XNAS:AMAG AMAG Pharmaceuticals Inc Quarterly Report 10-Q Filing - 6/30/2012

Effective Date 6/30/2012

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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 June 30, 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 July 30, 2012, there were 21,390,188 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 June 30, 2012 and December 31, 2011

4

 

Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2012 and 2011

5

 

Condensed Consolidated Statements of Comprehensive (Income) Loss for the three and six months ended June 30, 2012 and 2011

6

 

Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 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

24

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

45

Item 4.

Controls and Procedures

46

 

 

 

PART II.

OTHER INFORMATION

 

Item 1.

Legal Proceedings

46

Item 1A.

Risk Factors

47

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)

 

 

 

June 30, 2012

 

December 31, 2011

 

ASSETS

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

30,678

 

$

63,474

 

Short-term investments

 

176,571

 

148,703

 

Accounts receivable, net

 

5,778

 

5,932

 

Inventories

 

13,580

 

15,206

 

Receivable from collaboration

 

15,133

 

428

 

Prepaid and other current assets

 

4,202

 

6,288

 

Total current assets

 

245,942

 

240,031

 

Property, plant and equipment, net

 

7,831

 

9,206

 

Long-term investments

 

 

17,527

 

Restricted cash

 

460

 

460

 

Total assets

 

$

254,233

 

$

267,224

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Accounts payable

 

$

3,757

 

$

3,732

 

Accrued expenses

 

23,351

 

28,916

 

Deferred revenues

 

6,346

 

6,346

 

Total current liabilities

 

33,454

 

38,994

 

Long-term liabilities:

 

 

 

 

 

Deferred revenues

 

42,148

 

45,196

 

Other long-term liabilities

 

2,239

 

2,438

 

Total liabilities

 

77,841

 

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; 21,390,188 and 21,306,413 shares issued and outstanding at June 30, 2012 and December 31, 2011, respectively

 

214

 

213

 

Additional paid-in capital

 

628,508

 

625,133

 

Accumulated other comprehensive loss

 

(3,325

)

(4,842

)

Accumulated deficit

 

(449,005

)

(439,908

)

Total stockholders’ equity

 

176,392

 

180,596

 

Total liabilities and stockholders’ equity

 

$

254,233

 

$

267,224

 

 

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

 

4



Table of Contents

 

AMAG PHARMACEUTICALS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(IN THOUSANDS, EXCEPT PER SHARE DATA)

(Unaudited)

 

 

 

Three Months Ended June 30,

 

Six Months Ended June 30,

 

 

 

2012

 

2011

 

2012

 

2011

 

Revenues:

 

 

 

 

 

 

 

 

 

Product sales, net

 

$

14,420

 

$

13,081

 

$

28,128

 

$

24,103

 

License fee and other collaboration revenues

 

16,592

 

2,288

 

18,345

 

4,615

 

Royalties

 

 

33

 

19

 

69

 

Total revenues

 

31,012

 

15,402

 

46,492

 

28,787

 

Costs and expenses:

 

 

 

 

 

 

 

 

 

Cost of product sales

 

3,224

 

2,082

 

5,870

 

5,123

 

Research and development expenses

 

7,671

 

16,695

 

20,133

 

30,261

 

Selling, general and administrative expenses

 

15,101

 

16,826

 

28,282

 

36,460

 

Restructuring expenses

 

1,058

 

 

1,058

 

 

Total costs and expenses

 

27,054

 

35,603

 

55,343

 

71,844

 

Other income (expense):

 

 

 

 

 

 

 

 

 

Interest and dividend income, net

 

338

 

452

 

731

 

1,012

 

Losses on investments, net

 

(1,471

)

(209

)

(1,471

)

(208

)

Total other income (expense)

 

(1,133

)

243

 

(740

)

804

 

Net income (loss) before income taxes

 

2,825

 

(19,958

)

(9,591

)

(42,253

)

Income tax benefit

 

494

 

396

 

494

 

396

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

$

3,319

 

$

(19,562

)

$

(9,097

)

$

(41,857

)

 

 

 

 

 

 

 

 

 

 

Net income (loss) per share:

 

 

 

 

 

 

 

 

 

Basic

 

$

0.16

 

$

(0.92

)

$

(0.43

)

$

(1.98

)

Diluted

 

$

0.15

 

$

(0.92

)

$

(0.43

)

$

(1.98

)

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

Basic

 

21,370

 

21,167

 

21,359

 

21,156

 

Diluted

 

21,649

 

21,167

 

21,359

 

21,156

 

 

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 INCOME (LOSS)

(IN THOUSANDS)

(Unaudited)

 

 

 

Three Months Ended June 30,

 

Six Months Ended June 30,

 

 

 

2012

 

2011

 

2012

 

2011

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

$

3,319

 

$

(19,562

)

$

(9,097

)

$

(41,857

)

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

 

Unrealized gains (losses) on securities:

 

 

 

 

 

 

 

 

 

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

 

(31

)

1,380

 

46

 

1,269

 

Reclassification adjustment for (gains) losses included in net income (loss)

 

1,471

 

210

 

1,471

 

210

 

Net unrealized gains (losses) on securities

 

1,440

 

1,590

 

1,517

 

1,479

 

Total comprehensive income (loss)

 

$

4,759

 

$

(17,972

)

$

(7,580

)

$

(40,378

)

 

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)

 

 

 

Six Months Ended June 30,

 

 

 

2012

 

2011

 

Cash flows from operating activities:

 

 

 

 

 

Net loss

 

$

(9,097

)

$

(41,857

)

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

 

 

 

 

 

Depreciation

 

1,422

 

1,317

 

Non-cash equity-based compensation expense

 

3,262

 

7,096

 

Non-cash income tax benefit

 

(494

)

(396

)

Amortization of premium/discount on purchased securities

 

1,463

 

1,841

 

Losses on investments, net

 

1,471

 

208

 

Changes in operating assets and liabilities:

 

 

 

 

 

Accounts receivable, net

 

154

 

972

 

Inventories

 

2,276

 

1,028

 

Receivable from collaboration

 

(14,705

)

(430

)

Prepaid and other current assets

 

2,086

 

2,382

 

Accounts payable and accrued expenses

 

