safety or drug interaction problems with respect to Feraheme, uncertainties regarding market acceptance of Feraheme, uncertainties related to patient insurance coverage and third-party reimbursement for Feraheme, uncertainties related to the impact of current and future healthcare initiatives and legislation, competition in our industry, uncertainties related to our recent publicly announced process of evaluating strategic alternatives, our limited experience commercializing and distributing a pharmaceutical product, our dependence on key personnel, our reliance on our licensees to commercialize Feraheme in certain territories outside of the U.S., our potential inability to operate our manufacturing facilities in compliance with current good manufacturing practices, our potential inability to obtain raw or other materials and manufacture sufficient quantities of Feraheme, uncertainty of the regulatory approval process for the broader Feraheme indication, both in and outside of the U.S. or for potential alternative manufacturing facilities and processes, the potential fluctuation of our operating results, our reliance on a limited number of customers, potential differences between actual future results and the estimates or assumptions used by us in preparation of our condensed consolidated financial statements, the volatility of our stock price, our potential inadvertent failure to comply with reporting and payment obligations under government pricing programs, our potential inadvertent failure to comply with the regulations of the FDA or other federal, state or foreign government agencies, uncertainties related to the actions of activist stockholders, uncertainties related to

 

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the protection of proprietary technology, potential product liability, potential legislative and regulatory changes, and potential costs and liabilities associated with pending or future litigation.

 

Throughout this Quarterly Report on Form 10-Q, AMAG Pharmaceuticals, Inc. and our consolidated subsidiaries are collectively referred to as “the Company,” “we,” “us,” or “our.”

 

B.               Basis of Presentation and Summary of Significant Accounting Policies

 

Basis of Presentation

 

These condensed consolidated financial statements are unaudited and, in the opinion of management, include all adjustments necessary for a fair statement of the financial position and results of operations of the Company for the interim periods presented. Such adjustments consisted only of normal recurring items. The year-end condensed consolidated balance sheet data was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America.

 

In accordance with accounting principles generally accepted in the United States of America for interim financial reports and the instructions for Form 10-Q and the rules of the Securities and Exchange Commission, certain information and footnote disclosures normally included in annual financial statements have been condensed or omitted. Our accounting policies are described in the Notes to the Financial Statements in our Annual Report on Form 10-K for the year ended December 31, 2011. Interim results are not necessarily indicative of the results of operations for the full year. These interim financial statements should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2011.

 

Use of Estimates and Assumptions

 

The preparation of condensed consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make certain estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and the related disclosure of contingent assets and liabilities. The most significant estimates and assumptions are used in, but are not limited to, revenue recognition related to product sales and collaboration agreements, product sales allowances and accruals, assessing investments for potential other-than-temporary impairment and determining values of investments, reserves for doubtful accounts, accrued expenses, reserves for legal matters, income taxes and equity-based compensation expense. Actual results could differ materially from those estimates.

 

Principles of Consolidation

 

The accompanying condensed consolidated financial statements include our accounts and the accounts of our wholly-owned subsidiaries, Alamo Acquisition Sub, Inc., AMAG Europe Limited, and AMAG Securities Corporation. Alamo Acquisition Sub, Inc. was incorporated in Delaware in July 2011. AMAG Europe Limited was incorporated in October 2009 in London, England. AMAG Securities Corporation is a Massachusetts corporation which was incorporated in August 2007. All intercompany account balances and transactions between the companies have been eliminated.

 

Fair Value of Financial Instruments

 

Under current accounting standards, fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date.

 

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Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs.

 

Current accounting guidance establishes a hierarchy used to categorize how fair value is measured and which is based on three levels of inputs, of which the first two are considered observable and the third unobservable, as follows:

 

Level 1 - Quoted prices in active markets for identical assets or liabilities.

 

Level 2 - Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

 

Level 3 - Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

 

We hold certain assets that are required to be measured at fair value on a recurring basis, including our cash equivalents and short- and long-term investments. The following tables represent the fair value hierarchy as of March 31, 2012 and December 31, 2011 for those assets that we measure at fair value on a recurring basis (in thousands):

 

 

 

Fair Value Measurements at March 31, 2012 Using:

 

 

 

 

 

Quoted Prices in Active
Markets for Identical
Assets

 

Significant Other
Observable Inputs

 

Significant
Unobservable
Inputs

 

 

 

Total

 

(Level 1)

 

(Level 2)

 

(Level 3)

 

Money market funds

 

$

31,546

 

$

31,546

 

$

 

$

 

Corporate debt securities

 

97,581

 

 

97,581

 

 

U.S. treasury and government agency securities

 

58,270

 

 

58,270

 

 

Commercial paper

 

6,982

 

 

6,982

 

 

Auction rate securities

 

17,409

 

 

 

17,409

 

 

 

$

211,788

 

$

31,546

 

$

162,833

 

$

17,409

 

 

 

 

Fair Value Measurements at December 31, 2011 Using:

 

 

 

 

 

Quoted Prices in Active
Markets for Identical
Assets

 

Significant Other
Observable Inputs

 

Significant
Unobservable
Inputs

 

 

 

Total

 

(Level 1)

 

(Level 2)

 

(Level 3)

 

Money market funds

 

$

55,995

 

$

55,995

 

$

 

$

 

Corporate debt securities

 

94,626

 

 

94,626

 

 

U.S. treasury and government agency securities

 

48,086

 

 

48,086

 

 

Commercial paper

 

5,991

 

 

5,991

 

 

Auction rate securities

 

17,527

 

 

 

17,527

 

 

 

$

222,225

 

$

55,995

 

$

148,703

 

$

17,527

 

 

With the exception of our auction rate securities, or ARS, which are valued using Level 3 inputs, as discussed below, and our money market funds, the fair value of our investments is primarily determined from independent pricing services which use Level 2 inputs to determine fair value. Independent pricing services normally derive security prices from recently reported trades for identical or similar securities,

 

10



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making adjustments based upon other significant observable market transactions. At the end of each reporting period, we perform quantitative and qualitative analyses of prices received from third parties to determine whether prices are reasonable estimates of fair value. After completing our analyses, we did not adjust or override any fair value measurements provided by our pricing services as of either March 31, 2012 or December 31, 2011. In addition, there were no transfers or reclassifications of any securities between Level 1 and Level 2 during the three months ended March 31, 2012.

 

We also analyze when the volume and level of activity for an asset or liability have significantly decreased and when circumstances indicate that a transaction may not be considered orderly. In order to determine whether the volume and level of activity for an asset or liability have significantly decreased, we assess current activity as compared to normal market activity for the asset or liability. We rely on many factors such as trading volume, trading frequency, the levels at which market participants indicate their willingness to buy and sell our securities, as reported by market participants, and current market conditions. Using professional judgment and experience, we evaluate and weigh the relevance and significance of all applicable factors to determine if there has been a significant decrease in the volume and level of activity for an asset, group of similar assets or liabilities. Similarly, in order to identify transactions that are not orderly, we take into consideration the activity in the market which can influence the determination and occurrence of an orderly transaction. Also, we inquire as to whether there may have been restrictions on the marketing of the security to a single or limited number of participants. Where possible, we assess the financial condition of the seller to determine whether observed transactions may have been forced. If there is a significant disparity between the trading price for a security held by us as compared to the trading prices of similar recent transactions, we consider whether this disparity is an indicator of a disorderly trade. Using professional judgment and experience, we evaluate and weigh the relevance and significance of all applicable factors to determine if the evidence suggests that a transaction or group of similar transactions is not orderly. Based upon these procedures, we determined that market activity for our non-ARS assets appeared normal and that transactions did not appear disorderly as of March 31, 2012.

 

Because there is currently no active market for trading the ARS that we hold, we value these securities using a discounted cash flow model. The assumptions used in preparing this model consist of unobservable inputs, including estimates for interest rates, timing and amount of cash flows and the average expected term over which we expect our ARS to be outstanding. In the process of developing these assumptions, we review the characteristics of each individual ARS, including the frequency of coupon payments, the credit rating of the individual security, the quality of the underlying collateral, the final maturity of each security, the approximate repayment time for student loans underlying the security and any pre-maturity redemption or prepayments for comparable securities. We prepare a discounted cash flow model for three expected term scenarios and then apply a weighted average probability formula to each scenario. We estimate the amount of cash flows for each security by utilizing market forecasts of interest rates to calculate the maximum amount of future interest payments. We then apply a discount rate to these estimated cash flows in order to arrive at a discounted cash flow value for each ARS. We calculate this discount rate by using a base index plus two additional factors which address the current lack of liquidity in the ARS market and the difference in credit risk associated with the specific ARS that we own. A significant increase or decrease in the interest rates used to forecast expected cash flows would result in a significantly higher or lower fair value measurement of our ARS. A significant increase or decrease in the discount rate used to discount these cash flows would result in a significantly lower or higher fair value measurement of our ARS. A significant increase or decrease in the expected term assumption would result in a significantly lower or higher fair value measurement.

 

The following table provides quantitative information on the unobservable inputs of our fair value measurements for our Level 3 assets for the three months ended March 31, 2012 (in thousands):

 

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Quantitative Information about Level 3 Fair Value Measurements

 

 

 

Estimated Fair
Value at March
31, 2012

 

Valuation Technique

 

Unobservable Inputs

 

Range (Weighted Average)

 

 

 

 

 

 

 

 

 

 

 

Auction rate securities

 

$

17,409

 

Discounted cash flow

 

Coupon rate (%)

 

0.55% - 1.72% (0.85%)

 

 

 

 

 

 

 

Discount rate (%)

 

4.00% - 7.00% (5.14%)

 

 

 

 

 

 

 

Expected term (in years)

 

3 - 10 (4.7)

 

 

The following table provides a rollforward of Level 3 assets for the three months ended March 31, 2012 (in thousands):

 

 

 

Three Months Ended
March 31, 2012

 

Balance at beginning of period

 

$

17,527

 

Transfers to Level 3

 

 

Total gains (losses) (realized or unrealized):

 

 

 

Included in earnings

 

 

Included in other comprehensive income (loss)

 

(18

)

Purchases, issuances, sales and settlements:

 

 

 

Purchases

 

 

Issuances

 

 

Sales

 

 

Settlements

 

(100

)

Balance at end of period

 

$

17,409

 

 

 

 

 

The amount of total gains (losses) for the period included in earnings attributable to the change in unrealized gains (losses) relating to assets still held at end of period

 

$

 

 

Gains and losses (realized or unrealized) included in earnings in the table above are reported in other income (expense) in our condensed consolidated statement of operations.

 

Revenue Recognition

 

Net Product Sales

 

We recognize net product sales in accordance with current accounting guidance related to the recognition, presentation and disclosure of revenue in financial statements, which outlines the basic criteria that must be met to recognize revenue and provides guidance for disclosure of revenue in financial statements.

