XNAS:ARIA ARIAD 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

 

 

 

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

 

¨ 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: 0-21696

 

 

ARIAD Pharmaceuticals, Inc.

(Exact name of registrant as specified in its charter)

 

 

 

Delaware   22-3106987

(State or other jurisdiction of

Incorporation or organization)

 

(I.R.S. Employer

Identification No.)

26 Landsdowne Street, Cambridge, Massachusetts 02139

(Address of principal executive offices) (Zip Code)

Registrant’s Telephone Number, Including Area Code: (617) 494-0400

Former Name, Former Address and Former Fiscal Year, If Changed Since Last Report: Not Applicable

 

 

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  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

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 “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. Check one:

 

Large accelerated filer   x    Accelerated filer   ¨
Non-accelerated filer   ¨  (Do not check if a smaller reporting company)    Smaller reporting company   ¨

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

The number of shares of the registrant’s common stock outstanding as of July 31, 2012 was 166,204,624.

 

 

 


Table of Contents

ARIAD PHARMACEUTICALS, INC.

TABLE OF CONTENTS

 

          Page  
PART I.    FINANCIAL INFORMATION      1   
ITEM 1.    UNAUDITED FINANCIAL STATEMENTS      1   
  

Condensed Consolidated Balance Sheets – June 30, 2012 and December 31, 2011

     1   
  

Condensed Consolidated Statements of Operations for the Three Months and Six Months Ended June 30, 2012 and 2011

     2   
  

Condensed Consolidated Statements of Comprehensive Loss for the Three Months and Six Months Ended June 30, 2012 and 2011

     2   
  

Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2012 and 2011

     3   
  

Notes to Unaudited Condensed Consolidated Financial Statements

     4   
ITEM 2.   

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

     12   
ITEM 3.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK      26   
ITEM 4.    CONTROLS AND PROCEDURES      26   
PART II.    OTHER INFORMATION      27   
ITEM 1A.    RISK FACTORS      27   
ITEM 6.    EXHIBITS      29   
   SIGNATURES      30   
   EXHIBIT INDEX      31   


Table of Contents
PART I. FINANCIAL INFORMATION

 

ITEM 1. UNAUDITED FINANCIAL STATEMENTS

ARIAD PHARMACEUTICALS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

 

In thousands, except share and per share data         June 30,     
2012
    December 31,
2011
 
     (Unaudited)        

ASSETS

    

Current assets:

    

Cash and cash equivalents

   $ 160,733      $ 306,256   

Marketable securities

     89,533        —     

Other current assets

     2,843        1,311   
  

 

 

   

 

 

 

Total current assets

     253,109        307,567   

Restricted cash

     949        749   

Property and equipment, net

     6,673        6,611   

Intangible and other assets, net

     981        5,785   
  

 

 

   

 

 

 

Total assets

   $ 261,712      $ 320,712   
  

 

 

   

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

    

Current liabilities:

    

Accounts payable

   $ 10,394      $ 5,728   

Current portion of long-term debt and capital lease obligations

     1,790        1,454   

Accrued compensation and benefits

     4,749        1,209   

Accrued product development expenses

     10,002        11,948   

Other accrued expenses

     4,524        3,634   

Current portion of deferred executive compensation

     2,533        1,032   

Current portion of deferred revenue

     230        231   

Other current liabilities

     136        136   
  

 

 

   

 

 

 

Total current liabilities

     34,358        25,372   
  

 

 

   

 

 

 

Long-term debt and capital lease obligations

     10,150        11,215   
  

 

 

   

 

 

 

Deferred executive compensation

     1,641        2,723   
  

 

 

   

 

 

 

Deferred revenue

     653        768   
  

 

 

   

 

 

 

Other long-term liabilities

     3,421        1,854   
  

 

 

   

 

 

 

Warrant liability

     —          58,639   
  

 

 

   

 

 

 

Stockholders’ equity:

    

Preferred stock, $.01 par value; authorized 10,000,000 shares, none issued and outstanding

    

Common stock, $.001 par value; authorized, 240,000,000 shares; issued and outstanding, 166,072,162 shares in 2012 and 157,608,702 shares in 2011

     166        158   

Additional paid-in capital

     875,493        776,946   

Accumulated other comprehensive loss

     (1     —     

Accumulated deficit

     (664,169     (556,963
  

 

 

   

 

 

 

Total stockholders’ equity

     211,489        220,141   
  

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 261,712      $ 320,712   
  

 

 

   

 

 

 

See notes to unaudited condensed consolidated financial statements.