(6,546

)

1,413

 

Deferred revenues

 

(3,048

)

(3,305

)

Other long-term liabilities

 

(199

)

(172

)

Total adjustments

 

(12,858

)

11,954

 

Net cash used in operating activities

 

(21,955

)

(29,903

)

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

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

 

85,234

 

71,033

 

Purchase of available-for-sale investments

 

(96,178

)

(73,912

)

Capital expenditures

 

(47

)

(212

)

Net cash used in investing activities

 

(10,991

)

(3,091

)

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

Proceeds from the exercise of stock options

 

 

10

 

Proceeds from the issuance of common stock under ESPP

 

150

 

294

 

Net cash provided by financing activities

 

150

 

304

 

 

 

 

 

 

 

Net decrease in cash and cash equivalents

 

(32,796

)

(32,690

)

Cash and cash equivalents at beginning of the period

 

63,474

 

112,646

 

Cash and cash equivalents at end of the period

 

$

30,678

 

$

79,956

 

 

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

JUNE 30, 2012

(Unaudited)

 

A.               Description of Business

 

AMAG Pharmaceuticals, Inc., a Delaware corporation, was founded in 1981. We are a specialty pharmaceutical company focused on the development and commercialization of Feraheme® (ferumoxytol) Injection for Intravenous, or IV, use to treat iron deficiency anemia, or IDA. Currently, our principal source of revenue is from the sale of Feraheme, which was approved for marketing in the U.S. in June 2009 by the U.S. Food and Drug Administration 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, ferumoxytol was granted marketing approval in Canada, under the trade name Feraheme, for use as an IV iron replacement therapy for the treatment of IDA in adult patients with CKD. In June 2012, the European Commission granted marketing authorization for ferumoxytol, under the trade name Rienso® 30mg/ml solution for Injection, for use as an IV iron replacement therapy for the treatment of IDA in adult patients with CKD. Under an agreement with Takeda Pharmaceutical Company Limited, or Takeda, Takeda has an exclusive license to market and sell ferumoxytol in Canada and in the European Union, or EU. The EU marketing authorization triggered a $15.0 million milestone payment to us from Takeda, which we received in July 2012. We expect Takeda to launch Feraheme/Rienso in Canada and the EU in the second half of 2012. In addition, we are currently pursuing a marketing application with Takeda for ferumoxytol in Switzerland, under the trade name Rienso, for the treatment of IDA in CKD patients.

 

GastroMARK®, which has been 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 the second quarter of 2012, we terminated our commercial license agreements for GastroMARK. Following the completion of our obligations under these agreements, we no longer intend to commercially manufacture or sell GastroMARK. Pursuant to the terms of the respective termination agreements, during the three months ended June 30, 2012, we paid our licensees termination fees of $1.6 million, which we recorded in selling, general and administrative expenses in our condensed consolidated statement of operations.

 

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.

 

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Table of Contents

 

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. 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.

 

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Table of Contents

 

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 June 30, 2012 and December 31, 2011 for those assets that we measure at fair value on a recurring basis (in thousands):

 

 

 

Fair Value Measurements at June 30, 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

 

$

27,417

 

$

27,417

 

$

 

$

 

Corporate debt securities

 

110,218

 

 

110,218

 

 

U.S. treasury and government agency securities

 

58,876

 

 

58,876

 

 

Commercial paper

 

7,477

 

 

7,477

 

 

 

 

$

203,988

 

$

27,417

 

$

176,571

 

$

 

 

 

 

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 money market funds and, previously, our auction rate securities, or ARS, which we sold in June 2012, and which were valued using Level 3 inputs, as discussed below, 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, 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 June 30, 2012 or December 31, 2011. In addition, there were no transfers or reclassifications of any securities between Level 1 and Level 2 during the six months ended June 30, 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

 

10



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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 assets appeared normal and that transactions did not appear disorderly as of June 30, 2012.

 

In June 2012, we sold our remaining ARS portfolio, with a par value of $19.8 million, for proceeds of $18.3 million.

 

The following table provides a rollforward of Level 3 assets for the six months ended June 30, 2012 (in thousands):

 

 

 

Six Months Ended June
30, 2012

 

Balance at beginning of period

 

$

17,527

 

Transfers to Level 3

 

 

Total gains (losses) (realized or unrealized):

 

 

 

Included in earnings

 

(1,471

)

Included in other comprehensive income (loss)

 

2,373

 

Purchases, issuances, sales and settlements:

 

 

 

Purchases

 

 

Issuances

 

 

Sales

 

(18,329

)

Settlements

 

(100

)

Balance at end of period

 

$

 

 

 

 

 

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 organizations, 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

 

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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 based on inventory in our sales channel. An analysis of our product sales allowances and accruals for the three and six months ended June 30, 2012 and 2011 is as follows (in thousands):

 

 

 

Three Months Ended June 30,

 

 

 

2012

 

2011

 

Product sales allowances and accruals

 

 

 

 

 

Discounts and chargebacks

 

$

6,846

 

$

3,579

 

Government and other rebates

 

1,672

 

2,737

 

Returns

 

(292

)

369

 

Total provision for product sales allowances and accruals

 

$

8,226

 

$

6,685

 

 

 

 

 

 

 

Total gross product sales

 

$

22,646

 

$

19,766

 

 

 

 

 

 

 

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

 

36

%

34

%

 

 

 

Six Months Ended June 30,

 

 

 

2012

 

2011

 

Product sales allowances and accruals

 

 

 

 

 

Discounts and chargebacks

 

$

12,738

 

$

5,799

 

Government and other rebates

 

3,132

 

5,271

 

Returns

 

(558

)

668

 

Total provision for product sales allowances and accruals

 

$

15,312

 

$

11,738

 

 

 

 

 

 

 

Total gross product sales

 

$

43,440

 

$

35,841

 

 

 

 

 

 

 

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

 

35

%

33

%

 

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

 

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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 half of 2012, we reduced our reserve for product returns by approximately $1.1 million due to the lapse of the product return period on certain manufactured Feraheme lots that carried a two year expiration. As a result, the product returns reserve applied to gross sales for the six months ended June 30, 2012 was ($0.6) million as compared to $0.7 million in the six months ended June 30, 2011.