 

We record product sales allowances and accruals related to prompt payment discounts, chargebacks, governmental and other rebates, distributor, wholesaler and group purchasing organization, or GPO, fees, and product returns as a reduction of revenue in our condensed consolidated statement of operations at the time product sales are recorded. Calculating these gross-to-net sales adjustments involves estimates and judgments based primarily on actual Feraheme sales data, forecasted customer buying patterns blended with historical experience of products similar to Feraheme sold by others, and other market research. In addition, we also monitor our distribution channel to determine whether additional allowances or accruals are required

 

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based on inventory in our sales channel. An analysis of our product sales allowances and accruals for the three months ended March 31, 2012 and 2011 is as follows (in thousands):

 

 

 

Three Months Ended March 31,

 

 

 

2012

 

2011

 

Product sales allowances and accruals

 

 

 

 

 

Discounts and chargebacks

 

$

5,892

 

$

2,220

 

Government and other rebates

 

1,460

 

2,534

 

Returns

 

(266

)

299

 

Total provision for product sales allowances and accruals

 

$

7,086

 

$

5,053

 

 

 

 

 

 

 

Total gross product sales

 

$

20,794

 

$

16,075

 

 

 

 

 

 

 

Total provision for product sales allowances and accruals as a percent of total gross product sales

 

34

%

31

%

 

Product sales allowances and accruals are primarily comprised of both direct and indirect fees, discounts and rebates and provisions for estimated product returns. Direct fees, discounts and rebates are contractual fees and price adjustments payable to wholesalers, specialty distributors and other customers that purchase products directly from us. Indirect fees, discounts and rebates are contractual price adjustments payable to healthcare providers and organizations, such as certain physicians, clinics, hospitals, GPOs, and dialysis organizations that typically do not purchase products directly from us but rather from wholesalers and specialty distributors. In accordance with guidance related to accounting for fees and consideration given by a vendor to a customer, including a reseller of a vendor’s products, these fees, discounts and rebates are presumed to be a reduction of the selling price of Feraheme. Product sales allowances and accruals are based on definitive contractual agreements or legal requirements (such as Medicaid laws and regulations) related to the purchase and/or utilization of the product by these entities and are recorded in the same period that the related revenue is recognized. We estimate product sales allowances and accruals using either historical, actual and/or other data, including estimated patient usage, applicable contractual rebate rates, contract performance by the benefit providers, other current contractual and statutory requirements, historical market data based upon experience of Feraheme and other products similar to Feraheme, specific known market events and trends such as competitive pricing and new product introductions and current and forecasted customer buying patterns and inventory levels, and the shelf life of Feraheme. As part of this evaluation, we also review changes to federal and other legislation, changes to rebate contracts, changes in the level of discounts, and changes in product sales trends. Although allowances and accruals are recorded at the time of product sale, certain rebates are typically paid out, on average, up to six months or longer after the sale.

 

We generally offer our wholesalers, specialty distributors and other customers a limited right to return product purchased directly from us, principally based on the product’s expiration date which, once packaged, is currently four years. Reserves for product returns are recorded in the period the related revenue is recognized, resulting in a reduction to product sales. We evaluate our estimated product returns rate each period based on the historical return patterns and known or expected changes in the marketplace. Due to the extended period between the sale of Feraheme and when the limited right of return is allowable, which could be several years, we currently have limited actual returns data and therefore are not able to solely rely on our actual returns experience. During the first quarter of 2012, we reversed approximately $0.5 million of previously reserved product returns allowance due to the lapse of the product return period on certain manufactured Feraheme lots that carried a two year expiration period. As a result, the product returns reserve against gross sales for the three months ended March 31, 2012 was ($0.3) million as compared to $0.3 million in the three months ended March 31, 2011.

 

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Concentrations and Significant Customer Information

 

Financial instruments which potentially subject us to concentrations of credit risk consist principally of cash, cash equivalents, investments, and accounts receivable. As of March 31, 2012, our cash, cash equivalents and investments amounted to approximately $217.9 million. We currently invest our excess cash primarily in U.S. government and agency money market funds, and investments in corporate debt securities, U.S. treasury and government agency securities, commercial paper and ARS. As of March 31, 2012 we had approximately $31.5 million of our total $37.6 million cash and cash equivalents balance invested in institutional money market funds, of which $16.0 million was invested in a single fund, which is collateralized solely by U.S. treasury and government agency securities.

 

Our operations are located solely within the U.S. We are focused principally on developing, manufacturing, and commercializing Feraheme. We perform ongoing credit evaluations of our customers and generally do not require collateral. The following table sets forth customers who represented 10% or more of our total revenues for the three months ended March 31, 2012 and 2011.

 

 

 

Three Months Ended March 31,

 

 

 

2012

 

2011

 

AmerisourceBergen Drug Corporation

 

45

%

38

%

McKesson Corporation

 

20

%

18

%

Cardinal Health, Inc.

 

15

%

13

%

Takeda Pharmaceuticals Company Limited

 

11

%

17

%

 

In addition, approximately 35% of our end-user demand during the three months ended March 31, 2012 was generated by members of a single GPO with which we have contracted. Revenues from customers outside of the U.S. amounted to approximately 11% and 18% of our total revenues for the three months ended March 31, 2012 and 2011, respectively, and were principally related to collaboration revenue recognized in connection with our collaboration agreement with Takeda, which is based in Japan.

 

C.    Investments

 

As of March 31, 2012 and December 31, 2011, the combined total of our short- and long-term investments equaled $180.2 million and $166.2 million, respectively, and consisted of securities classified as available-for-sale in accordance with accounting standards which provide guidance related to accounting and classification of certain investments in debt and equity securities.

 

The following is a summary of our short- and long-term investments as of March 31, 2012 and December 31, 2011 (in thousands):

 

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Table of Contents

 

 

 

March 31, 2012

 

 

 

 

 

Gross

 

Gross

 

Estimated

 

 

 

Amortized

 

Unrealized

 

Unrealized

 

Fair

 

 

 

Cost

 

Gains

 

Losses

 

Value

 

Short-term investments:

 

 

 

 

 

 

 

 

 

Corporate debt securities

 

 

 

 

 

 

 

 

 

Due in one year or less

 

$

53,623

 

$

120

 

$

(21

)

$

53,722

 

Due in one to three years

 

43,795

 

93

 

(29

)

43,859

 

U.S. treasury and government agency securities

 

 

 

 

 

 

 

 

 

Due in one year or less

 

17,474

 

72

 

(1

)

17,545

 

Due in one to three years

 

40,584

 

159

 

(18

)

40,725

 

Commercial paper

 

 

 

 

 

 

 

 

 

Due in one year or less

 

3,999

 

 

(1

)

3,998

 

Due in one to three years

 

2,992

 

 

(8

)

2,984

 

Total short-term investments

 

$

162,467

 

$

444

 

$

(78

)

$

162,833

 

 

 

 

 

 

 

 

 

 

 

Long-term investments:

 

 

 

 

 

 

 

 

 

Auction rate securities

 

 

 

 

 

 

 

 

 

Due after five years

 

19,800

 

 

(2,391

)

17,409

 

Total long-term investments

 

$

19,800

 

$

 

$

(2,391

)

$

17,409

 

 

 

 

 

 

 

 

 

 

 

Total short and long-term investments

 

$

182,267

 

$

444

 

$

(2,469

)

$

180,242

 

 

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Table of Contents

 

 

 

December 31, 2011

 

 

 

 

 

Gross

 

Gross

 

Estimated

 

 

 

Amortized

 

Unrealized

 

Unrealized

 

Fair

 

 

 

Cost

 

Gains

 

Losses

 

Value

 

Short-term investments:

 

 

 

 

 

 

 

 

 

Corporate debt securities

 

 

 

 

 

 

 

 

 

Due in one year or less

 

$

74,687

 

$

81

 

$

(115

)

$

74,653

 

Due in one to three years

 

19,950

 

73

 

(50

)

19,973

 

U.S. treasury and government agency securities

 

 

 

 

 

 

 

 

 

Due in one year or less

 

26,770

 

67

 

(7

)

26,830

 

Due in one to three years

 

21,028

 

228

 

 

21,256

 

Commercial paper

 

 

 

 

 

 

 

 

 

Due in one year or less

 

5,997

 

 

(6

)

5,991

 

Total short-term investments

 

$

148,432

 

$

449

 

$

(178

)

$

148,703

 

 

 

 

 

 

 

 

 

 

 

Long-term investments:

 

 

 

 

 

 

 

 

 

Auction rate securities

 

 

 

 

 

 

 

 

 

Due after five years

 

19,900

 

 

(2,373

)

17,527

 

Total long-term investments

 

$

19,900

 

$

 

$

(2,373

)

$

17,527

 

 

 

 

 

 

 

 

 

 

 

Total short and long-term investments

 

$

168,332

 

$

449

 

$

(2,551

)

$

166,230

 

 

Auction Rate Securities

 

As of March 31, 2012, we held a total of $17.4 million in fair market value of ARS, reflecting a reduction of approximately $2.4 million from the par value of these securities of approximately $19.8 million. As of March 31, 2012, all of our ARS were municipal bonds with an auction reset feature and were classified as available-for-sale. The majority of our ARS portfolio was rated AAA as of March 31, 2012 by at least one of the major securities rating agencies and was primarily collateralized by student loans substantially guaranteed by the U.S. government under the Federal Family Education Loan Program. As of March 31, 2012, all of our ARS continue to pay interest according to their stated terms.

 

In February 2008, our ARS began to experience failed auctions and have continued to experience failed auctions since that time. As a result of the lack of significant observable ARS market activity since February 2008, we use a discounted cash flow methodology to value these securities as opposed to valuing them at their par value. Our valuation analysis considers, among other items, assumptions that market participants would use in their estimates of fair value, such as the collateral underlying the security, the creditworthiness of the issuer and any associated guarantees, credit ratings of the security by the major securities rating agencies, the ability or inability to sell the investment in an active market or to the issuer, the timing of expected future cash flows, and the expectation of the next time the security will have a successful auction or when call features may be exercised by the issuer. In addition, for all available-for-sale debt securities with unrealized losses, management performs an analysis to assess whether we intend to sell or whether we would more likely than not be required to sell the security before the expected recovery of the amortized cost basis. In the event that we intend to sell a security, or may be required to do so, the decline in fair value of the security would be deemed to be other-than-temporary and the full amount of the unrealized loss would be recorded in our condensed consolidated statement of operations as an impairment loss. Regardless of our intent to sell a security, we perform additional

 

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analyses on all securities with unrealized losses to evaluate whether there could be a credit loss associated with the security. Based on the methodology and the analysis above, we have estimated the fair value of our ARS to be $17.4 million and have recorded the $2.4 million reduction in fair value as an unrealized loss to accumulated other comprehensive loss as of March 31, 2012.

 

Due to our belief that the market for ARS will likely take in excess of twelve months to fully recover, we have classified our portfolio of ARS as long-term investments in our condensed consolidated balance sheet as of March 31, 2012. We believe that the impairment related to our ARS is primarily attributable to the lack of liquidity of these investments, coupled with the ongoing uncertainty in the credit and capital markets, and we have no reason to believe that any of the underlying issuers of our ARS are presently at risk of default. All of our ARS have final maturity dates which occur approximately 20 to 35 years in the future. We believe we will ultimately be able to liquidate our investments in ARS without significant loss prior to their maturity dates primarily due to the collateral securing most of our ARS. However, it could take until final maturity of the ARS to realize the par value of our remaining ARS investments. As a result, we believe the decline in value of our ARS is a temporary impairment and similarly, any future fluctuation in fair value related to our ARS that we deem to be temporary, including any recoveries of previous write-downs, would be recorded to accumulated other comprehensive loss. If we determine that any future unrealized loss is other-than-temporary, we will record a charge to our condensed consolidated statement of operations. In the event that we need to access our investments in these securities, we will not be able to do so until a future auction is successful, the issuer calls the security pursuant to a mandatory tender or redemption prior to maturity, a buyer is found outside the auction process, or the securities mature. In the event we are forced to seek a buyer outside the auction process, we may realize a significant loss on the sale of these securities. In addition, as part of our determination of the fair value of our investments, we consider credit ratings provided by independent investment rating agencies as of the valuation date. These ratings are subject to change, and we may be required to adjust our future valuation of these ARS which may adversely affect the value of these investments. Based upon the various analyses described above, we did not recognize any unrealized credit losses related to our securities during the three months ended March 31, 2012.