 

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Table of Contents

ARIAD PHARMACEUTICALS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

 

     Three Months Ended     Six Months Ended  
     June 30,     June 30,  
In thousands, except per share data    2012     2011     2012     2011  

License revenue

   $ 318      $ 39      $ 382      $ 39   

Service revenue

     —          27        17        83   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total revenue

     318        66        399        122   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses:

        

Research and development

     39,425        18,754        68,198        33,329   

General and administrative

     12,224        6,152        23,512        11,005   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     51,649        24,906        91,710        44,334   
  

 

 

   

 

 

   

 

 

   

 

 

 

Loss from operations

     (51,331     (24,840     (91,311     (44,212
  

 

 

   

 

 

   

 

 

   

 

 

 

Other income (expense):

        

Interest income

     69        44        137        99   

Interest expense

     (50     (63     (108     (123

Revaluation of warrant liability

     —          (22,903     (15,924     (41,475
  

 

 

   

 

 

   

 

 

   

 

 

 

Other income (expense), net

     19        (22,922     (15,895     (41,499
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

   $ (51,312   $ (47,762   $ (107,206   $ (85,711
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss per share – basic and diluted

   $ (0.31   $ (0.36   $ (0.66   $ (0.66
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted-average number of shares of common stock outstanding – basic and diluted

     165,848        132,021        163,409        130,518   

ARIAD PHARMACEUTICALS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS

OF COMPREHENSIVE LOSS

(Unaudited)

 

     Three Months Ended     Six Months Ended  
     June 30,     June 30,  
In thousands    2012     2011     2012     2011  

Net loss

   $ (51,312   $ (47,762   $ (107,206   $ (85,711
  

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss):

        

Net unrealized gains (losses) on marketable securities

     14        —          (1     —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss)

     14        —          (1     —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive loss

   $ (51,298   $ (47,762   $ (107,207   $ (85,711
  

 

 

   

 

 

   

 

 

   

 

 

 

See notes to unaudited condensed consolidated financial statements.

 

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ARIAD PHARMACEUTICALS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

     Six Months Ended June 30,  
In thousands    2012     2011  

Cash flows from operating activities:

    

Net loss

   $ (107,206   $ (85,711

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

    

Depreciation, amortization and impairment charges

     6,640        2,093   

Amortization of premium on marketable securities

     20        —     

Stock-based compensation

     8,444        4,321   

Deferred executive compensation expense

     1,482        1,034   

Revaluation of warrant liability

     15,924        41,475   

Increase (decrease) from:

    

Other current assets

     (1,511     (753

Amounts due under license agreements

     (20     390   

Other assets

     (17     (6

Accounts payable

     4,448        668   

Accrued compensation and benefits

     3,540        (49

Accrued product development expenses

     (1,947     (172

Other accrued expenses

     1,589        930   

Other liabilities

     1,635        —     

Deferred revenue

     (115     1,114   

Deferred executive compensation paid

     (1,063     (775
  

 

 

   

 

 

 

Net cash used in operating activities

     (68,157     (35,441
  

 

 

   

 

 

 

Cash flows from investing activities:

    

Acquisitions of marketable securities

     (89,554     —     

Change in restricted cash

     (200     —     

Investment in property and equipment

     (1,966     (977

Investment in intangible assets

     (465     (412
  

 

 

   

 

 

 

Net cash used in investing activities

     (92,185     (1,389
  

 

 

   

 

 

 

Cash flows from financing activities:

    

Proceeds from long term borrowings

     —          4,375   

Repayment of long-term borrowings

     (700     (700

Principal payments under capital lease obligations

     (29     (38

Proceeds from issuance of common stock pursuant to warrants

     12,482        7,580   

Payment of tax withholding obligations related to stock compensation

     (2,615     (827

Proceeds from issuance of common stock pursuant to stock option and purchase plans

     5,681        3,659   
  

 

 

   

 

 

 

Net cash provided by financing activities

     14,819        14,049   
  

 

 

   

 

 

 

Net decrease in cash and cash equivalents

     (145,523     (22,781

Cash and cash equivalents, beginning of period

     306,256        103,630   
  

 

 

   

 

 

 

Cash and cash equivalents, end of period

   $ 160,733      $ 80,849   
  

 

 

   

 

 

 

See notes to unaudited condensed consolidated financial statements.