 

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 June 30, 2012, our cash, cash equivalents and investments amounted to approximately $207.2 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, and commercial paper. As of June 30, 2012 we had approximately $27.4 million of our total $30.7 million cash and cash equivalents balance invested in institutional money market funds, of which $13.0 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 six months ended June 30, 2012 and 2011.

 

 

 

Six Months Ended June 30,

 

 

 

2012

 

2011

 

Takeda Pharmaceuticals Company Limited

 

40

%

16

%

AmerisourceBergen Drug Corporation

 

30

%

40

%

McKesson Corporation

 

14

%

19

%

Cardinal Health, Inc.

 

10

%

12

%

 

In addition, approximately 32% of our end-user demand during the six months ended June 30, 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 40% and 17% of our total revenues for the six months ended June 30, 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 June 30, 2012 and December 31, 2011, the combined total of our short- and long-term investments equaled $176.6 million and $166.2 million, respectively, and consisted of securities classified

 

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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 June 30, 2012 and December 31, 2011 (in thousands):

 

 

 

June 30, 2012

 

 

 

 

 

Gross

 

Gross

 

Estimated

 

 

 

Amortized

 

Unrealized

 

Unrealized

 

Fair

 

 

 

Cost

 

Gains

 

Losses

 

Value

 

Short-term investments:

 

 

 

 

 

 

 

 

 

Corporate debt securities

 

 

 

 

 

 

 

 

 

Due in one year or less

 

$

57,598

 

$

86

 

$

(37

)

$

57,647

 

Due in one to three years

 

52,577

 

64

 

(70

)

52,571

 

U.S. treasury and government agency securities

 

 

 

 

 

 

 

 

 

Due in one year or less

 

17,972

 

95

 

 

18,067

 

Due in one to three years

 

40,709

 

104

 

(4

)

40,809

 

Commercial paper

 

 

 

 

 

 

 

 

 

Due in one year or less

 

7,487

 

 

(10

)

7,477

 

Total investments

 

$

176,343

 

$

349

 

$

(121

)

$

176,571

 

 

 

 

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

 

 

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Auction Rate Securities

 

In June 2012, we sold our remaining ARS portfolio, with a par value of $19.8 million, for proceeds of $18.3 million and recognized a loss of approximately $1.5 million in other income (expense) in our condensed consolidated statements of income for the three and six months ended June 30, 2012. All of the ARS we held consisted of municipal bonds with an auction reset feature and were classified as available-for-sale.

 

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 June 30, 2012 and December 31, 2011 (in thousands):

 

 

 

June 30, 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

 

$

58,433

 

$

(92

)

$

937

 

$

(15

)

$

59,370

 

$

(107

)

U.S. treasury and government agency securities

 

8,391

 

(4

)

 

 

8,391

 

(4

)

Commercial paper

 

7,477

 

(10

)

 

 

7,477

 

(10

)

 

 

$

74,301

 

$

(106

)

$

937

 

$

(15

)

$

75,238

 

$

(121

)

 

 

 

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 of the three or six months ended June 30, 2012. 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. During both the three and six months ended June 30, 2012 we recorded realized losses of $1.5 million to our condensed consolidated statements of operations related to the sale of our remaining ARS portfolio, as discussed above.

 

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D.           Accounts Receivable

 

Our accounts receivable were $5.8 million and $5.9 million as of June 30, 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 June 30, 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 June 30, 2012 and December 31, 2011 were as follows:

 

 

 

June 30, 2012

 

December 31, 2011

 

AmerisourceBergen Drug Corporation

 

48

%

44

%

McKesson Corporation

 

25

%

33

%

Cardinal Health, Inc.

 

20

%

15

%

 

E.        Inventories

 

Our major classes of inventories were as follows as of June 30, 2012 and December 31, 2011 (in thousands):

 

 

 

June 30, 2012

 

December 31, 2011

 

Raw materials

 

$

1,803

 

$

1,892

 

Work in process

 

2,171

 

3,696

 

Finished goods

 

9,606

 

9,618

 

Total inventories

 

$

13,580

 

$

15,206

 

 

During the first half of 2012, we wrote-off $0.6 million of inventory which was produced to validate the manufacturing process at third-party suppliers and which we no longer believed was suitable for sale. In addition, included in our total inventory at June 30, 2012 is $0.6 million of additional inventory reserves recognized as a restructuring cost in the three and six months ended June 30, 2012 related to our planned divestiture of our Cambridge, Massachusetts manufacturing facility.

 

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 finished goods inventory. If actual market conditions are less

 

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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 six months ended June 30, 2012, we recognized a $0.5 million current federal income tax benefit, which was primarily the result of a decrease in unrealized losses associated with the sale of our remaining ARS portfolio in the second quarter of 2012.  For the six months ended June 30, 2011, we recognized a $0.4 million current federal income tax benefit, which was the result of our recognition of corresponding income tax expense associated with the increase in the value of certain securities that we carried at fair market value during the period. The corresponding income tax expense was recorded in other comprehensive income (loss). 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 Income (Loss) Per Share

 

We compute basic net income (loss) per share by dividing net income (loss) by the weighted average number of common shares outstanding during the relevant period. The components of basic and diluted net income (loss) per share were as follows (in thousands, except per share data):

 

 

 

Three Months Ended June 30,

 

Six Months Ended June 30,

 

 

 

2012

 

2011

 

2012

 

2011

 

Net income (loss)

 

$

3,319

 

$

(19,562

)

$

(9,097

)

$

(41,857

)

 

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding

 

21,370

 

21,167

 

21,359

 

21,156

 

Effect of dilutive securities:

 

 

 

 

 

 

 

 

 

Stock options and restricted stock units

 

279

 

 

 

 

Shares used in calculating dilutive net income (loss) per share

 

21,649

 

21,167

 

21,359

 

21,156

 

 

 

 

 

 

 

 

 

 

 

Net income (loss) per share:

 

 

 

 

 

 

 

 

 

Basic

 

$

0.16

 

$

(0.92

)

$

(0.43

)

$

(1.98

)

Diluted

 

$

0.15

 

$

(0.92

)

$

(0.43

)

$

(1.98

)

 