 

Impairments and Unrealized Gains and Losses on Investments

 

The following is a summary of the fair value of our investments with unrealized losses that are deemed to be temporarily impaired and their respective gross unrealized losses aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position as of March 31, 2012 and December 31, 2011 (in thousands):

 

 

 

March 31, 2012

 

 

 

Less than 12 Months

 

12 Months or Greater

 

Total

 

 

 

Fair

 

Unrealized

 

Fair

 

Unrealized

 

Fair

 

Unrealized

 

 

 

Value

 

Losses

 

Value

 

Losses

 

Value

 

Losses

 

Corporate debt securities

 

$

23,682

 

$

(50

)

$

 

$

 

$

23,682

 

$

(50

)

U.S. treasury and government agency securities

 

14,937

 

(19

)

 

 

14,937

 

(19

)

Commercial paper

 

6,982

 

(9

)

 

 

6,982

 

(9

)

Auction rate securities

 

 

 

17,409

 

(2,391

)

17,409

 

(2,391

)

 

 

$

45,601

 

$

(78

)

$

17,409

 

$

(2,391

)

$

63,010

 

$

(2,469

)

 

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Table of Contents

 

 

 

December 31, 2011

 

 

 

Less than 12 Months

 

12 Months or Greater

 

Total

 

 

 

Fair

 

Unrealized

 

Fair

 

Unrealized

 

Fair

 

Unrealized

 

 

 

Value

 

Losses

 

Value

 

Losses

 

Value

 

Losses

 

Corporate debt securities

 

$

34,097

 

$

(161

)

$

4,124

 

$

(4

)

$

38,221

 

$

(165

)

U.S. treasury and government agency securities

 

8,841

 

(7

)

 

 

8,841

 

(7

)

Commercial paper

 

5,991

 

(6

)

 

 

5,991

 

(6

)

Auction rate securities

 

 

 

19,900

 

(2,373

)

19,900

 

(2,373

)

 

 

$

48,929

 

$

(174

)

$

24,024

 

$

(2,377

)

$

72,953

 

$

(2,551

)

 

We did not recognize any other-than-temporary impairment losses in our condensed consolidated statements of operations related to our securities during either as of March 31, 2012 or 2011. Future events may occur, or additional information may become available, which may cause us to identify credit losses where we do not expect to receive cash flows sufficient to recover the entire amortized cost basis of a security and which may necessitate the recording of future realized losses on securities in our portfolio. Significant losses in the estimated fair values of our investments could have a material adverse effect on our earnings in future periods.

 

Realized Gains and Losses on Investments

 

Gains and losses are determined on the specific identification method. Realized gains were insignificant during both the three months ended March 31, 2012 and 2011.

 

D.            Accounts Receivable

 

Our accounts receivable were $6.3 million and $5.9 million as of March 31, 2012 and December 31, 2011, respectively, and primarily represented amounts due from wholesalers and distributors to whom we sell Feraheme directly. Accounts receivable are recorded net of reserves for estimated chargeback obligations, prompt payment discounts and any allowance for doubtful accounts. Reserves for other sales-related allowances such as rebates, distribution and other fees, and product returns are included in accrued expenses in our condensed consolidated balance sheets.

 

As part of our credit management policy, we perform ongoing credit evaluations of our customers, and we have not required collateral from any customer. To date, we have not experienced significant bad debts. Accordingly, we have not established an allowance for doubtful accounts at either March 31, 2012 or December 31, 2011. If the financial condition of any of our significant customers was to deteriorate and result in an impairment of its ability to make payments owed to us, an allowance for doubtful accounts may be required which could have a material effect on earnings in the period of any such adjustment.

 

Customers which represented greater than 10% of our accounts receivable balances as of March 31, 2012 and December 31, 2011were as follows:

 

 

 

March 31, 2012

 

December 31, 2011

 

AmerisourceBergen Drug Corporation

 

48

%

44

%

McKesson Corporation

 

27

%

33

%

Cardinal Health, Inc.

 

18

%

15

%

 

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Table of Contents

 

E.        Inventories

 

Our major classes of inventories were as follows as of March 31, 2012 and December 31, 2011 (in thousands):

 

 

 

March 31, 2012

 

December 31, 2011

 

Raw materials

 

$

2,224

 

$

1,892

 

Work in process

 

1,758

 

3,696

 

Finished goods

 

10,273

 

9,618

 

Total inventories

 

$

14,255

 

$

15,206

 

 

Included in work in process and finished goods inventories as of March 31, 2012 and December 31, 2011 was approximately $2.4 million and $3.0 million, respectively, of Feraheme produced in third-party manufacturing facilities and using processes for which we have not yet received regulatory approval. We believe future regulatory approval of these facilities and processes is probable and that this inventory is fully realizable. During the quarter ended March 31, 2012, we wrote-off $0.6 million of pre-approved inventory which we no longer believed was suitable for sale.

 

On a quarterly basis, we analyze our inventory levels to determine whether we have any obsolete, expired, or excess inventory. If any inventory is expected to expire prior to being sold, has a cost basis in excess of its net realizable value, is in excess of expected sales requirements as determined by internal sales forecasts, or fails to meet commercial sale specifications, the inventory is written-down through a charge to cost of goods sold. The determination of whether inventory costs will be realizable requires estimates by management. A critical input in this determination is future expected inventory requirements, based on internal sales forecasts. Once packaged, Feraheme currently has a shelf-life of four years in the U.S., and as a result of comparison to internal sales forecasts, we expect to fully realize the carrying value of our current Feraheme inventory. If actual market conditions are less favorable than those projected by management, additional inventory write-downs may be required. Charges for inventory write-downs are not reversed if it is later determined that the product is saleable.

 

F.             Income Taxes

 

Deferred tax assets and deferred tax liabilities are recognized based on temporary differences between the financial reporting and tax basis of assets and liabilities using future enacted rates. A valuation allowance is recorded against deferred tax assets if it is more likely than not that some or all of the deferred tax assets will not be realized.

 

For the three months ended March 31, 2012 and 2011, we did not recognize any tax expense or benefit due to our continued net operating loss position. Due to the uncertainty surrounding the realization of favorable tax attributes in future tax returns, we have recorded a full valuation allowance against our otherwise recognizable net deferred tax assets.

 

G.              Net Loss per Share

 

We compute basic net loss per share by dividing net loss by the weighted average number of common shares outstanding during the relevant period. The following table sets forth the potential common shares issuable upon the exercise of outstanding options and the vesting of restricted stock units (prior to consideration of the treasury stock method), the total of which was excluded from our computation of diluted net loss per share because such options and restricted stock units were anti-dilutive due to a net loss in the relevant periods (in thousands):

 

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Table of Contents

 

 

 

Three Months Ended March 31,

 

 

 

2012

 

2011

 

Options to purchase shares of common stock

 

1,717

 

2,213

 

Shares of common stock issuable upon the vesting of restricted stock units

 

679

 

701

 

Total

 

2,396

 

2,914

 

 

The components of basic and diluted net loss per share were as follows (in thousands, except per share data):

 

 

 

Three Months Ended March 31,

 

 

 

2012

 

2011

 

Net loss

 

$

(12,416

)

$

(22,295

)

Weighted average common shares outstanding

 

21,349

 

21,144

 

Net loss per share:

 

 

 

 

 

Basic and diluted

 

$

(0.58

)

$

(1.05

)

 

H.              Equity-Based Compensation

 

We currently maintain several equity compensation plans, including our Second Amended and Restated 2007 Equity Incentive Plan, or the 2007 Plan, our Amended and Restated 2000 Stock Plan, or the 2000 Plan, and our 2010 Employee Stock Purchase Plan.

 

Second Amended and Restated 2007 Equity Incentive Plan

 

As of March 31, 2012, we have granted options and restricted stock units covering 4,089,775 shares of common stock under our 2007 Plan, of which 1,534,008 stock options and 286,293 restricted stock units have expired or terminated, and of which 35,338 options have been exercised and 228,525 shares of common stock have been issued pursuant to restricted stock units that became fully vested. The number of options and restricted stock units outstanding under this plan as of March 31, 2012 was 1,326,698 and 678,913, respectively. The remaining number of shares available for future grants as of March 31, 2012 was 1,315,108, not including shares subject to outstanding awards under the 2000 Plan, which will be added to the total number of shares available for issuance under the 2007 Plan to the extent that such awards expire or terminate for any reason prior to exercise. All outstanding stock options granted under our 2007 Plan have an exercise price equal to the closing price of a share of our common stock on the grant date and a ten-year term.

 

Amended and Restated 2000 Stock Plan

 

As of March 31, 2012, the number of shares underlying outstanding options which were issued pursuant to our 2000 Plan was 390,742. There were no restricted stock units outstanding as of March 31, 2012. In November 2007, the 2000 Plan was succeeded by our 2007 Plan and, accordingly, no further grants may be made under this plan. Any shares that remained available for issuance under the 2000 Plan as of the date of adoption of the 2007 Plan are included in the number of shares that may be issued under the 2007 Plan. Any shares subject to outstanding awards granted under the 2000 Plan that expire or terminate for any reason prior to exercise will be added to the total number of shares available for issuance under the 2007 Plan.

 

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Table of Contents

 

Equity-based compensation expense

 

Equity-based compensation expense, excluding amounts that have been capitalized into inventory, for the three months ended March 31, 2012 and 2011 consisted of the following (in thousands):

 

 

 

Three Months Ended March 31,

 

 

 

2012

 

2011

 

Cost of product sales

 

$

78

 

$

195

 

Research and development

 

422

 

642

 

Selling, general and administrative

 

1,185

 

3,638

 

Total equity-based compensation expense

 

$

1,685

 

$

4,475

 

 

We reduce the compensation expense being recognized to account for estimated forfeitures, which we estimate based primarily on historical experience. Under the current accounting guidance, forfeitures are estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates.

 

I.                Commitments and Contingencies

 

Legal Proceedings

 

A purported class action complaint was originally filed on March 18, 2010 in the United States District Court for the District of Massachusetts, entitled Silverstrand Investments et. al. v. AMAG Pharm., Inc., et. al., Civil Action No. 1:10-CV-10470-NMG, and was amended on September 15, 2010 and on December 17, 2010. The second amended complaint, or SAC, filed on December 17, 2010 alleged that we and our former President and Chief Executive Officer, former Executive Vice President and Chief Financial Officer, our Board of Directors, and certain underwriters in our January 2010 offering of common stock violated certain federal securities laws, specifically Sections 11 and 12(a)(2) of the Securities Act of 1933, as amended, and that our former President and Chief Executive Officer and former Executive Vice President and Chief Financial Officer violated Section 15 of such Act, respectively, by making certain alleged false and misleading statements and omissions in a registration statement filed in January 2010. The plaintiff sought unspecified damages on behalf of a purported class of purchasers of our common stock pursuant to our common stock offering on or about January 21, 2010. On August 11, 2011, the Court issued an Opinion and Order dismissing the SAC in its entirety for failure to state a claim upon which relief could be granted. A separate Order of Dismissal was filed on August 15, 2011. On September 14, 2011, the plaintiffs filed a Notice of Appeal to the United States Court of Appeals for the First Circuit, or the Court of Appeals. Plaintiffs’ appeal brief was filed on February 1, 2012. The defendants’ responding briefs were filed on March 5, 2012, and the plaintiffs’ reply brief was filed on March 16, 2012. The Court of Appeals has scheduled oral argument on the appeal for May 11, 2012. We are currently unable to predict the outcome or reasonably estimate the range of potential loss associated with this matter, if any, and have therefore not recorded any potential estimated liability as we do not believe that such a liability is probable nor do we believe that a range of loss is currently estimable.

 

In February 2010, we submitted to FINRA Dispute Resolution, Inc. an arbitration claim against our broker-dealer, Jefferies & Company, Inc., or Jefferies, and two former Jefferies employees, Anthony J. Russo, and Robert A. D’Addario, who managed our cash account with Jefferies. We alleged that Jefferies, Russo and D’Addario wrongfully marketed and sold a balance of $54.1 million in unsuitable ARS to us from September 2007 through January 2008. We further alleged that Jefferies, Russo and D’Addario misrepresented or omitted material facts concerning the nature and risks of ARS, which were inconsistent with our investment objectives to maintain liquidity and flexibility in our portfolio. In February 2012, we

 

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Table of Contents

 

entered into a settlement agreement whereby the parties agreed to dismiss all claims related to this matter with prejudice.

 

We may periodically become subject to legal proceedings and claims arising in connection with ongoing business activities, including claims or disputes related to patents that have been issued or that are pending in the field of research on which we are focused. Other than the above actions, we are not aware of any material claims against us at March 31, 2012. We expense legal costs as they are incurred.