 

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Table of Contents

ARIAD PHARMACEUTICALS, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS

 

1. Management Statement

In the opinion of the Company’s management, the accompanying unaudited condensed consolidated financial statements contain all adjustments (consisting of items of a normal and recurring nature) necessary to present fairly the financial position as of June 30, 2012, the results of operations for the three-month and six-month periods ended June 30, 2012 and 2011 and cash flows for the six-month periods ended June 30, 2012 and 2011. The results of operations for the three-month and six-month periods ended June 30, 2012 are not indicative of the results to be expected for any other period or the full year. These financial statements should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2011, which includes consolidated financial statements and notes thereto for the years ended December 31, 2011, 2010 and 2009.

 

2. Marketable Securities

The Company has classified its marketable securities as available-for-sale and, accordingly, carries such securities at fair value. At June 30, 2012, all of the Company’s marketable securities consisted of United States government or agency securities.

At June 30, 2012, the aggregate fair value and amortized cost of the Company’s marketable securities were $89,533,000 and $89,534,000, respectively. Gross unrealized gains and losses were $12,000 and $13,000, respectively, at June 30, 2012.

At December 31, 2011, the Company had no marketable securities.

 

3. Property and Equipment, Net

Property and equipment, net, was comprised of the following at June 30, 2012 and December 31, 2011:

 

In thousands    June 30,
2012
    December 31,
2011
 

Leasehold improvements

   $     23,290      $ 22,252   

Construction in progress

     —          699   

Equipment and furniture

     18,157        17,032   
  

 

 

   

 

 

 
     41,447        39,983   

Less accumulated depreciation and amortization

     (34,774     (33,372
  

 

 

   

 

 

 
   $ 6,673      $ 6,611   
  

 

 

   

 

 

 

Depreciation and amortization expense amounted to $748,000 and $783,000 for the three-month periods ended June 30, 2012 and 2011, respectively, and $1.4 million and $1.5 million for the six-month periods ended June 30, 2012 and 2011, respectively.

 

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The Company leases certain assets under capital leases having terms up to four years. Assets under capital leases included in property and equipment were as follows at June 30, 2012 and December 31, 2011:

 

In thousands    June 30,
2012
    December 31,
2011
 

Equipment and furniture

   $           392      $ 392   

Less accumulated depreciation and amortization

     (298     (257
  

 

 

   

 

 

 
   $ 94      $ 135   
  

 

 

   

 

 

 

 

4. Intangible and Other Assets, Net

Intangible and other assets, net, were comprised of the following at June 30, 2012 and December 31, 2011:

 

In thousands    June 30,
2012
    December 31,
2011
 

Capitalized patent and license costs

   $         5,895      $ 6,799   

Purchased technology

     —          5,901   
  

 

 

   

 

 

 
     5,895        12,700   

Less accumulated amortization

     (4,973     (6,957
  

 

 

   

 

 

 
     922        5,743   

Other assets

     59        42   
  

 

 

   

 

 

 
   $ 981      $ 5,785   
  

 

 

   

 

 

 

Amortization expense for intangible assets amounted to $41,000 and $381,000 for the three-month periods ended June 30, 2012 and 2011, respectively, and $210,000 and $547,000 for the six-month periods ended June 30, 2012 and 2011, respectively. The weighted average amortization period for intangible assets was 17.0 years in 2012 and 15.3 years in 2011.