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), that were excluded from our computation of diluted net income (loss) per share because such options and restricted stock units were anti-dilutive due to a net loss or because the exercise price exceeded the current stock price for options in the relevant periods (in thousands):

 

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Three Months Ended June 30,

 

Six Months Ended June 30,

 

 

 

2012

 

2011

 

2012

 

2011

 

Options to purchase shares of common stock

 

3,044

 

2,127

 

2,873

 

2,127

 

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

 

142

 

649

 

484

 

649

 

Total

 

3,186

 

2,776

 

3,357

 

2,776

 

 

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 June 30, 2012, we have granted options and restricted stock units covering 5,161,025 shares of common stock under our 2007 Plan, of which 1,723,324 stock options and 584,880 restricted stock units have expired or terminated, and of which 35,338 options have been exercised and 247,725 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 June 30, 2012 was 2,186,032 and 383,726, respectively. The remaining number of shares available for future grants as of June 30, 2012 was 847,505, 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 have either a seven or ten-year term.

 

Amended and Restated 2000 Stock Plan

 

As of June 30, 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 June 30, 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.

 

Other Equity Compensation Grants

 

In addition, in May 2012, in connection with his entry into an employment agreement as our President and Chief Executive Officer, our Board of Directors granted William Heiden an option to purchase 300,000 shares of our common stock at an exercise price equal to the then fair market value of a share of our common stock. The option will be exercisable in four equal annual installments beginning on the first anniversary of the grant date. Mr. Heiden was also granted 100,000 restricted stock units, which will vest in four equal annual installments beginning on the first anniversary of the grant date. The foregoing grants were made pursuant to an inducement grant exception under the NASDAQ rules and therefore were granted outside of our 2007 Plan. We assessed the terms of these awards to Mr. Heiden and determined there was no possibility that we would have to settle these awards in cash and therefore, equity accounting was applied.

 

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Equity-based compensation expense

 

Equity-based compensation expense, excluding amounts that have been capitalized into inventory, for the three and six months ended June 30, 2012 and 2011 consisted of the following (in thousands):

 

 

 

Three Months Ended June 30,

 

Six Months Ended June 30,

 

 

 

2012

 

2011

 

2012

 

2011

 

Cost of product sales

 

$

68

 

$

157

 

$

146

 

$

352

 

Research and development

 

525

 

639

 

947

 

1,281

 

Selling, general and administrative

 

984

 

1,825

 

2,169

 

5,463

 

Total equity-based compensation expense

 

$

1,577

 

$

2,621

 

$

3,262

 

$

7,096

 

 

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. After briefing was completed by all parties, the Court of Appeals heard oral argument on May 11, 2012, and took the matter under advisement. 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.

 

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 June 30, 2012. We expense legal costs as they are incurred.

 

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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.

 

In November 2011, we entered into an agreement with our financial advisor, Jefferies & Company, Inc., or Jefferies, or the Jefferies Agreement, with respect to conducting a strategic review of our company. In connection with the conclusion of our strategic review, which we announced in May 2012, we terminated the Jefferies Agreement in July 2012. Pursuant to the terms of the Jefferies Agreement, we are required to pay Jefferies a transaction fee in the event that we enter into certain sale or acquisition transactions above a certain threshold on or prior to April 3, 2013 or such a transaction is consummated on or before such date. The fee would be determined based on the transaction value of the respective transaction but in no event be less than $1.5 million, depending on the nature of the transaction.

 

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 June 30, 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/Rienso 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. In June 2012, we entered into an amendment to the Takeda Agreement, or the Amended Takeda Agreement, which removed the Commonwealth of Independent States from the territories under which Takeda has the exclusive rights to develop and commercialize Feraheme/Rienso, or the Amended Licensed Territory. In addition, the Amended Takeda Agreement modified the timing and pricing arrangements for a supply agreement to be entered into between us and Takeda in the future, the terms related to primary and secondary manufacturing for drug substance and drug product, certain patent related provisions, and the allocation of certain of the agreed upon milestone payments. We analyzed the Amended Takeda Agreement and determined that the amended terms do not result in a material modification of the original Takeda Agreement.

 

Under the Amended Takeda Agreement, except under limited circumstances, we have retained the right to manufacture Feraheme/Rienso and, accordingly, are responsible for supply of Feraheme/Rienso 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 original 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 additional regulatory approval and performance-based milestone payments, reimbursement of certain out-of-pocket regulatory and clinical supply costs, defined payments for supply of Feraheme/Rienso, and tiered double-digit royalties on net product sales in the

 

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Amended Licensed Territory under the Amended Takeda Agreement. The remaining milestone payments we may be entitled to receive under the agreement could over time equal approximately $205.0 million, including up to an aggregate of $18.0 million upon the commercial launch of Feraheme/Rienso in Canada and the EU. We have determined that any milestone 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 achieved.

 

In June 2012, we earned a $15.0 million milestone payment from Takeda based on the European Commission marketing authorization for ferumoxytol, which is recorded as a receivable from collaboration in our condensed consolidated balance sheet. We have deemed this milestone payment to be a substantive milestone based on our analysis that the milestone consideration received was commensurate with our performance to achieve the milestone, was solely related to past performance, and was reasonable relative to all of the deliverables and payment terms, including other milestones, within the arrangement. Therefore, we recognized the $15.0 million milestone payment as revenue in the three and six months ended June 30, 2012 in our condensed consolidated statements of operations. Any future non-substantive milestone payments will be accounted for in accordance with our revenue attribution method for the upfront payment as described below.

 

We have determined that our obligations under the Amended Takeda Agreement have not changed and include the following four deliverables: the license, access to future know-how and improvements to the Feraheme/Rienso technology, regulatory and clinical research activities, and the manufacturing and supply of product. Pursuant to the accounting guidance in effect when we signed the original Takeda Agreement in March 2010, and which governed revenue recognition on multiple element arrangements, we evaluated the four deliverables under the original 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 Amended 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 originally entered the Takeda Agreement, which represented the then current patent life of Feraheme/Rienso 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 Amended 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.

 

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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 and six months ended June 30, 2012, we recorded $1.5 million and $3.0 million in revenues, respectively, associated with the upfront payment. In addition, we recorded $0.1 million and $0.3 million associated with other reimbursement revenues in our condensed consolidated statement of operations for the three and six months ended June 30, 2012, respectively.