 

Contractual Obligations

 

In July 2011, we entered into an Agreement and Plan of Merger and Reorganization, or the Allos Merger Agreement, with Alamo Acquisition Sub, Inc., a Delaware corporation and our wholly-owned subsidiary, and Allos Therapeutics, Inc., or Allos, which was amended in August 2011. In October 2011, pursuant to the terms of the Allos Merger Agreement, we terminated the Allos Merger Agreement and paid Allos an expense reimbursement fee of $2.0 million in connection with such termination. In addition, we will be required to pay Allos a termination fee of $12.0 million (in addition to the $2.0 million expense reimbursement fee we paid to Allos in October 2011) if we enter into a definitive agreement for an Acquisition Transaction, as defined in the Allos Merger Agreement, on or before October 21, 2012 or such a transaction is consummated on or before such date.

 

J.              Collaborative Agreements

 

Our commercial strategy includes the formation of collaborations with other pharmaceutical companies to facilitate the sale and distribution of our products, primarily outside of the U.S. As of March 31, 2012, we were a party to the following collaborations:

 

Takeda

 

In March 2010, we entered into a License, Development and Commercialization Agreement, or the Takeda Agreement, with Takeda under which we granted exclusive rights to Takeda to develop and commercialize Feraheme as a therapeutic agent in Europe, Asia-Pacific countries (excluding Japan, China and Taiwan), the Commonwealth of Independent States, Canada, India and Turkey, or collectively, the Licensed Territory.

 

Under the Takeda Agreement, except under limited circumstances, we have retained the right to manufacture Feraheme and, accordingly, are responsible for supply of Feraheme to Takeda at a fixed price per unit, which is capped. We are also responsible for conducting, and bearing the costs related to, certain pre-defined clinical studies with the costs of future modifications or additional studies to be allocated between the parties according to an agreed upon cost-sharing mechanism, which provides for a cap on such costs. In connection with the execution of the Takeda Agreement, we received a $60.0 million upfront payment from Takeda in April 2010, which we recorded as deferred revenue. We may also receive a combination of regulatory approval and performance-based milestone payments, reimbursement of certain out-of-pocket regulatory and clinical supply costs, defined payments for supply of Feraheme, and tiered double-digit royalties on net product sales in the Licensed Territory under the Takeda Agreement. The milestone payments we may be entitled to receive under the agreement could over time equal approximately $220.0 million, including up to an aggregate of $33.0 million upon the commercial launch of Feraheme in Canada and the regulatory approval and commercial launch of Feraheme in the EU. Of the $220.0 million in potential milestone payments, we have determined that any payments which may become due upon approval by certain regulatory agencies will be deemed substantive milestones and, therefore, will be accounted for as revenue in the period in which they are

 

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achieved. All remaining milestone payments will be accounted for in accordance with our revenue attribution method for the upfront payment as defined below.

 

We have determined that the Takeda Agreement includes four deliverables: the license, access to future know-how and improvements to the Feraheme technology, regulatory and clinical research activities, and the manufacturing and supply of product. Pursuant to the accounting guidance in effect when we signed the Takeda Agreement, and which governed revenue recognition on multiple element arrangements, we evaluated the four deliverables under the Takeda Agreement and determined that our obligation to provide manufacturing supply of product meets the criteria for separation and is therefore treated as a single unit of accounting, which we refer to as the supply unit of accounting. Further, we concluded that the license is not separable from the undelivered future know-how and technological improvements or the undelivered regulatory and clinical research activities. Accordingly, these deliverables are being combined and also treated as a single unit of accounting, which we refer to as the combined unit of accounting.

 

With respect to the combined unit of accounting, our obligation to provide access to our future know-how and technological improvements is the final deliverable and is an obligation which exists throughout the term of the Takeda Agreement. Because we cannot reasonably estimate the total level of effort required to complete the obligations under the combined deliverable, we are recognizing the entire $60.0 million upfront payment, the $1.0 million reimbursed to us in 2010 for certain expenses incurred prior to entering the agreement, as well as any milestone payments that are achieved and not deemed to be substantive milestones into revenues on a straight-line basis over a period of ten years from March 31, 2010, the date on which we entered the Takeda Agreement, which represented the then current patent life of Feraheme and our best estimate of the period over which we will substantively perform our obligations. The potential milestone payments that may be received in the future will be recognized into revenue on a cumulative catch up basis when they become due and payable.

 

Under the terms of the Takeda Agreement, Takeda is responsible for reimbursing us for certain out-of-pocket regulatory and clinical trial supply costs associated with carrying out our regulatory and clinical research activities under the collaboration agreement. Because we are acting as the principal in carrying out these services, any reimbursement payments received from Takeda will be recorded in license fee and other collaboration revenues in our condensed consolidated statement of operations to match the costs that we incur during the period in which we perform those services.

 

Revenues related to the combined unit of accounting and any reimbursement revenues are recorded in license fee and other collaboration revenues in our condensed consolidated statement of operations. During the three months ended March 31, 2012, we recorded $1.5 million associated with the upfront payment and $0.2 million associated with other reimbursement revenues received from Takeda. Payments to be received for supply of the drug product and royalties will be recorded in product sales and royalties in our condensed consolidated statement of operations.

 

3SBio

 

In 2008, we entered into a Collaboration and Exclusive License Agreement, or the 3SBio License Agreement, and a Supply Agreement, or the 3SBio Supply Agreement, with 3SBio for the development and commercialization of Feraheme as an IV iron replacement therapeutic agent in China. The 3SBio License Agreement grants 3SBio an exclusive license for an initial term of thirteen years to develop and commercialize Feraheme as a therapeutic agent in China for an initial indication for the treatment of IDA in patients with CKD, and an option to expand into additional therapeutic indications. In consideration of the grant of the license, we received an upfront payment of $1.0 million, the recognition of which has been deferred and is being recognized under the proportional performance methodology as we supply

 

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Feraheme to 3SBio over the thirteen year initial term of the agreement. We are eligible to receive certain other specified milestone payments upon regulatory approval of Feraheme in China for CKD and other indications. We are also entitled to receive tiered royalties of up to 25% based on net sales of Feraheme by 3SBio in China. We retained all manufacturing rights for Feraheme under these agreements. In addition, pursuant to the 3SBio Supply Agreement, 3SBio has agreed to purchase from us, and we have agreed to supply to 3SBio, Feraheme at a predetermined supply price for use in connection with 3SBio’s development and commercialization obligations described above for so long as the 3SBio License Agreement is in effect. To date we have not provided 3SBio with any commercial product under this agreement.

 

K.           Restructuring

 

In November 2011, we initiated a corporate restructuring, including a workforce reduction plan, which included an approximate 25% reduction in positions. During the fourth quarter of 2011, we recorded $3.5 million of restructuring related costs, primarily related to employee severance and benefits. The workforce reduction was substantially completed by the end of 2011, and we expect that the majority of our restructuring charges will be paid by the end of 2012.

 

The following table outlines the components of our restructuring expenses which were recorded in operating expenses and current liabilities for the three months ended March 31, 2012 (in thousands):

 

 

 

Three Months Ended
March 31, 2012

 

 

 

 

 

Accrued restructuring, beginning of period

 

$

2,366

 

Employee severance, benefits and related costs

 

85

 

Payments

 

(609

)

Other adjustments

 

(79

)

Accrued restructuring, end of period

 

$

1,763

 

 

L.            Recently Issued and Proposed Accounting Pronouncements

 

In June 2011, the Financial Accounting Standards Board, or FASB, issued amended guidance on the presentation of comprehensive income in financial statements. This amendment provides companies the option to present the components of net income and other comprehensive income either as one continuous statement of comprehensive income or as two separate but consecutive statements. It eliminates the option to present components of other comprehensive income as part of the statement of changes in stockholders’ equity. The provisions of this guidance are effective for interim and annual periods in 2012. We have adopted all provisions of this pronouncement by including other comprehensive income as a part of our condensed consolidated statements of comprehensive loss and such adoption did not have a significant impact on our condensed consolidated financial statements.

 

In May 2011, the FASB issued an amendment to the accounting guidance for fair value measurements and related disclosures. This amendment clarifies the application of certain existing fair value measurement guidance and expands the disclosures for fair value measurements that are estimated using significant unobservable inputs, or Level 3 measurements. This guidance is effective for interim and annual periods beginning after December 15, 2011. We have adopted all provisions of this pronouncement and such adoption did not have a significant impact on our condensed consolidated financial statements.

 

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Item 2.  Management’s Discussion and Analysis Of Financial Condition and Results of Operations

 

The following information should be read in conjunction with the unaudited financial information and the notes thereto included in this Quarterly Report on Form 10-Q and the audited financial information and the notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2011.

 

Except for the historical information contained herein, the matters discussed in this Quarterly Report on Form 10-Q may be deemed to be forward-looking statements that involve risks and uncertainties. We make such forward-looking statements pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 and other federal securities laws. In this Quarterly Report on Form 10-Q, words such as “may,” “will,” “expect,” “intend,” and similar expressions (as well as other words or expressions referencing future events, conditions or circumstances) are intended to identify forward-looking statements.

 

Examples of forward-looking statements contained in this report include statements regarding the following: our expectation that we will receive a final decision on our Marketing Authorization Application by the European Commission in mid-2012, our expectation that Takeda Pharmaceutical Company Limited, or Takeda, will launch Feraheme in Canada in the second quarter of 2012 and in the European Union in the second half of 2012, our expectation of revenue sources to fund our future operations, our expectations regarding the success of our collaboration with Takeda, including any potential milestone payments or royalties we may receive, our expectation that we will submit our Feraheme Supplemental New Drug Application in the U.S. for the treatment of anemia in all adult patients with iron deficiency anemia in 2012, our expectation that Takeda plans to file a Type II Variation with the European Medicines Agency in 2013 for the treatment of anemia in all adult patients with iron deficiency anemia, the design of our two pediatric studies to be conducted to meet our Pediatric Research Equity Act requirement, our intention to conduct two additional pediatric studies included in our pediatric investigation plan, our plan to conduct a post-approval trial to determine the safety and efficacy of repeat doses of Feraheme for the treatment of iron deficiency anemia and the design of such trial, our plan to conduct a magnetic resonance imaging study to evaluate the potential for iron deposits in the body following treatment with IV iron, our expectation that Feraheme will be sold in the European Union under the trade name Rienso™, our expectation of the timing of a decision from Swissmedic on our Rienso™ Marketing Authorization Application, our statement that our licensee in China, 3SBio Inc., or, 3SBio, plans to begin a Feraheme clinical study in China in 2012, our expectation that sales of GastroMARK® will not materially increase, our expectation that we will manufacture Feraheme drug substance and drug product for use in the European Union at our third-party manufacturers, our expectation that the majority of our November 2011 restructuring charges will be paid by the end of 2012, our expectations regarding our future revenues, including expected Feraheme revenues under our Takeda and 3SBio collaborations, our expectation that our reserves as a percentage of gross sales will increase during the remainder of 2012, our expectation regarding future license fee revenues from 3SBio and Takeda, our expectation that our costs of product sales as a percentage of net product sales will remain relatively stable during the remainder of 2012, our expectation that our research and development expenses will decrease during the remainder of 2012, our expectations regarding the amount of external expenses we expect to incur and the timing of our planned research and development projects, our expectation that selling, general and administrative expenses will remain relatively stable during the remainder of 2012, our expectation regarding our dividend and interest income, our expectations regarding our short- and long-term liquidity and capital requirements and our ability to finance our operations, our expectations regarding our future cash flows, our belief that the decline in the value of our auction rate securities is temporary and that we will ultimately be able to liquidate these investments without significant loss, our belief regarding the potential impact of the

 

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adoption of newly issued and future accounting guidance on our financial statements, our expectations that our cash and cash equivalents will remain relatively stable as compared to 2011, and information with respect to any other plans and strategies for our business. Our actual results and the timing of certain events may differ materially from the results discussed, projected, anticipated or indicated in any forward-looking statements.