In addition to amortization expense, during the three-month period ended June 30, 2012, the Company recorded charges to operating expenses of $4.8 million to reflect impairment of the carrying value of intangible assets associated with ridaforolimus, the Company’s investigational oral mTOR inhibitor being developed by Merck & Co., Inc. (“Merck”) for oncology indications pursuant to a license with the Company, following the decision in June 2012 by the U.S. Food and Drug Administration (“FDA”) to not approve the New Drug Application (“NDA”) filed by Merck for the treatment of patients with soft tissue or bone sarcomas, stating that additional clinical trial(s) would need to be conducted to further assess safety and efficacy of ridaforolimus in this indication. Merck has announced that is in ongoing discussions with health authorities in Europe and other countries as part of their application procedures for ridaforolimus for the treatment of metastatic soft-tissue or bone sarcomas in patients who had a favorable response to chemotherapy, and that Merck is studying ridaforolimus in combination with other mechanisms in several tumor types. Under the license agreement, Merck has agreed to pay the Company milestone payments based on successful development of ridaforolimus and achievement of specified sales thresholds, as well as tiered, double-digit royalties on global net sales of ridaforolimus. The impairment of the carrying value of ridaforolimus intangible assets was based on management’s current assessment of the uncertainty related to the timing and amount of future cash flows anticipated from these assets.

 

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5. Long-term Debt and Capital Lease Obligations

Long-term debt and capital lease obligations were comprised of the following at June 30, 2012 and December 31, 2011:

 

In thousands    June 30,
2012
    December 31,
2011
 

Bank term loan

   $       11,900      $ 12,600   

Capital lease obligations

     40        69   
  

 

 

   

 

 

 
     11,940        12,669   

Less current portion

     (1,790     (1,454
  

 

 

   

 

 

 
   $ 10,150      $ 11,215   
  

 

 

   

 

 

 

The term loan provides for quarterly payments of principal and interest with final scheduled maturity on December 31, 2015. The loan bears interest at LIBOR plus 1.25 to 2.25 percent, depending on the percentage of the Company’s liquid assets on deposit with or invested through the bank, or at the prime rate. The effective interest on the loan was 1.49 percent at June 30, 2012. The loan is secured by a lien on all assets of the Company excluding intellectual property, which the Company has agreed not to pledge to any other party. The loan requires the Company to maintain a minimum of $15 million in unrestricted cash, cash equivalents and investments. The loan also contains certain covenants that restrict additional indebtedness, additional liens and sales of assets, and dividends, distributions or repurchases of common stock.

In addition, the Company leases certain equipment under capital leases with original terms of up to four years. These leases have effective interest rates ranging from 5.6 percent to 7.2 percent and are secured by the underlying leased assets.

The future scheduled principal payments due under these financing obligations were as follows at June 30, 2012:

 

In thousands    Bank Term
Loan
    Capital
Lease
Obligations
 

Year ended December 31:

    

2012

   $ 700      $ 25   

2013

     2,100        15   

2014

     4,200        —     

2015

     4,900        —     
  

 

 

   

 

 

 
     11,900        40   

Less current portion

     (1,750     (40
  

 

 

   

 

 

 

Long-term portion

   $ 10,150      $ —     
  

 

 

   

 

 

 

 

6. Executive Compensation Plan

Under the Company’s deferred executive compensation plan, the Company accrues a liability for the value of the awards ratably over the vesting period. The grant-date value of awards made in March 2012 and April 2011 were $1.1 million and $1.6 million, respectively. The net expense for this plan was $644,000 and $654,000 for the three-month periods ended June 30, 2012 and 2011, respectively, and $1.5 million and $1.0 million for the six-month periods ended June 30, 2012 and 2011, respectively.

 

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7. Leases

The Company conducts its operations in a 100,000 square foot office and laboratory facility under a non-cancelable operating lease. The current lease term extends to July 2019 with two consecutive five-year renewal options. In May 2012, the Company entered into a three-year operating lease agreement for an additional 26,000 square feet of office space. Future minimum annual rental payments through July 2019 under these leases are $2.9 million in 2012, $6.5 million in 2013, $6.7 million in 2014, $6.2 million in 2015, $5.5 million in 2016, $5.6 million in 2017, and $9.0 million thereafter.

 

8. Stockholders’ Equity and Warrant Liability

Authorized Common Stock

At June 30, 2012, the Company had 240,000,000 shares of common stock authorized.