 

Payments to be received for supply of the drug product and royalties are recorded in product sales and royalties in our condensed consolidated statement of operations. During the three and six months ended June 30, 2012, we recorded $0.2 million in net product revenues related to the supply of drug product to Takeda in preparation for the planned launch of the product in Canada.

 

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 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 June 2012, we initiated a corporate restructuring, including a workforce reduction plan. The majority of the workforce reduction plan is associated with our manufacturing and development infrastructure. As a result of the restructuring, we expect to record total charges of approximately $1.6 million. Of the $1.6 million, approximately $1.0 million is related to employee severance and benefits. We recognized $0.5 million of the $1.0 million during the second quarter of 2012 and additional charges will likely occur in future quarters. In addition, in connection with our decision to divest our Cambridge, Massachusetts manufacturing facility, we have recorded $0.6 million in restructuring charges related to the write-down of primarily raw material inventory that will no longer be usable upon the closure of the facility. We expect that the majority of our restructuring charges will be paid by the end of 2012.

 

In November 2011, we initiated a corporate restructuring, including a workforce reduction plan, which included a 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.

 

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The following table outlines the components of our restructuring expenses which were recorded in operating expenses and current liabilities for the three and six months ended June 30, 2012 (in thousands):

 

 

 

Three Months Ended
June 30, 2012

 

Six Months Ended
June 30, 2012

 

 

 

 

 

 

 

Accrued restructuring, beginning of period

 

$

1,763

 

$

2,366

 

Employee severance, benefits and related costs

 

493

 

578

 

Payments

 

(518

)

(1,127

)

Reclassifiction to inventory reserve

 

(575

)

(575

)

Other adjustments

 

565

 

486

 

Accrued restructuring, end of period

 

$

1,728

 

$

1,728

 

 

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 Takeda Pharmaceutical Company Limited, or Takeda, will launch Feraheme/Rienso in Canada and the European Union, or EU, 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 the fourth quarter of 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, including our plan to conduct an iron sucrose treatment arm and a magnetic resonance imaging study to evaluate the potential for iron deposits in the body following treatment with IV iron, our statement that Takeda expects to initiate a Phase IIIb study to examine the efficacy and safety of Feraheme as compared to an active comparator, our expectation that Feraheme will be sold in the EU 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, our expectation that we plan to divest our manufacturing facility, our expectation that we will manufacture Feraheme drug substance and drug product for use in the EU at our third-party manufacturers, our expectation that the majority of our November 2011 and June 2012 restructuring charges will be paid by the end of 2012, our expectations regarding our future revenues, including expected Feraheme/Rienso revenues under our Takeda and 3SBio collaborations, our expectation that our reserves as a percentage of gross product sales will increase slightly during the remainder of 2012, our expectation that the average net selling price of Feraheme will begin to increase in future periods, our expectations 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 increase slightly 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 regarding the potential impact of the adoption of newly issued and future accounting guidance on our financial statements, our expectations that our cash and cash equivalents will remain relatively consistent at the

 

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end of 2012 as compared to at the end of 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 specialty pharmaceutical company focused on the development and commercialization of Feraheme® (ferumoxytol) Injection for Intravenous, or IV, use to treat iron deficiency anemia, or IDA. Our principal source of revenue is from the sale of Feraheme, 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, ferumoxytol was granted marketing approval in Canada, under the trade name Feraheme, for use as an IV iron replacement therapy for the treatment of IDA in adult patients with CKD. In June 2012, the European Commission granted marketing authorization for ferumoxytol, under the trade name Rienso® 30mg/ml solution for Injection, for use as an IV iron replacement therapy for the treatment of IDA in adult patients with CKD. The marketing authorization is valid in the current European Union, or EU, Member States as well as in Iceland and Norway, and is based on data obtained from an extensive clinical development program. Under an agreement with Takeda Pharmaceutical Company Limited, or Takeda, Takeda has an exclusive license to market and sell ferumoxytol in Canada and in the EU. The EU marketing authorization triggered a $15.0 million milestone payment to us from Takeda, which we received in July 2012. We expect Takeda to launch Feraheme/Rienso in Canada and the EU in the second half of 2012. In addition, we are currently pursuing a marketing application with Takeda for ferumoxytol in Switzerland, under the trade name Rienso, for the treatment of IDA in CKD patients.

 

In June 2012, we initiated a corporate restructuring, including a workforce reduction plan. The majority of the workforce reduction plan is expected to be associated with our manufacturing and development infrastructure. As a result of the restructuring, we expect to record charges of approximately $1.6 million. Of the $1.6 million, approximately $1.0 million is related to employee severance and benefits, of which $0.5 million was recognized during the second quarter of 2012 and the remaining $0.5 million will be recognized in the second half of 2012. In addition, in connection with our decision to divest our Cambridge, Massachusetts manufacturing facility, we have recorded $0.6 million in restructuring charges related to the write-down of primarily raw material inventory that will no longer be usable upon the closure of the facility. We expect that the majority of our restructuring charges will be paid by the end of 2012.

 

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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 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 continue 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 milestone payments and 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/Rienso in Canada and the EU, royalties we may receive with respect to sales of Feraheme/Rienso in Canada and the EU, cash generated by our investing activities, and the sale of our equity securities, if necessary. As of June 30, 2012, we had an accumulated deficit of approximately $449.0 million and a cash, cash equivalents and investments balance of approximately $207.2 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/Rienso 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. In June 2012, we entered into an amendment to the Takeda Agreement, or the Amended Takeda Agreement, which removed the Commonwealth of Independent States from the territories under which Takeda has the exclusive rights to develop and commercialize Feraheme/Rienso. In addition, the Amended Takeda Agreement modified the timing and pricing arrangements for a supply agreement to be entered into between us and Takeda in the future, the terms related to primary and secondary manufacturing for drug substance and drug product, certain patent related provisions, and the allocation of certain of the agreed upon milestone payments. In June 2012, we earned a $15.0 million milestone payment based on the European Commission marketing authorization for Rienso, which we received in July 2012. Under the Amended Takeda Agreement, we may also be entitled to receive additional milestone payments over time equaling approximately $205.0 million, including up to an aggregate of $18.0 million upon the commercial launch of Feraheme/Rienso in Canada and the EU, which we expect to receive in 2012.