 

Any forward-looking statement should be considered in light of the risks discussed in Part II, Item 1A below under “Risk Factors” in this Quarterly Report on Form 10-Q and in Part 1, Item 1A in our Annual Report on Form 10-K for the year ended December 31, 2011. We caution readers not to place undue reliance on any such forward-looking statements, which speak only as of the date they are made. We disclaim any obligation, except as specifically required by law and the rules of the United States Securities and Exchange Commission to publicly update or revise any such statements to reflect any change in company expectations or in events, conditions or circumstances on which any such statements may be based, or that may affect the likelihood that actual results will differ from those set forth in these forward-looking statements.

 

Overview

 

AMAG Pharmaceuticals, Inc., a Delaware corporation, was founded in 1981. We are a biopharmaceutical company focused on the development and commercialization of a therapeutic iron compound to treat iron deficiency anemia, or IDA. Our principal source of revenue is from the sale of Feraheme® (ferumoxytol) Injection for Intravenous, or IV, use, which was approved for marketing in the U.S. in June 2009 by the U.S. Food and Drug Administration, or the FDA, for use as an IV iron replacement therapy for the treatment of IDA in adult patients with chronic kidney disease, or CKD. We market and sell Feraheme in the U.S. through our own commercial organization, including a specialized sales force. We began commercial sale of Feraheme in the U.S. in July 2009 and sell Feraheme primarily to authorized wholesalers and specialty distributors.

 

In December 2011, Feraheme was granted marketing approval in Canada for use as an IV iron replacement therapy for the treatment of IDA in adult patients with CKD. In April 2012, the Committee for Medicinal Products for Human Use, or CHMP, of the European Medicines Agency, or EMA, issued a positive opinion for ferumoxytol for the treatment of IDA in adult patients with CKD. We expect a final decision on our Marketing Authorization Application, or MAA, by the European Commission in mid-2012. Under an agreement with Takeda Pharmaceutical Company Limited, or Takeda, Takeda has an exclusive license to market and sell Feraheme in Canada and the European Union, or EU. We expect Takeda to launch Feraheme in Canada in the second quarter of 2012 and in the EU, under the trade name Rienso™, in the second half of 2012. In addition, we are currently pursuing a marketing application with Takeda for Feraheme in Switzerland, under the trade name Rienso™, for the treatment of IDA in CKD patients.

 

In November 2011, we announced that we hired Jefferies & Company, Inc., or Jefferies, as our financial advisor to explore whether a sale of our company is a viable strategy for value maximization at this time while we simultaneously establish a solid foundation from which to drive profitability and deliver stockholder value if a sale is not pursued. We are conducting a strategic review with Jefferies to determine the optimal strategy for growth, which involves an evaluation of all business strategies to enhance our portfolio, including in-licensing and acquisition opportunities.

 

Prior to the FDA approval and commercial launch of Feraheme in 2009, we devoted substantially all of our resources to our research and development programs. Since then, we have incurred substantial costs related to the commercialization and development of Feraheme. We expect to continue to incur significant expenses to manufacture, market and sell Feraheme as an IV iron replacement therapeutic for

 

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use in adult CKD patients in the U.S., to further develop and seek marketing approval for Feraheme for the treatment of IDA in a broad range of patients, and to obtain marketing approval for Feraheme in countries outside of the U.S. Prior to the commercial launch of Feraheme, we financed our operations primarily from the sale of our equity securities, cash generated by our investing activities, and payments from our licensees. Since 2009, our revenues have been primarily attributable to product sales of Feraheme, along with license fee payments from Takeda. We currently expect to fund our future operations from cash from sales of Feraheme in the U.S., milestone payments we expect to receive from Takeda upon the commercial launch of Feraheme in Canada and regulatory approval and commercial launch of Feraheme in the EU, royalties we may receive with respect to sales of Feraheme in Canada and in the EU, cash generated by our investing activities, and the sale of our equity securities, if necessary. As of March 31, 2012, we had an accumulated deficit of approximately $452.3 million and a cash, cash equivalents and investments balance of approximately $217.9 million.

 

Takeda Collaboration

 

In March 2010, we entered into a License, Development and Commercialization Agreement, or the Takeda Agreement, with Takeda under which we granted exclusive rights to Takeda to develop and commercialize Feraheme as a therapeutic agent in Europe, Asia-Pacific countries (excluding Japan, China and Taiwan), the Commonwealth of Independent States, Canada, India and Turkey, or collectively, the Licensed Territory. Under the Takeda Agreement we may be entitled to receive milestone payments over time equaling approximately $220.0 million, including up to an aggregate of $33.0 million upon the commercial launch of Feraheme in Canada and the regulatory approval and commercial launch of Feraheme in the EU.

 

Clinical Development and Regulatory Status of Feraheme

 

During the first quarter of 2012, we completed enrollment in our global registrational program for Feraheme in patients with IDA regardless of the underlying cause. This program consists of two Phase III multi-center clinical trials to assess Feraheme for the treatment of IDA in a broad range of patients for whom treatment with oral iron is unsatisfactory, including women with abnormal uterine bleeding, or AUB, patients with cancer or gastrointestinal diseases, postpartum women and other causes.

 

In March 2012, we reported preliminary results from the first of the two Phase III studies in our global IDA registrational program. This study was an open label, active controlled trial that compared treatment with Feraheme to treatment with IV iron sucrose and enrolled 605 patients at 74 sites in Europe, Asia Pacific and Australia. The patients enrolled in the study had a history of unsatisfactory oral iron therapy and had IDA associated with various conditions including AUB, cancer, gastrointestinal disorders or other causes.

 

The study enrolled patients to receive a one gram IV course of either Feraheme or iron sucrose and was designed to demonstrate non-inferiority on the efficacy of Feraheme as compared to iron sucrose. Of the 605 patients enrolled in the study, 406 patients were randomly assigned to receive Feraheme and 199 were randomly assigned to receive iron sucrose. The demographics and all baseline parameters of patients who participated in the study were well balanced between the two treatment groups. The primary efficacy endpoint of the study was the mean change in hemoglobin from the date of determination of each patient’s baseline hemoglobin level to the fifth week following administration of the study drug or the proportion of patients who achieved a greater than or equal to 2.0 gram per deciliter increase in hemoglobin at any time from the date of determination of their baseline hemoglobin level to the fifth week following administration of the study drug, depending on the regulatory authority.

 

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In this study, Feraheme achieved the predefined criteria for non-inferiority on both primary efficacy endpoints. Patients treated with Feraheme achieved a mean increase in hemoglobin at week five of 2.7 grams per deciliter as compared to a mean increase of 2.4 grams per deciliter in patients treated with IV iron sucrose. An increase of 2.0 grams per deciliter or more in hemoglobin at any time from baseline to week five was achieved in 84% of patients treated with Feraheme as compared to 81% of patients treated with IV iron sucrose.

 

No new safety signals were observed with Feraheme and the types of reported adverse events, or AEs, were consistent with those seen in previous studies and those contained in the U.S. package insert for Feraheme. Overall, AEs experienced by patients in the two treatment groups were comparable, with AEs reported in 41.4% of Feraheme-treated patients as compared to 44.2% of patients treated with IV iron sucrose. Patients in both treatment groups experienced protocol-defined adverse events of special interest, including moderate to severe hypotension or hypersensitivity reactions, ranging from fever alone to an anaphylactoid reaction. Cardiovascular AEs were comparable between the two treatment groups. Serious adverse events, or SAEs, were reported in 4.2% of Feraheme-treated patients as compared to 2.5% of patients treated with IV iron sucrose. The SAEs reported in two Feraheme treated patients, or 0.5%, were reported as related to treatment by the applicable investigators in the study, compared to none that were deemed related to study drug by the investigator in the iron sucrose group.

 

The second Phase III trial in our global IDA registrational program is a double blind, placebo-controlled study to assess the efficacy and safety of two doses of 510 milligrams each of Feraheme compared to placebo in a total of approximately 800 patients with IDA. We completed enrollment in this trial during the first quarter of 2012 and we expect to submit a Supplemental New Drug Application, or sNDA, in the U.S. seeking marketing approval for Feraheme for the treatment of anemia in all adult patients with IDA with a history of unsatisfactory oral iron therapy during the second half of 2012. In addition, we expect that Takeda will file a Type II Variation, which is the equivalent of a sNDA in the U.S., seeking marketing approval for Feraheme for the treatment of anemia in all adult patients with IDA with a history of unsatisfactory oral iron therapy with the EMA in 2013.

 

Further, we have completed enrollment in an open label extension study for patients from the placebo-controlled study described above. Patients in this study will be followed for six months and will be eligible to receive two doses of 510 milligrams each of Feraheme whenever they meet treatment criteria.

 

We have also initiated two randomized, active-controlled pediatric studies of Feraheme for the treatment of IDA in pediatric CKD patients to meet our FDA post-approval Pediatric Research Equity Act requirement to support pediatric labeling of Feraheme. One study is in dialysis-dependent CKD pediatric patients, and the other is in CKD patients not on dialysis. Each study will assess the safety and efficacy of Feraheme treatment as compared to oral iron in approximately 144 pediatric patients. Both of these pediatric studies are currently open for enrollment.

 

Our pediatric investigation plan, which was a requirement for submission of our MAA, was approved by the EMA in December 2009 and includes the two pediatric studies needed to meet the requirements of the Pediatric Research Equity Act in the U.S. described above, and two additional pediatric studies requested by the EMA. These studies include a rollover study in pediatric CKD patients and a study in pediatric patients with IDA regardless of the underlying cause. The rollover study is open for enrollment. The Pediatric IDA study will commence once the appropriate dose of Feraheme is determined from the study data resulting from the two ongoing pediatric studies of Feraheme for the treatment of IDA in pediatric CKD patients, described above.

 

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As part of our obligations under the Takeda Agreement, we are also required to initiate a multi-center clinical trial to determine the safety and efficacy of repeat doses of Feraheme for the treatment of IDA in patients with hemodialysis dependent CKD. This study will be modified to include a treatment arm with iron sucrose, and will serve to meet a commitment we made to the EMA as a condition of the approval of our MAA for Feraheme in the EU. Final study design and timing of this trial is subject to further discussions with Takeda, however we currently expect enrollment to begin in the fourth quarter of 2012.

 

In addition, as part of the post-approval commitment we made to the EMA as a condition of the approval of our MAA for Feraheme in the EU, we plan to conduct a magnetic resonance imaging, or MRI, study to evaluate the potential for iron to deposit in the body following treatment with IV iron, specifically in the heart and liver, and, where possible, other major organs following repeated IV iron administration for the treatment of IDA in patients with CKD over a two year period.

 

In August 2010, Takeda filed an MAA with Swissmedic, the Swiss Agency for Therapeutic Products, seeking marketing approval for Feraheme for the treatment of IDA in CKD patients. We have received a positive pre-decision from Swissmedic and expect the final decision during the second or third quarter of 2012.

 

In December 2009, our licensee in China, 3SBio Inc., or 3SBio, filed an application with the Chinese State Food and Drug Administration, or the SFDA, to obtain approval to begin a registrational clinical trial necessary to file for marketing approval of Feraheme in China. If approved by the SFDA, 3SBio plans to commence a multi-center randomized efficacy and safety study of Feraheme in China involving approximately 200 CKD patients in 2012.

 

Other information

 

GastroMARK® , which is marketed and sold under the trade name Lumirem® outside of the U.S, is our oral contrast agent used for delineating the bowel in MRI and is approved and marketed in the U.S., Europe, and other countries through our licensees. Sales of GastroMARK by our licensees have been at approximately their current levels for many years, and we do not expect sales of GastroMARK to materially increase. In addition, in April 2012, we entered into an agreement with our U.S. licensee for GastroMARK to terminate that license effective immediately.