Financings

On February 25, 2009, the Company sold 14,378,698 shares of its common stock in a registered direct offering to institutional investors, at a purchase price of $1.69 per share, resulting in net proceeds after fees and expenses of $22.8 million. The investors also received warrants to purchase an additional 10,784,024 shares of the Company’s common stock exercisable at a price of $2.15 per share in cash or pursuant to the net exercise provisions of the warrants. The warrants became exercisable on August 25, 2009 and were scheduled to expire if not exercised by February 25, 2012. During the year ended December 31, 2010, 1,220,414 warrants were exercised for proceeds to the Company of $2.6 million. During the year ended December 31, 2011, a total of 3,757,767 warrant warrants were exercised for proceeds to the Company of $8.1 million. In the first quarter of 2012, the remaining 5,805,843 warrants were exercised for proceeds to the Company of $12.5 million. Prior to exercise, the warrant liability was recorded at fair value, with the adjustment to carrying value recognized in earnings. Upon exercise, the sum of the fair value of the exercised warrants and the proceeds received were credited to additional paid-in-capital and totaled $87.0 million in the first quarter of 2012. Upon the exercise of these remaining warrants, the balance of the warrant liability was credited to stockholders’ equity and the liability was eliminated.

On January 11, 2010, the Company filed a shelf registration statement with the U.S. Securities and Exchange Commission (“SEC”) for the issuance of common stock, preferred stock, various series of debt securities and or warrants or rights to purchase any of such securities, either individually or in units, with a total value of up to $125 million, from time to time at prices and on terms to be determined at the time of any such offering. This filing was declared effective on January 21, 2010. As of June 30, 2012, the Company has $65.8 million of securities remaining available under this shelf registration that can be sold before January 21, 2013.

On December 14, 2011, the Company filed a shelf registration statement with the SEC for the issuance of an unspecified amount of common stock, preferred stock, various series of debt securities and/or warrants to purchase any of such securities, either individually or in units, from time to time at prices and on terms to be determined at the time of any such offering. This filing was effective upon filing and will remain in effect for up to three years from filing.

On December 20, 2011, the Company sold 24,725,000 shares of its common stock in an underwritten public offering at a purchase price of $10.42 per share. Net proceeds of this offering, after underwriting discounts and commissions and expenses, were $243.1 million.

 

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Changes in Stockholders’ Equity

The changes in stockholders’ equity for the six-month period ended June 30, 2012 were as follows:

 

                         Accumulated              
                   Additional     Other              
     Common Stock      Paid-in     Comprehensive     Accumulated        
$ in thousands    Shares      Amount      Capital     Loss     Deficit     Total  

Balance, January 1, 2012

     157,608,702       $ 158       $ 776,946      $ —        $ (556,963   $ 220,141   

Issuance of common stock pursuant to warrant exercises

     5,805,843         5         87,040            87,045   

Issuance of common stock pursuant to ARIAD stock plans

     2,657,617         3         5,678            5,681   

Stock-based compensation

           8,444            8,444   

Payment of tax withholding obligations related to stock based compensation

           (2,615         (2,615

Net unrealized losses on marketable securities

             (1       (1

Net loss

               (107,206     (107,206
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Balance, June 30, 2012

     166,072,162       $ 166       $ 875,493      $ (1   $ (664,169   $ 211,489   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

 

9. Fair Value of Financial Instruments

The Company provides disclosure of financial assets and financial liabilities that are carried at fair value based on the price that would be received upon sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value measurements may be classified based on the amount of subjectivity associated with the inputs to fair valuation of these assets and liabilities using the following three levels:

Level 1—Inputs are unadjusted quoted prices in active markets for identical assets or liabilities that the Company has the ability to access at the measurement date.

Level 2—Inputs include quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability (i.e., interest rates, yield curves, etc.) and inputs that are derived principally from or corroborated by observable market data by correlation or other means (market corroborated inputs).

Level 3—Unobservable inputs that reflect the Company’s estimates of the assumptions that market participants would use in pricing the asset or liability. The Company develops these inputs based on the best information available, including its own data.