 

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

 

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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 for the EU regulatory authorities was the mean change in hemoglobin from the date of determination of each patient’s baseline hemoglobin level, or baseline, to the fifth week following administration of the study drug, or week five. The primary efficacy endpoint of the study for the FDA was the proportion of patients who achieved a greater than or equal to 2.0 gram per deciliter increase in hemoglobin at any time from base line to week five.

 

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 AEs 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.

 

In July 2012, we reported preliminary results from the second of the two Phase III studies in our global IDA registrational program. This study was a double-blind, placebo-controlled trial that compared treatment with Feraheme to placebo and enrolled 808 patients at 136 sites in the U.S., Canada, India, Latvia, Hungary, and Poland. The patients enrolled in this study had a history of unsatisfactory response to, or could otherwise not tolerate, 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 placebo and was designed to demonstrate superiority on efficacy of Feraheme as compared to placebo. Of the 808 patients enrolled in this study, 608 patients were randomly assigned to receive Feraheme and 200 were randomly assigned to receive placebo. The demographics and all baseline parameters of patients who participated in

 

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this study were well balanced between the two treatment groups. The primary efficacy endpoint of the study for the FDA was the proportion of subjects who achieved a greater than 2.0 grams per deciliter increase in hemoglobin at any time from baseline to week five. The primary efficacy endpoint of the study for the EU regulatory authorities was the mean change in hemoglobin from baseline to week five. Patients enrolled in this study were eligible to enter an ongoing open-label extension study to evaluate repeat dosing with Feraheme. We have completed enrollment in this extension study with 634 patients. These patients 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.

 

In our second of two Phase III studies, Feraheme demonstrated superiority on all primary efficacy endpoints evaluated and the efficacy and safety of Feraheme demonstrated in this study were comparable to that reported earlier this year in the first of our two Phase III trials in our global IDA registrational program, which compared Feraheme to iron sucrose. Patients treated with Feraheme in the second of our two Phase III trials achieved a statistically significant mean increase in hemoglobin at week five of 2.7 grams per deciliter, compared to a mean increase of only 0.1 grams per deciliter in patients who received placebo. These data are consistent with the 2.7 grams per deciliter increase in hemoglobin reported in the first of our two Phase III studies. In addition, a greater than 2.0 grams per deciliter increase in hemoglobin at any time from baseline to week five was achieved in a statistically significantly greater proportion, 81.1%, of patients treated with Feraheme in this study, compared with only 5.5% of patients who received placebo. These data are also consistent with the data from the first of our two Phase III trials, in which 84.0% of Feraheme-treated patients achieved a greater than 2.0 grams per deciliter increase in hemoglobin. Further, a statistically significant improvement in fatigue, as assessed by patient reported outcome measures, was demonstrated at week five in Feraheme-treated patients.

 

No new safety signals were observed with Feraheme in the second of our two Phase III trials and the types of reported AEs were consistent with those seen in both our previously reported IDA phase III study, our CKD phase III studies, and those contained in the approved U.S. package insert for Feraheme. Overall, AEs were reported in 49.2% of Feraheme-treated patients as compared to 43.0% of patients who received placebo. Patients in both groups experienced protocol-defined AEs of special interest, including mild to severe hypotension or hypersensitivity reactions ranging from fever alone to an anaphylactoid reaction. Of the Feraheme-treated patients, 3.6% experienced AEs of special interest compared to 1.0% of patients who received placebo. Cardiovascular AEs were reported in 0.8% of Feraheme-treated patients, all of which were considered unrelated to study drug by the investigators, and none were reported in the placebo group. SAEs were reported at a comparable frequency in both treatment groups, with SAEs reported in 2.6% of Feraheme-treated patients and 3.0% of patients who received placebo. Four of the SAEs in Feraheme-treated patients, or 0.7%, were reported as related to study drug by investigators. The percent of Feraheme-treated patients that experienced an SAE in this study, or 2.6%, was lower than that previously reported in the first of our two Phase III trials, or 4.2%, and was comparable to the rate of SAEs in iron sucrose-treated patients, or 2.5% in that study.

 

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 fourth quarter of 2012. In addition, we expect that in 2013 Takeda will file a Type II Variation, which is the equivalent of a sNDA in the U.S., with the European Medicines Agency, or EMA, seeking marketing approval for Feraheme/Rienso for the treatment of anemia in all adult patients with IDA with a history of unsatisfactory oral iron therapy.

 

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

 

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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 Marketing Authorization Application, or 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.

 

As part of our obligations under the Amended Takeda Agreement, we are also required to initiate a multi-center clinical trial to determine the safety and efficacy of repeat doses of ferumoxytol for the treatment of IDA in patients with hemodialysis dependent CKD. As part of the post-approval commitment we made to the EMA as a condition of the approval of our MAA for ferumoxytol in the EU, this study will be modified to include a treatment arm with iron sucrose as well as a magnetic resonance imaging, or MRI, study which will 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. 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, Takeda expects to initiate a Phase IIIb open-label, head-to-head, non-inferiority study to examine the efficacy and safety of two doses of 510 milligrams each of ferumoxytol compared with a one gram dose of an active comparator for the treatment of IDA in approximately 275 patients with non-dialysis dependent CKD. The cost of this trial will be allocated between us and Takeda according to the Amended Takeda Agreement. 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 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 half 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.

 

Other information

 

GastroMARK®, which has been 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. In the second quarter of 2012, we terminated our commercial license agreements for GastroMARK. Following the completion of our obligations under these agreements, we no longer intend to commercially manufacture or sell GastroMARK. Pursuant to the terms of the respective termination agreements, during the three months ended June 30, 2012, we paid our licensees termination fees of $1.6 million, which we recorded in selling, general and administrative expenses in our condensed consolidated statement of operations.