 

Results of Operations for the Three Months Ended March 31, 2012 as Compared to the Three Months Ended March 31, 2011

 

Revenues

 

Our total revenues for the three months ended March 31, 2012 and 2011 consisted of the following (in thousands):

 

 

 

Three Months Ended March 31,

 

 

 

 

 

 

 

2012

 

2011

 

$ Change

 

% Change

 

Product sales, net

 

$

13,708

 

$

11,022

 

$

2,686

 

24

%

License fee and other collaboration revenues

 

1,753

 

2,327

 

(574

)

-25

%

Royalties

 

19

 

36

 

(17

)

-47

%

Total

 

$

15,480

 

$

13,385

 

$

2,095

 

16

%

 

Our total revenues during the three months ended March 31, 2012 and 2011 were approximately $15.5 million and $13.4 million, respectively. Our revenues during the three months ended March 31,

 

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2012 reflect a $2.7 million increase in our net product sales and a $0.6 million decrease in our license fee and other collaboration revenues as compared to the three months ended March 31, 2011, as discussed in greater detail below.

 

The following table sets forth customers who represented 10% or more of our total revenues for the three months ended March 31, 2012 and 2011.

 

 

 

Three Months Ended March 31,

 

 

 

2012

 

2011

 

AmerisourceBergen Drug Corporation

 

45

%

38

%

McKesson Corporation

 

20

%

18

%

Cardinal Health, Inc.

 

15

%

13

%

Takeda Pharmaceuticals Company Limited

 

11

%

17

%

 

Net Product Sales

 

Net product sales for the three months ended March 31, 2012 and 2011 consisted of the following (in thousands):

 

 

 

Three Months Ended March 31,

 

 

 

 

 

 

 

2012

 

2011

 

$ Change

 

% Change

 

Feraheme

 

$

13,626

 

$

10,861

 

$

2,765

 

25

%

GastroMARK

 

82

 

161

 

(79

)

-49

%

Total

 

$

13,708

 

$

11,022

 

$

2,686

 

24

%

 

Our total net product sales increased by $2.7 million, or 24%, during the three months ended March 31, 2012 as compared to the three months ended March 31, 2011. The $2.7 million increase was primarily due to increased sales of Feraheme as the result of an increase in provider demand in the first quarter of 2012 as compared to the first quarter of 2011 as well as a $0.5 million reversal of previously reserved returns due to the lapse of the return period. However, we also offered higher average customer discounts, chargebacks and rebates to our end-users during the three months ended March 31, 2012 as compared to the three months ended March 31, 2011, which partially offset the increase in gross product sales for the quarter ended March 31, 2012 as compared to the same period in 2011. During the first quarter of 2012, we reduced our gross product sales by recording allowances of $7.1 million as compared to allowances of $5.1 million recorded during the first quarter of 2011.

 

Our net product sales may fluctuate from period to period as a result of a number of factors, including but not limited to the following:

 

·                  Wholesaler demand forecasts and buying decisions as well as end-user demand, which can create uneven purchasing patterns by our customers;

 

·                  Changes or adjustments to our reserves or changes in the timing or availability of government or customer discounts, rebates and incentives;

 

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·                  The impact of any pricing strategies we may implement related to Feraheme, including the magnitude of rebates and/or discounts we may offer;

 

·                  Changes in the actual or perceived safety and efficacy profile of Feraheme, or products that compete with Feraheme, which could cause customers to reduce, discontinue or increase their use of Feraheme;

 

·                  The introduction of new products into the market that compete with Feraheme, such as Nulecit™ or, if approved, Injectafer®;

 

·                  The enactment of or changes in legislation that impact third-party reimbursement coverage and pricing; and

 

·                  Any expansion or contraction of the overall size of the IV iron market, which could result from a number of factors including but not limited to, changes in treatment guidelines or practices related to IDA.

 

For further details related to our revenue recognition and related sales allowances policy, refer to our critical accounting policies included in 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, 2011.

 

An analysis of our product sales allowances and accruals for the three months ended March 31, 2012 and 2011 is as follows (in thousands):

 

 

 

Three Months Ended March 31,

 

 

 

2012

 

2011

 

Product sales allowances and accruals

 

 

 

 

 

Discounts and chargebacks

 

$

5,892

 

$

2,220

 

Government and other rebates

 

1,460

 

2,534

 

Returns

 

(266

)

299

 

Total provision for product sales allowances and accruals

 

$

7,086

 

$

5,053

 

 

 

 

 

 

 

Total gross product sales

 

$

20,794

 

$

16,075

 

 

 

 

 

 

 

Total provision for product sales allowances and accruals as a percent of total gross product sales

 

34

%

31

%

 

Product sales allowances and accruals are primarily comprised of both direct and indirect fees, discounts and rebates, and provisions for estimated product returns. Direct fees, discounts and rebates are contractual fees and price adjustments payable to wholesalers, specialty distributors and other customers that purchase products directly from us. Indirect fees, discounts and rebates are contractual price adjustments payable to healthcare providers and organizations, such as certain physicians, clinics, hospitals, GPOs, and dialysis organizations that typically do not purchase products directly from us but rather from wholesalers and specialty distributors. In accordance with guidance related to accounting for fees and consideration given by a vendor to a customer, including a reseller of a vendor’s products, these fees, discounts and rebates are presumed to be a reduction of the selling price of Feraheme. Product sales allowances and accruals are based on definitive contractual agreements or legal requirements (such as Medicaid laws and regulations) related to the purchase and/or utilization of the product by these entities.

 

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Product sales allowances and accruals are recorded in the same period that the related revenue is recognized and are estimated using either historical, actual and/or other data, including estimated patient usage, applicable contractual rebate rates, contract performance by the benefit providers, other current contractual and statutory requirements, historical market data based upon experience of Feraheme and other products similar to Feraheme, specific known market events and trends such as competitive pricing and new product introductions and current and forecasted customer buying patterns and inventory levels, and the shelf life of Feraheme. As part of this evaluation, we also review changes to federal and other legislation, changes to rebate contracts, changes in the level of discounts, and changes in product sales trends. Reserve estimates are evaluated quarterly and may require changes to our estimates to better align our estimates with actual results. Although allowances and accruals are recorded at the time of product sale, certain rebates are typically paid out, on average, up to six months or longer after the sale.

 

We are subject to reimbursement arrangements with state Medicaid programs for which we estimate and record rebate reserves. We determine our estimates for Medicaid rebates based on market research data related to utilization rates by various end-users, and actual Feraheme sales data and forecasted customer buying patterns blended with historical experience of products similar to Feraheme sold by others. If we determine in future periods that our actual rebate experience is not indicative of expected claims or if other factors affect estimated claims rates, we may be required to change our current estimated Medicaid accumulated reserve, which would affect our earnings in the period of the change and could be significant.

 

We generally offer our wholesalers, specialty distributors and other customers a limited right to return product purchased directly from us, principally based on the product’s expiration date which, once packaged, is currently four years. Reserves for product returns are recorded in the period the related revenue is recognized, resulting in a reduction to product sales. We evaluate our estimated product returns rate each period based on the historical return patterns and known or expected changes in the marketplace. Due to the extended period between the sale of Feraheme and when the limited right of return is allowable, which could be several years, we currently have limited actual returns data and therefore are not able to solely rely on our actual returns experience. During the first quarter of 2012, we reversed approximately $0.5 million of previously reserved product returns allowance due to the lapse of the product return period on certain manufactured Feraheme lots that carried a two year expiration period. As a result, the product returns reserve applied to gross product sales for the three months ended March 31, 2012 was ($0.3) million as compared to $0.3 million in the three months ended March 31, 2011.

 

An analysis of the amount of, and change in, reserves for the three months ended March 31, 2012 and 2011 is as follows (in thousands):

 

 

 

Discounts

 

Rebates and
Fees

 

Returns

 

Total

 

Balance at January 1, 2012

 

$

1,822

 

$

3,101

 

$

2,842

 

$

7,765

 

Current provisions relating to sales in current year

 

5,892

 

1,554

 

255

 

7,701

 

Adjustments relating to sales in prior years

 

 

(94

)

(521

)

(615

)

Payments/returns relating to sales in current year

 

(3,976

)

(156

)

 

(4,132

)

Payments/returns relating to sales in prior years

 

(1,859

)

(1,562

)

(199

)

(3,620

)

Balance at March 31, 2012

 

$

1,879

 

$

2,843

 

$

2,377

 

$

7,099

 

 

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Discounts

 

Rebates and
Fees

 

Returns

 

Total

 

Balance at January 1, 2011

 

$

1,148

 

$

8,218

 

$

1,797

 

$

11,163

 

Current provisions relating to sales in current year

 

2,443

 

2,601

 

299

 

5,343

 

Other provisions relating to deferred revenue

 

 

(13

)

 

(13

)

Adjustments relating to sales in prior years

 

(223

)

(67

)

 

(290

)

Payments/returns relating to sales in current year

 

(1,185

)

(73

)

 

(1,258

)

Payments/returns relating to sales in prior years

 

(925

)

(4,088

)

 

(5,013

)

Balance at March 31, 2011

 

$

1,258

 

$

6,578

 

$

2,096

 

$

9,932

 

 

During the three months ended March 31, 2012 and 2011, we decreased our product sales allowances and accruals by approximately $0.6 million and $0.3 million, respectively, for changes in estimates relating to sales in prior years. The $0.6 million adjustments in the first quarter of 2012 were primarily caused by the reversal of $0.5 million of previously reserved returns due to the lapse of the return period. The $0.3 million adjustments in the first quarter of 2011 were primarily caused by differences between actual customer utilization and claims experience to date as compared to our initial estimates. Product return rights for additional lots of Feraheme will expire throughout the second and third quarters of 2012, and it is possible there will be additional reductions in our returns reserve as we continue to gain actual returns experience.

 

There are several factors that make it difficult to predict future changes in our sales allowances and accruals as a percentage of gross product sales including, but not limited to, the following:

 

·                  Variations in, and the success of pricing, fee, rebate and discount structures implemented in our efforts to increase adoption of Feraheme;

 

·                  Variations in our customer mix;

 

·                  Changes in legislation, such as the Health Care and Education Affordability Reconciliation Act, or the Health Care Reform Act, the Budget Control Act of 2011 or any future legislation;

 

·                  Adjustments and refinements to our prior estimates and assumptions; and

 

·                  The impact of and any actions taken by us or our competitors to address pricing and reimbursement considerations related to Feraheme or products that compete with Feraheme.

 

Overall, we expect that our reserves as a percentage of gross sales will increase during the remainder of 2012 due primarily to our efforts to continue to increase adoption and utilization of Feraheme, our efforts to address continuing reimbursement and competitive pricing pressures, as well as the expected customer mix and utilization rates, all of which will negatively affect the future average net selling price of Feraheme.

 

There are a number of factors that make it difficult to predict the magnitude of future Feraheme sales, including but not limited to, the following:

 

·                  The magnitude and timing of adoption of Feraheme by physicians, hospitals and other healthcare payors and providers;

 

·                  Any expansion or contraction of the overall size of the IV iron market, which could result from a number of factors including but not limited to, changes in treatment guidelines or practices related to IDA;

 

·                  The effect of federal and other legislation such as the Health Care Reform Act and the Budget Control Act of 2011;

 

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·                  The inventory levels maintained by Feraheme wholesalers, distributors and other customers;

 

·                  The frequency of re-orders by existing customers;

 

·                  The impact of any actual or perceived safety or efficacy issues with Feraheme; and

 

·                  The impact of and any actions taken by us or our competitors to address pricing and reimbursement considerations related to Feraheme or products that compete with Feraheme.

 

As a result of these and other factors, future Feraheme sales could vary significantly from quarter to quarter and, accordingly, our Feraheme net product revenues in current or previous quarters may not be indicative of future Feraheme net product revenues.