 

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The following table presents information about the Company’s assets and liabilities as of June 30, 2012 and December 31, 2011 that are measured at fair value on a recurring basis and indicates the fair value hierarchy of the valuation techniques the Company utilized to determine such fair value:

 

     June 30, 2012  
In thousands    Total      Level 1      Level 2      Level 3  

Marketable securities

   $ 89,533       $      —         $ 89,533       $      —     
  

 

 

    

 

 

    

 

 

    

 

 

 
     December 31, 2011  
In thousands    Total      Level 1      Level 2      Level 3  

Warrant liability

   $ 58,639       $ —         $ 58,639       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

The Company’s marketable securities are carried at fair value. Marketable securities are classified as Level 2 in the fair value hierarchy as their prices are based on observable inputs but not for identical securities. Therefore, their fair value is based on observable inputs other than quoted prices included within Level 1.

The Company’s warrant liability was carried at fair value and, at December 31, 2011 was classified as Level 2 in the fair value hierarchy as the unobservable inputs did not have a significant impact on the valuation of the warrant liability. This classification as Level 2 reflects that the warrants’ exercise price was significantly lower than the market price of the underlying common stock on the reporting date. The fair value of the warrants on December 31, 2011 was determined to be $58.6 million using the Black-Scholes option valuation model applying the following assumptions: (i) the market price of the Company’s common stock of $12.25 on that date, (ii) a risk-free rate of 0.015%, (iii) an expected term of 0.2 years, (iv) no dividend yield, and (v) a volatility of 59.9%. As of June 30, 2012, all warrants have been exercised and the fair value of the warrants on the exercise dates plus the proceeds from exercise were recorded in equity. The changes in the fair value of the warrant liability for the three and six-month periods ended June 30, 2012 and 2011 were as follows:

 

     Three Months Ended
June  30,
     Six Months Ended
June 30,
 
In thousands    2012      2011      2012     2011  

Balance, beginning of period

   $       —         $ 32,524       $ 58,639      $ 28,815   

Revaluation of warrants

     —           22,903         15,924        41,475   

Exercise of warrants

     —           —           (74,563     (14,863
  

 

 

    

 

 

    

 

 

   

 

 

 

Balance, end of period

   $ —         $ 55,427       $ —        $ 55,427   
  

 

 

    

 

 

    

 

 

   

 

 

 

The carrying amounts of cash equivalents, accounts payable and accrued liabilities approximate fair value because of their short-term nature. The carrying amount of the Company’s bank term loan approximates fair value due to its variable interest rate and other terms. The Company’s obligation under its executive compensation plan is based in part on the current fair value of specified mutual funds, which is therefore stated at its estimated fair value. The carrying amounts of cash equivalents, accounts payable, accrued liabilities, the bank term loan liability and the executive compensation liability are classified as Level 2 in the fair value hierarchy.

 

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10. Stock-Based Compensation

The Company awards stock options, stock units and other equity-based instruments to its employees, directors and consultants and provides employees the right to purchase common stock at a discount (collectively “share-based payments”), pursuant to stockholder approved plans. The Company’s statements of operations included total compensation cost from share-based payments for the three and six-month periods ended June 30, 2012 and 2011, as follows:

 

     Three Months Ended
June  30,
     Six Months Ended
June 30,
 
In thousands    2012      2011      2012      2011  

Compensation cost from:

           

Stock options

   $ 1,803       $ 718       $ 4,692       $ 1,606   

Stock and stock units

     1,671         1,156         3,646         2,618   

Purchases of common stock at a discount

     57         43         106         97   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 3,531       $ 1,917       $ 8,444       $ 4,321   
  

 

 

    

 

 

    

 

 

    

 

 

 

Compensation cost included in:

           

Research and development expenses

   $ 1,675       $ 947       $ 4,191       $ 2,105   

General and administrative expenses

     1,856         970         4,253         2,216   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 3,531       $ 1,917       $ 8,444       $ 4,321   
  

 

 

    

 

 

    

 

 

    

 

 

 

Stock Options

Stock options are granted with an exercise price equal to the closing market price of the Company’s common stock on the date of grant. Stock options generally vest ratably over four years and have contractual terms of ten years. Stock options are valued using the Black-Scholes option valuation model and compensation cost is recognized based on such fair value over the period of vesting on a straight-line basis.