 

In November 2011, we entered into an agreement with our financial advisor, Jefferies & Company, Inc., or Jefferies, or the Jefferies Agreement with respect to conducting a strategic review of our company. In connection with the conclusion of our strategic review, which we announced in May 2012, we terminated the Jefferies Agreement in July 2012. Pursuant to the terms of the Jefferies Agreement, we are required to pay Jefferies a transaction fee in the event that we enter into certain sale or acquisition transactions above a certain threshold on or prior to April 3, 2013 or such a transaction is consummated on or before such date. The fee would be determined based on the transaction value of the respective transaction but in no event be less than $1.5 million, depending on the nature of the transaction.

 

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Results of Operations

 

Three and six months ended June 30, 2012 and 2011

 

Revenues

 

Our total revenues for the three and six months ended June 30, 2012 and 2011 consisted of the following (in thousands):

 

 

 

Three Months Ended June 30,

 

Change

 

Six Months Ended June 30,

 

Change

 

 

 

2012

 

2011

 

$ Change

 

% Change

 

2012

 

2011

 

$ Change

 

% Change

 

Product sales, net

 

$

14,420

 

$

13,081

 

$

1,339

 

10

%

$

28,128

 

$

24,103

 

$

4,025

 

17

%

License fee and other collaboration revenues

 

16,592

 

2,288

 

14,304

 

>100

%

$

18,345

 

4,615

 

13,730

 

>100

%

Royalties

 

 

33

 

(33

)

-100

%

$

19

 

69

 

(50

)

-72

%

Total

 

$

31,012

 

$

15,402

 

$

15,610

 

>100

%

$

46,492

 

$

28,787

 

$

17,705

 

62

%

 

The $15.6 million increase in our total revenues during the three months ended June 30, 2012 as compared to the three months ended June 30, 2011 was primarily attributable to a $15.0 million milestone payment earned by us upon marketing approval by the European Commission in June 2012 and a $1.3 million increase in our net product sales, partially offset by a $0.7 million decrease in our other license fee and other collaboration revenues as compared to the three months ended June 30, 2011, as discussed in greater detail below.

 

The $17.7 million increase in our total revenues during the six months ended June 30, 2012 as compared to the same period in 2011 was primarily attributable to a $15.0 million milestone payment earned by us upon marketing approval by the European Commission in June 2012 and a $4.0 million increase in our net product sales, offset by a $1.3 million decrease in our other license fee and other collaboration revenues as compared to the six months ended June 30, 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 and six months ended June 30, 2012 and 2011.

 

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Three Months Ended June 30,

 

Six Months Ended June 30,

 

 

 

2012

 

2011

 

2012

 

2011

 

Takeda Pharmaceuticals Company Limited

 

54

%

15

%

40

%

16

%

AmerisourceBergen Drug Corporation

 

23

%

41

%

30

%

40

%

McKesson Corporation

 

11

%

20

%

14

%

19

%

Cardinal Health, Inc.

 

< 10

%

12

%

10

%

12

%

 

Net Product Sales

 

Net product sales for the three and six months ended June 30, 2012 and 2011 consisted of the following (in thousands):

 

 

 

Three Months Ended June 30,

 

Change

 

Six Months Ended June 30,

 

Change

 

 

 

2012

 

2011

 

$ Change

 

% Change

 

2012

 

2011

 

$ Change

 

% Change

 

Feraheme

 

$

14,262

 

$

12,846

 

$

1,416

 

11

%

$

27,888

 

$

23,707

 

$

4,181

 

18

%

GastroMARK

 

158

 

235

 

(77

)

-33

%

240

 

396

 

(156

)

-39

%

Total

 

$

14,420

 

$

13,081

 

$

1,339

 

10

%

$

28,128

 

$

24,103

 

$

4,025

 

17

%

 

Our total net product sales increased by $1.3 million and $4.0 million during the three and six months ended June 30, 2012, respectively, as compared to the same periods in 2011, primarily as the result of an increase in Feraheme provider demand in the three and six months ended June 30, 2012 and to a lesser extent, the impact of our May 2012 Feraheme price increase. In addition, during the three and six months ended June 30, 2012, we reduced our reserve for product returns by approximately $0.6 million and $1.1 million, respectively, due to the lapse of the return period as compared to no reductions of our reserve for product returns during 2011. Our gross product sales increased by $2.9 million and $7.6 million during the three and six months ended June 30, 2012, respectively, as compared to the same periods in 2011. However, we offered higher average customer discounts, chargebacks and rebates to our end-users during the three and six months ended June 30, 2012 as compared to the same periods in 2011, which partially offset the increase in gross product sales for the respective periods. During the three and six months ended June 30, 2012, we reduced our gross product sales by recording allowances of $8.2 million and $15.3 million, respectively, as compared to allowances of $6.7 million and $11.7 million recorded during the three and six months ended June 30, 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 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;

 

·                  The impact of any pricing strategies we may implement related to Feraheme;

 

·                  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;

 

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·                  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 and six months ended June 30, 2012 and 2011 is as follows (in thousands):

 

 

 

Three Months Ended June 30,

 

 

 

2012

 

2011

 

Product sales allowances and accruals

 

 

 

 

 

Discounts and chargebacks

 

$

6,846

 

$

3,579

 

Government and other rebates

 

1,672

 

2,737

 

Returns

 

(292

)

369

 

Total provision for product sales allowances and accruals

 

$

8,226

 

$

6,685

 

 

 

 

 

 

 

Total gross product sales

 

$

22,646

 

$

19,766

 

 

 

 

 

 

 

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

 

36

%

34

%

 

 

 

Six Months Ended June 30,

 

 

 

2012

 

2011

 

Product sales allowances and accruals

 

 

 

 

 

Discounts and chargebacks

 

$

12,738

 

$

5,799

 

Government and other rebates

 

3,132

 

5,271

 

Returns

 

(558

)

668

 

Total provision for product sales allowances and accruals

 

$

15,312

 

$

11,738

 

 

 

 

 

 

 

Total gross product sales

 

$

43,440

 

$

35,841

 

 

 

 

 

 

 

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

 

35

%

33

%

 

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, group purchasing organizations, and dialysis organizations that typically do not purchase products directly from us but rather

 

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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.