 

License Fee and Other Collaboration Revenues

 

License fee and other collaboration revenues for the three months ended March 31, 2012 and 2011 consisted of the following (in thousands):

 

 

 

Three Months Ended March 31,

 

 

 

 

 

 

 

2012

 

2011

 

$ Change

 

% Change

 

Deferred license fee revenues from Takeda

 

$

1,524

 

$

1,524

 

$

 

0

%

Reimbursement revenues primarily from Takeda

 

229

 

803

 

(574

)

-71

%

Total

 

$

1,753

 

$

2,327

 

$

(574

)

-25

%

 

Most of our license fee and other collaboration revenues for the three months ended March 31, 2012 and 2011 related to revenue recognized under the Takeda Agreement. During each of the three months ended March 31, 2012 and 2011 we recorded $1.5 million of revenues associated with the amortization of $61.0 million of deferred revenues recorded in connection with the Takeda Agreement. The $61.0 million of deferred revenues was comprised of a $60.0 million upfront payment which we received from Takeda in April 2010, as well as approximately $1.0 million reimbursed to us during 2010 for certain expenses incurred prior to entering the agreement, which we considered an additional upfront payment. As of March 31, 2012, we had approximately $48.8 million remaining in deferred revenues related to the $61.0 million upfront payments received from Takeda.

 

In addition, under the terms of the Takeda Agreement, Takeda is responsible for reimbursing us for certain out-of-pocket regulatory and clinical trial supply costs we incur in the conduct of certain regulatory and clinical research activities we manage under the agreement. Because we are acting as the principal in carrying out these activities, any reimbursement payments received from Takeda are recorded in license fee and other collaboration revenues in our condensed consolidated statement of operations and offsets the costs that we incur during the period in which we perform those services. During the three months ended March 31, 2012 and 2011, we recorded $0.2 million and $0.8 million, respectively, of revenues associated with the reimbursement of out-of pocket regulatory and clinical supply costs in connection with the Takeda Agreement.

 

We anticipate that our license fee and other collaboration revenues will increase for the remainder of 2012 due to our expected receipt of $33.0 million in milestone payments from Takeda upon the commercial launch of Feraheme in Canada and the regulatory approval and commercial launch of Feraheme in the EU, a portion of which will be deferred and reflected in our license fee and other collaboration revenues.

 

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Costs and Expenses

 

Cost of Product Sales

 

Cost of product sales for the three months ended March 31, 2012 and 2011 consisted of the following (in thousands):

 

 

 

Three Months Ended March 31,

 

 

 

 

 

 

 

2012

 

2011

 

$ Change

 

% Change

 

Cost of Product Sales

 

$

2,646

 

$

3,041

 

$

(395

)

-13

%

Percentage of Net Product Sales

 

19

%

28

%

 

 

 

 

 

Our cost of product sales are primarily comprised of manufacturing costs associated with Feraheme. Our cost of product sales decreased by $0.4 million, or 13%, during the three months ended March 31, 2012 as compared to the same period in 2011, primarily due to a lower average production cost of certain vials sold in the first quarter of 2012 as compared to vials sold in the first quarter of 2011 due to the sale of certain inventory in the first quarter of 2012 that had lower associated carrying value because it was produced prior to regulatory approval.

 

We expect our cost of product sales as a percentage of net product sales to remain relatively stable for the remainder of 2012.

 

Research and Development Expenses

 

Research and development expenses include external expenses, such as costs of clinical trials, contract research and development expenses, certain manufacturing research and development costs, regulatory filing fees, consulting and professional fees and expenses, and internal expenses, such as compensation of employees engaged in research and development activities, the manufacture of product needed to support research and development efforts, related costs of facilities, and other general costs related to research and development. Where possible, we track our external costs by major project. To the extent that external costs are not attributable to a specific project or activity, they are included in other external costs. Prior to the initial regulatory approval of our products or development of new manufacturing processes, costs associated with manufacturing process development and the manufacture of drug product are recorded as research and development expenses. Subsequent to initial regulatory approval, costs associated with the manufacture of our products for commercial sale are capitalized in inventory and recorded as cost of product sales when sold.

 

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Research and development expenses for the three months ended March 31, 2012 and 2011 consisted of the following (in thousands):

 

 

 

Three Months Ended March 31,

 

 

 

 

 

 

 

2012

 

2011

 

$ Change

 

% Change

 

External Research and Development Expenses

 

 

 

 

 

 

 

 

 

Feraheme to treat IDA regardless of the underlying cause

 

$

6,781

 

$

5,736

 

$

1,045

 

18

%

Feraheme to treat IDA in CKD patients

 

730

 

2,499

 

(1,769

)

-71

%

Feraheme as a therapeutic agent, general

 

88

 

60

 

28

 

47

%

Feraheme manufacturing process development and materials

 

883

 

422

 

461

 

>100

%

Other external costs

 

56

 

35

 

21

 

60

%

Total

 

$

8,538

 

$

8,752

 

$

(214

)

-2

%

 

 

 

 

 

 

 

 

 

 

Internal Research and Development Expenses

 

 

 

 

 

 

 

 

 

Compensation, payroll taxes, benefits and other expenses

 

3,502

 

4,172

 

(670

)

-16

%

Equity-based compensation expense

 

422

 

642

 

(220

)

-34

%

Total

 

$

3,924

 

$

4,814

 

$

(890

)

-18

%

 

 

 

 

 

 

 

 

 

 

Total Research and Development Expenses

 

$

 12,462

 

$

13,566

 

$

(1,104

)

-8

%

 

Total research and development expenses incurred in the three months ended March 31, 2012 decreased by $1.1 million, or 8%, as compared to the three months ended March 31, 2011. The $1.1 million decrease was due to reduced external costs resulting from decreased clinical trial activity in our CKD related trials, partially offset by an increase in external research and development expenses in connection with our Phase III clinical development program for Feraheme to treat IDA regardless of the underlying cause. In addition, the $1.1 million decrease in total research and development expenses was due to reduced internal research and development expenses primarily as the result of lower compensation related costs, as discussed in greater detail below.

 

Our external research and development expenses decreased by $0.2 million, or 2%, for the three months ended March 31, 2012 as compared to the three months ended March 31, 2011. The decrease in our external expenses was due primarily to decreased costs incurred in connection with our global clinical program to support our MAA in the EU for the treatment of IDA in CKD patients, which was completed in 2012, our post-approval clinical study evaluating Feraheme treatment compared to treatment with another IV iron, which was completed in 2011, and the current pace of enrollment in our on-going pediatric studies of Feraheme, partially offset by increased external costs related to our Phase III clinical development program for Feraheme to treat IDA regardless of the underlying cause. In addition, our Feraheme manufacturing process development and materials costs were $0.5 million higher in the first quarter of 2012 as compared to the same period in 2011 due to the write-off of pre-approved inventory which we no longer believed was suitable for sale.

 

Our internal research and development expenses decreased by $0.9 million, or 18%, for the three months ended March 31, 2012 as compared to the three months ended March 31, 2011. The decrease in internal costs was primarily attributable to the net decrease of other compensation-related benefits following our November 2011 corporate restructuring, which resulted in lower headcount in our research and development departments and the reduction of equity-based compensation expense.

 

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Research and Development Activities

 

We expect research and development expenses to continue to decrease for the remainder of 2012 primarily due to the completion of our clinical development program of Feraheme for the treatment of IDA regardless of the underlying cause and our study to support our Feraheme MAA in the EU for the treatment of IDA in CKD patients, partially offset by costs related to the preparation and submission of our planned regulatory filings in 2012, including our Feraheme sNDA in the U.S. to treat IDA regardless of the underlying cause, costs associated with certain Feraheme clinical studies we have committed to conduct as a condition of approval of our Feraheme MAA by the EMA, such as the MRI trial discussed above, as well as other miscellaneous research and development related activities in support of our Feraheme development programs.

 

We do not track our internal costs by project since our research and development personnel work on a number of projects concurrently and much of our fixed costs benefit multiple projects or our operations in general. We track our external costs on a major project basis, in most cases through the later of the completion of the last trial in the project or the last submission of a regulatory filing to the FDA or applicable foreign regulatory body. The following two major research and development projects are currently ongoing:

 

·                  Feraheme to treat IDA regardless of the underlying cause. This project currently includes: (1) a Phase III clinical study evaluating Feraheme treatment compared to treatment with placebo; (2) a Phase III clinical study evaluating Feraheme treatment compared to treatment with another IV iron; and (3) an extension study.

 

·                  Feraheme to treat IDA in CKD patients. This project currently includes: (1) a post-approval clinical study evaluating Feraheme treatment compared to treatment with another IV iron to support our MAA submission; (2) two ongoing pediatric studies that are being conducted as part of our post-approval Pediatric Research Equity Act requirement to support pediatric CKD labeling of Feraheme; (3) two additional pediatric studies to be conducted in accordance with our approved pediatric investigation plan to support our MAA submission; (4) a multi-center clinical trial to be conducted to determine the safety and efficacy of repeat doses of Feraheme for the treatment of IDA in patients with hemodialysis dependent CKD; and (5) a MRI study to evaluate the potential for iron to deposit in the body following treatment with IV iron, specifically in the heart and liver, and, where possible, other major organs following repeated IV iron administration for the treatment of IDA in patients with CKD over a two year period.

 

Through March 31, 2012, we have incurred aggregate external research and development expenses of approximately $52.1 million related to our current program for the development of Feraheme to treat IDA regardless of the underlying cause. We currently estimate that the total remaining external costs associated with the efforts needed to complete this development project will be in the range of approximately $8.0 to $13.0 million, the majority of which will be incurred by the end of 2012.

 

Through March 31, 2012, we have incurred aggregate external research and development expenses of approximately $21.5 million related to our current program for the development of Feraheme to treat IDA in CKD patients. We currently estimate that the total remaining external costs associated with this development project will be in the range of approximately $28.0 to $38.0 million over the next several years.

 

Conducting clinical trials involves a number of uncertainties, many of which are out of our control. Our estimates of external costs associated with our research and development projects could therefore vary from our current estimates for a variety of reasons including but not limited to the following: delays in our clinical trials due to slow enrollment, unexpected results from our clinical sites that affect our

 

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ability to complete the studies in a timely manner, unanticipated adverse reactions to Feraheme either in commercial use or in a clinical trial setting, inadequate performance or errors by third-party service providers, any deficiencies in the design or oversight of these studies by us, the need to conduct additional clinical trials, or any adverse regulatory action or delay in the submission of any applicable regulatory filing. As a result, we are unable to reasonably estimate the specific timing of any expected net cash inflows resulting from these projects, provided however, as the result of recent regulatory decisions on our marketing applications for Feraheme in the CKD indication from the CHMP and HealthCanada, we expect that Feraheme will be launched commercially in Canada and the EU during 2012, at which point we will receive an aggregate of $33.0 million of milestone payments and we will begin receiving royalty payments in accordance with the Takeda Agreement.

 

Selling, General and Administrative Expenses

 

Our selling, general and administrative expenses include costs related to our commercial personnel, including our specialized sales force, medical education professionals, pharmacovigilance and safety monitoring and other commercial support personnel, costs related to our administrative personnel, including our legal, finance and executive personnel, external and facilities costs required to support the marketing and sale of Feraheme and other costs associated with our corporate activities.

 

Selling, general and administrative expenses for the three months ended March 31, 2012 and 2011 consisted of the following (in thousands):

 

 

 

Three Months Ended March 31,

 

 

 

 

 

 

 

2012

 

2011

 

$ Change

 

% Change

 

Compensation, payroll taxes and benefits

 

$

6,807

 

$

8,408

 

$

(1,601

)

-19

%

Sales and marketing consulting, professional fees, and other expenses

 

2,532

 

4,664

 

(2,132

)

-46

%

General and administrative consulting, professional fees and other expenses

 

2,657

 

2,924

 

(267

)

-9

%

Equity-based compensation expense

 

1,185

 

3,638

 

(2,453

)

-67

%

Total

 

$

13,181

 

$

19,634

 

$

(6,453

)

-33

%

 

Total selling, general and administrative expenses incurred in the three months ended March 31, 2012 decreased by $6.5 million, or 33%, as compared to the three months ended March 31, 2011. Compensation, payroll taxes and benefits decreased by $1.6 million during the first quarter of 2012 as compared to the same period in 2011 primarily as a result of reduced headcount resulting from our November 2011 corporate restructuring. In addition, sales and marketing consulting, professional fees, and other expenses decreased by $2.1 million during the three months ended March 31, 2012 as compared to the same period in 2011 due primarily to reduced costs related to advertising and marketing materials, and certain other general marketing costs. The $2.5 million decrease in equity-based compensation expense during three months ended March 31, 2012 as compared to the three months ended March 31, 2011 was due primarily to a $1.4 million reduction of equity-based compensation expense associated with the 2011 departures of certain of our executive officers, including each of our former chief financial officer, chief executive officer and chief commercial officer, and the impact of our November 2011 corporate workforce reduction, partially offset by the expense associated with equity awards to new employees and additional equity awards to existing employees.