Stock option activity under the Company’s stock plans for the six months ended June 30, 2012 was as follows:

 

     Number of
Shares
    Weighted
Average

Exercise  Price
Per Share
 

Options outstanding, January 1, 2012

     7,381,329      $ 5.22   

Granted

     1,941,750      $ 15.36   

Forfeited

     (18,563   $ 6.34   

Exercised

     (1,248,837   $ 4.39   
  

 

 

   

Options outstanding, June 30, 2012

     8,055,679      $ 7.79   
  

 

 

   

Stock and Stock Unit Grants

Stock and stock unit grants are provided to non-employee directors as compensation may include restrictions as to resale or other vesting provisions. Stock and stock unit grants are also awarded to employees and carry restrictions as to resale for periods of time or vesting provisions over time as specified in the grant. Stock and stock unit grants are valued at the closing market price of the Company’s common stock on the date of grant and compensation expense is recognized over the requisite service period, vesting period or period during which restrictions remain on the common stock or stock units granted.

 

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Stock and stock unit activity under the Company’s stock plans for the six months ended June 30, 2012 was as follows:

 

     Number of
Shares
    Weighted
Average

Grant  Date
Fair Value
 

Outstanding, January 1, 2012

     2,785,026      $ 4.51   

Granted

     911,677      $ 15.02   

Forfeited

     (6,800   $ 4.13   

Vested or restrictions lapsed

     (1,551,242   $ 4.08   
  

 

 

   

Outstanding, June 30, 2012

     2,138,661      $ 9.31   
  

 

 

   

Included in stock and stock units outstanding in the above table are 392,500 performance share units, awarded in March 2011, that will vest upon regulatory approval of ponatinib by the U.S. Food and Drug Administration on or before December 31, 2016 and 352,000 performance share units, awarded in March 2012, that will vest upon regulatory approval of ponatinib by the European Medicines Agency on or before December 31, 2016. The number of shares that may vest, if any, related to the March 2012 awards is dependent on the timing of approval. The compensation costs for such performance-based stock awards will be based on the awards that ultimately vest and the grant date fair value of those awards. Compensation expense related to these performance share units will begin to be recognized when achievement of the performance condition is probable. The unrecognized stock compensation expense associated with the maximum number of shares that may be issued upon achievement of the performance conditions was $11.5 million at June 30, 2012.

 

11. Net Loss Per Share

Net loss per share amounts have been computed based on the weighted-average number of common shares outstanding during each period. Because of the net loss reported in each period, diluted and basic net loss per share amounts are the same. For the three and six-month periods ended June 30, 2012 and 2011, the following potentially dilutive securities were not included in the computation of net loss per share because the effect would be anti-dilutive:

 

     Three Months Ended
June  30,
     Six Months Ended
June 30,
 
In thousands    2012      2011      2012      2011  

Outstanding stock options

     8,056         6,958         8,056         6,958   

Outstanding restricted stock and restricted stock units

     2,139         2,791         2,139         2,791   

Warrants to purchase common stock

     —           6,038         —           6,038   
  

 

 

    

 

 

    

 

 

    

 

 

 
     10,195         15,787         10,195         15,787   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

12. Recently Adopted or Issued Accounting Pronouncements

In June 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2011-05, Presentation of Comprehensive Income, which requires the presentation of comprehensive income in either a continuous statement of comprehensive income or in two separate but consecutive statements. ASU No. 2011-05 is effective for fiscal years and interim periods within those fiscal years, beginning on or after December 15, 2011 and requires retrospective application. The Company adopted this ASU on January 1, 2012, and included separate consolidated statements of comprehensive loss.

 

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ITEM 2. MANAGEMENTS’ DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The information set forth below should be read in conjunction with our unaudited condensed consolidated financial statements and the notes thereto included herein, as well as our audited consolidated financial statements and the notes thereto contained in our Annual Report on Form 10-K for the year ended December 31, 2011. Unless stated otherwise, references in this Quarterly Report on Form 10-Q to “we,” “us,” or “our” refer to ARIAD Pharmaceuticals, Inc., a Delaware corporation, and our subsidiaries unless the context requires otherwise.