 

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. Actual claims to date have been limited, and if we determine in future periods that such experience is indicative of expected claims, we may be required to reduce our current Medicaid accumulated reserve estimate, and that adjustment could be significant. Any such adjustments would be reflected as a reduction to our sales allowances and, accordingly, an increase to net product sales in that period. If actual future results vary from any of our estimates, we may need to adjust our previous estimates, which would also affect our earnings in the period of the adjustment.

 

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 half of 2012, we reduced our reserve for product returns by approximately $1.1 million due to the lapse of the product return period on certain manufactured Feraheme lots that carried a two year expiration. As a result, the product returns reserve applied to gross product sales for the three and six months ended June 30, 2012 was ($0.3) million and ($0.6) million, respectively, as compared to $0.4 million and $0.7 million for the three and six months ended June 30, 2011. Actual returns to date have been limited, and if we determine in future periods that such experience is indicative of expected returns, we may be required to reduce our accumulated product returns reserve estimate, and that adjustment could be significant. This adjustment would be reflected as a reduction to our sales allowances and, accordingly, an increase to net product sales in that period. If actual future results vary from any of our estimates, we may need to adjust our previous estimates, which would also affect our earnings in the period of the adjustment.

 

An analysis of the amount of, and change in, reserves for the six months ended June 30, 2012 and 2011 is as follows (in thousands):

 

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Table of Contents

 

 

 

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

 

12,738

 

3,226

 

531

 

16,495

 

Adjustments relating to sales in prior years

 

 

(94

)

(1,089

)

(1,183

)

Payments/returns relating to sales in current year

 

(10,644

)

(1,574

)

 

(12,218

)

Payments/returns relating to sales in prior years

 

(1,859

)

(1,584

)

(290

)

(3,733

)

Balance at June 30, 2012

 

$

2,057

 

$

3,075

 

$

1,994

 

$

7,126

 

 

 

 

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

 

6,022

 

5,406

 

668

 

12,096

 

Other provisions relating to deferred revenue

 

 

(18

)

 

(18

)

Adjustments relating to sales in prior years

 

(223

)

(135

)

 

(358

)

Payments/returns relating to sales in current year

 

(4,533

)

(1,576

)

(11

)

(6,120

)

Payments/returns relating to sales in prior years

 

(925

)

(4,909

)

 

(5,834

)

Balance at June 30, 2011

 

$

1,489

 

$

6,986

 

$

2,454

 

$

10,929

 

 

During the six months ended June 30, 2012 and 2011, we decreased our product sales allowances and accruals by approximately $1.2 million and $0.4 million, respectively, for changes in estimates relating to sales in prior years. The $1.2 million adjustments in the first half of 2012 were primarily due to the reduction of our reserve for product returns of $1.1 million due to the lapse of the return period on certain manufactured Feraheme lots that carried a two year expiration. The $0.4 million adjustments in the first half of 2011 were primarily due to 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 continue to expire throughout the third quarter of 2012, and it is possible there will be additional reductions in our reserve for products returns 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 slightly 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. During the second quarter of 2012, we implemented the first gross price increase for Feraheme since its launch. We anticipate that the effect of the price increase will offset the impact of the widening gross to net adjustment and that the average net selling price of Feraheme will begin to increase in future periods.

 

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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;

 

·                  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 and six months ended June 30, 2012 and 2011 consisted of the following (in thousands):

 

 

 

Three Months Ended June 30,

 

Change

 

Six Months Ended June 30,

 

Change

 

 

 

2012

 

2011

 

$ Change

 

% Change

 

2012

 

2011

 

$ Change

 

% Change

 

Milestone revenues recognized from Takeda

 

$

15,000

 

$

 

$

15,000

 

N/A

 

$

15,000

 

$

 

$

15,000

 

N/A

 

Deferred license fee revenues recognized from Takeda

 

1,524

 

1,524

 

 

 

3,048

 

3,048

 

 

 

Reimbursement revenues primarily from Takeda

 

68

 

764

 

(696

)

-91

%

297

 

1,567

 

(1,270

)

-81

%

Total

 

$

16,592

 

$

2,288

 

$

14,304

 

>100

%

$

18,345

 

$

4,615

 

$

13,730

 

>100

%

 

Most of our license fee and other collaboration revenues for the three and six months ended June 30, 2012 and 2011 related to revenue recognized under the Amended Takeda Agreement. In June 2012, we recorded $15.0 million of revenue associated with the milestone payment earned upon the marketing authorization granted for ferumoxytol by the European Commission. In addition, during each of the three and six months ended June 30, 2012 and 2011, we recorded $1.5 million and $3.0 million of revenues, respectively, associated with the amortization of $61.0 million of deferred revenues recorded in connection with the original 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 June 30, 2012, we had

 

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Table of Contents

 

approximately $47.2 million remaining in deferred revenues related to the $61.0 million upfront payments received from Takeda.

 

In addition, under the terms of the Amended 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 offset the costs that we incur during the period in which we perform those services. During the three months ended June 30, 2012 and 2011, we recorded $0.1 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 Amended Takeda Agreement. During the six months ended June 30, 2012 and 2011, we recorded $0.3 million and $1.6 million, respectively, of revenues associated with the reimbursement of out-of pocket regulatory and clinical supply costs in connection with the Amended Takeda Agreement.

 

We anticipate that our license fee and other collaboration revenues will decrease for the remainder of 2012 due to our recording of $15.0 million in the first half of 2012 as a substantive milestone. In the second half of 2012 we expect to receive an additional $18.0 million in milestone payments from Takeda upon the commercial launch of Feraheme/Rienso in Canada and the EU. The $18.0 million non-substantive milestone payments will be recorded and amortized using the proportional performance method extended over the life of the Amended Takeda Agreement.

 

Costs and Expenses

 

Cost of Product Sales

 

Cost of product sales for the three and six months ended June 30, 2012 and 2011 consisted of the following (in thousands):

 

 

 

Three Months Ended June 30,

 

Change

 

Six Months Ended June 30,

 

Change

 

 

 

2012

 

2011

 

$ Change

 

% Change

 

2012

 

2011

 

$ Change

 

% Change

 

Cost of Product Sales

 

$

3,224

 

$

2,082

 

$

1,142

 

55

%

$

5,870

 

$

5,123

 

$

747

 

15

%

Percentage of Net Product Sales

 

22

%

16

%

 

 

 

 

21

%

21

%