 

We expect total selling, general and administrative expenses will remain relatively stable for the remainder of 2012.

 

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Other Income (Expense)

 

Other income (expense) for the three months ended March 31, 2012 and 2011 consisted of the following (in thousands):

 

 

 

Three Months Ended March 31,

 

 

 

 

 

 

 

2012

 

2011

 

$ Change

 

% Change

 

Interest and dividend income, net

 

$

393

 

$

560

 

$

(167

)

-30

%

Gains on investments, net

 

 

1

 

(1

)

-100

%

Total

 

$

393

 

$

561

 

$

(168

)

-30

%

 

Other income (expense) for the three months ended March 31, 2012 decreased by $0.2 million as compared to the three months ended March 31, 2011. This decrease was primarily attributable to a slight decrease in interest and dividend income as the result of lower average cash balances in the first quarter of 2012 as compared to the first quarter of 2011.

 

We expect interest and dividend income to remain relatively consistent with current levels for the remainder of 2012.

 

Net Loss

 

For the reasons stated above, we incurred a net loss of $12.4 million, or $0.58 per basic and diluted share, for the three months ended March 31, 2012 as compared to a net loss of $22.3 million, or $1.05 per basic and diluted share, for the three months ended March 31, 2011.

 

Liquidity and Capital Resources

 

General

 

We finance our operations primarily from the sale of Feraheme, payments from our licensees, cash generated from our investing activities, and the sale of our common stock. We expect to continue to incur significant expenses to manufacture, market and sell Feraheme as an IV iron replacement therapeutic for use in adult CKD patients in the U.S., Canada and the EU, and to further develop and seek regulatory approval for Feraheme for the treatment of IDA in a broad range of patients and in countries outside of the U.S.

 

Our long-term capital requirements will depend on many factors, including, but not limited to, the following:

 

·                  Our ability to successfully commercialize Feraheme in the U.S. and Takeda’s ability to successfully commercialize Feraheme in its licensed territories outside of the U.S.;

 

·                  The magnitude of U.S. Feraheme sales and royalties we may receive under the Takeda Agreement on Feraheme sales outside of the U.S.;

 

·                  Our ability to obtain U.S. regulatory approval for Feraheme to treat IDA regardless of the underlying cause and our ability to obtain final marketing approval for Feraheme outside the U.S., particularly in the EU;

 

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·                  Our ability to achieve the various milestones and receive the associated payments under the Takeda Agreement;

 

·                  Costs associated with the U.S. commercialization of Feraheme, including costs associated with maintaining our commercial infrastructure, executing our promotional and marketing strategy for Feraheme and conducting our required pediatric clinical trials and our post-marketing clinical studies;

 

·                  Costs associated with our development of Feraheme for the treatment of IDA in a broad range of patients in the U.S.;

 

·                  The outcome of and costs associated with any material litigation to which we are or may become a party;

 

·                  Our ability to liquidate our investments in auction rate securities, or ARS, in a timely manner and without significant loss;

 

·                  Our ability to maintain successful collaborations with our licensees and/or to enter into additional strategic relationships or acquisitions, if necessary; and

 

·                  Our ability to raise additional capital on terms and within a timeframe acceptable to us, if necessary.

 

As of March 31, 2012, our investments consisted of corporate debt securities, U.S. treasury and government agency securities, commercial paper and ARS. We place our cash and investments in instruments that meet high credit quality and diversification standards, as specified in our investment policy. Our investment policy also limits the amount of our credit exposure to any one issue or issuer, excluding U.S. government entities, and seeks to manage these assets to achieve our goals of preserving principal, maintaining adequate liquidity at all times, and maximizing returns.

 

Cash, cash equivalents and investments as of March 31, 2012 and December 31, 2011 consisted of the following (in thousands):

 

 

 

March 31, 2012

 

December 31, 2011

 

$ Change

 

% Change

 

Cash and cash equivalents

 

$

37,619

 

$

63,474

 

$

(25,855

)

-41

%

Short-term investments

 

162,833

 

148,703

 

14,130

 

10

%

Long-term investments

 

17,409

 

17,527

 

(118

)

-1

%

Total

 

$

217,861

 

$

229,704

 

$

(11,843

)

-5

%

 

The $11.8 million decrease in cash, cash equivalents and investments as of March 31, 2012 from December 31, 2011 was primarily due to cash expended to fund our operations partially offset by cash received from Feraheme sales and interest income.

 

We expect that our cash, cash equivalents and investments balances, in the aggregate, will increase from their current balances during the remainder of 2012. Our expectation assumes our continued investment in the development and commercialization of Feraheme, the continued realignment of our cost structure following our November 2011 corporate restructuring, and the expected receipt of $33.0 million in milestone payments from Takeda. We believe that our cash, cash equivalents, and short-term

 

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investments as of March 31, 2012 and the cash we currently expect to receive from sales of Feraheme, earnings on our investments, and potential milestone and royalty payments from Takeda will be sufficient to satisfy our cash flow needs for at least the next twelve months, including projected operating expenses related to our ongoing development and commercialization programs for Feraheme.

 

In November 2011, in order to align our operating expenses with our near-term revenue projections for Feraheme, we initiated a corporate restructuring, including a workforce reduction plan, which included an approximate 25% reduction in positions. During the fourth quarter of 2011, we recorded $3.5 million of restructuring related costs as operating expenses, primarily related to employee severance and benefits. The workforce reduction was substantially completed by the end of 2011, and we expect that the majority of our restructuring charges will be paid by the end of 2012.

 

In February 2008, our ARS began to experience failed auctions and have continued to experience failed auctions since that time. As a result of the lack of significant observable ARS market activity since February 2008, we use a discounted cash flow methodology to value these securities as opposed to valuing them at their par value. Our valuation analysis considers, among other items, assumptions that market participants would use in their estimates of fair value, such as the collateral underlying the security, the creditworthiness of the issuer and any associated guarantees, credit ratings of the security by the major securities rating agencies, the ability or inability to sell the investment in an active market or to the issuer, the timing of expected future cash flows, and the expectation of the next time the security will have a successful auction or when call features may be exercised by the issuer. We believe we will ultimately be able to liquidate our investments in ARS without significant loss prior to their maturity dates primarily due to the collateral securing most of our ARS. Our ARS balance has declined from a par value of $105.4 million at December 31, 2007 to a par value of $19.8 million at March 31, 2012 without the recognition of a material loss. However, it could take until final maturity of the ARS to realize the par value of our remaining ARS investments. In the event that we need to access our investments in these securities, we will not be able to do so until a future auction is successful, the issuer calls the security pursuant to a mandatory tender or redemption prior to maturity, a buyer is found outside the auction process, or the securities mature. In the event we are forced to seek a buyer outside the auction process, we may realize a significant loss on the sale of these securities.

 

As of March 31, 2012, we held a total of $17.4 million in fair market value of ARS, reflecting a reduction of approximately $2.4 million from the par value of these securities of approximately $19.8 million. As of March 31, 2012, all of our ARS were municipal bonds with an auction reset feature and were classified as available-for-sale. The majority of our ARS portfolio was rated AAA as of March 31, 2012 by at least one of the major securities rating agencies and was primarily collateralized by student loans substantially guaranteed by the U.S. government under the Federal Family Education Loan Program. As of March 31, 2012, all of our ARS continue to pay interest according to their stated terms.

 

The ongoing uncertainty in the global financial markets has had an adverse impact on financial market activities world-wide, resulting in, among other things, volatility in security prices, periodic diminished liquidity and credit availability, ratings downgrades of certain investments and declining valuations of others. Although we invest our excess cash in investment grade securities, there can be no assurance that changing circumstances will not affect our future financial position, results of operations or liquidity.

 

Cash flows from operating activities

 

During the three months ended March 31, 2012, our use of $11.1 million of cash in operations was attributable principally to our net loss of approximately $12.4 million, adjusted for the following:

 

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·                  Non-cash operating items of $3.0 million including equity-based compensation expense, depreciation, income tax benefit, and other non-cash items;

 

·                  A decrease in deferred revenues and other long-term liabilities of $1.6 million, which reflects timing differences between the receipt and payment of cash associated with certain transactions and the recognition of such amounts in our results of operations;

 

·                  A combined decrease of $2.4 million in accounts receivable, prepaid assets and inventories; and

 

·                  A decrease of $2.5 million in accounts payable and accrued expenses.

 

Our net loss of $12.4 million was primarily the result of commercialization expenses, including marketing and promotion costs, compensation and other expenses, research and development costs, including costs associated with our clinical trials, and general and administrative costs, partially offset by net product and collaboration revenues.

 

Cash flows from investing activities

 

Cash used in investing activities was $14.7 million during the three months ended March 31, 2012 and was primarily attributable to the purchases of investments partially offset by proceeds from the sales and maturities of our investments.

 

Contractual Obligations

 

In July 2011, we entered into an Agreement and Plan of Merger and Reorganization, or the Allos Merger Agreement, with Alamo Acquisition Sub, Inc., a Delaware corporation and our wholly-owned subsidiary, and Allos Therapeutics, Inc., or Allos, which was amended in August 2011. In October 2011, pursuant to the terms of the Allos Merger Agreement, we terminated the Allos Merger Agreement and paid Allos an expense reimbursement fee of $2.0 million in connection with such termination. Under the terms of the Allos Merger Agreement, we are required to pay Allos a termination fee of $12.0 million (in addition to the $2.0 million expense reimbursement fee we paid Allos in October 2011) in the event that we enter into certain acquisition transactions on or prior to October 21, 2012 or such a transaction is consummated on or before such date.

 

Off-Balance Sheet Arrangements

 

As of March 31, 2012, we did not have any off-balance sheet arrangements as defined in Regulation S-K, Item 303(a)(4)(ii).

 

Critical Accounting Policies

 

Our management’s discussion and analysis of our financial condition and results of operations is based on our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires management to make certain estimates and assumptions that affect the reported amount of assets, liabilities, revenues and expenses, and the related disclosure of contingent assets and liabilities. The most significant estimates and assumptions are used in, but are not limited to, revenue recognition related to product sales and collaboration agreements, product sales allowances and accruals, assessing investments for potential other-than-temporary impairment and determining values of investments, accrued expenses and equity-based compensation expense. Actual results could differ materially from those estimates. In

 

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making these estimates and assumptions, management employs critical accounting policies. Our critical accounting policies include revenue recognition and related sales allowances, valuation of investments and equity-based compensation. For a detailed description, refer to our critical accounting policies included in 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, 2011.

 

Impact of Recently Issued and Proposed Accounting Pronouncements

 

In June 2011, the Financial Accounting Standards Board, or FASB, issued amended guidance on the presentation of comprehensive income in financial statements. This amendment provides companies the option to present the components of net income and other comprehensive income either as one continuous statement of comprehensive income or as two separate but consecutive statements. It eliminates the option to present components of other comprehensive income as part of the statement of changes in stockholders’ equity. The provisions of this guidance are effective for interim and annual periods in 2012. We have adopted all provisions of this pronouncement and such adoption did not have a significant impact on our condensed consolidated financial statements.

 

In May 2011, the FASB issued an amendment to the accounting guidance for fair value measurements and related disclosures. This amendment clarifies the application of certain existing fair value measurement guidance and expands the disclosures for fair value measurements that are estimated using significant unobservable inputs, or Level 3 measurements. This guidance is effective for interim and annual periods beginning after December 15, 2011. We have adopted all provisions of this pronouncement and such adoption did not have a significant impact on our condensed consolidated financial statements.

 

Item 3.  Quantitative and Qualitative Disclosures About Market Risk.