Overview

Our vision is to transform the lives of cancer patients with breakthrough medicines. Our mission is to discover, develop and commercialize small-molecule drugs to treat cancer in patients with the greatest and most urgent unmet medical need – aggressive cancers where current therapies are inadequate. Our goal is to build a fully integrated oncology company focused on novel, molecularly targeted therapies to treat solid tumors and hematologic cancers.

Financial Condition and Results of Operations

At June 30, 2012, we had cash, cash equivalents and marketable securities of $250.3 million, working capital of $218.8 million, and total stockholders’ equity of $211.5 million compared to cash and cash equivalents of $306.3 million, working capital of $282.2 million, and total stockholders’ equity of $220.1 million at December 31, 2011. For the six-month period ended June 30, 2012, we reported a net loss of $107.2 million and cash used in operating activities of $68.2 million. Based on our current operating plan, we believe that our cash and cash equivalents at June 30, 2012 will be sufficient to fund our operations to the fourth quarter of 2013.

Product Development and Discovery

Our product pipeline currently consists of three product candidates – ponatinib, AP26113 and ridaforolimus.

Ponatinib is an investigational pan BCR-ABL inhibitor that we believe has potential applications in various hematological cancers and solid tumors. In the third quarter of 2011, we completed patient enrollment in a pivotal Phase 2 clinical trial of ponatinib, which we refer to as the PACE trial, in approximately 450 patients with resistant or intolerant chronic myeloid leukemia, or CML, or Philadelphia positive acute lymphoblastic leukemia, or Ph+ ALL, who are resistant or intolerant to dasatinib or nilotinib or who have the T315I mutation. In June 2012, we announced updated clinical data from the PACE trial that showed that 54% of chronic-phase CML patients in the trial, including 70% of patients who have a T315I mutation, achieved a major cytogenetic response. The most common adverse events considered related to ponatinib included thrombocytopenia, rash, dry skin, abdominal pain, and headache.

We have filed for regulatory approval of ponatinib in the United States based on the results of the PACE clinical trial and expect potential regulatory approval as soon as the first quarter of 2013. We also expect to file for regulatory approval of ponatinib in Europe in the third quarter of 2012. Subject to obtaining marketing approval, we intend to commercialize ponatinib in the United States and Europe and other select markets worldwide. We have initiated a Phase 3 clinical trial of ponatinib in newly diagnosed CML patients. We plan to initiate additional clinical trials of ponatinib, including a clinical trial of ponatinib in Japan, in the second half of 2012.

 

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AP26113 is an investigational dual inhibitor of anaplastic lymphoma kinase, or ALK, and epidermal growth factor receptor, or EGFR – two clinically validated targets in non-small cell lung cancer, or NSCLC. We initiated patient enrollment in a Phase 1/2 clinical trial of AP26113 in the third quarter of 2011. We expect to enroll approximately 30 to 50 patients in the Phase 1 portion of the trial. The Phase 2 portion of the trial is expected to begin in the second half of 2012 and is planned to enroll approximately 80 additional patients. Depending on the results of this trial, we could conduct a potential pivotal trial of AP26113 in patients with NSCLC commencing in 2013.

Ridaforolimus is an investigational mTOR inhibitor that we discovered internally and later licensed in 2010 to Merck & Co., Inc., or Merck. Under the license agreement, Merck is responsible for all activities and funds 100 percent of the costs related to the development, manufacturing and commercialization of ridaforolimus in oncology. In the third quarter of 2011, Merck filed in both Europe and the United States for regulatory approval of ridaforolimus as a maintenance therapy for patients with metastatic soft-tissue and bone sarcomas who had a favorable response to chemotherapy. In June 2012, the U.S. Food and Drug Administration, or FDA, issued a complete response letter regarding the New Drug Application, or NDA, filed by Merck, stating that the FDA cannot approve the application in its present form and that additional clinical trial(s) would need to be conducted to further assess safety and efficacy of ridaforolimus in this indication. Merck has announced that is in ongoing discussions with health authorities in Europe and other countries as part of their application procedures for ridaforolimus for the treatment of metastatic soft-tissue or bone sarcomas in patients who had a favorable response to chemotherapy, and that Merck is studying ridaforolimus in combination with other mechanisms in several tumor types. Under the license agreement, Merck has agreed to pay us milestone payments based on successful development of ridaforolimus and achievement of specified sales thresholds, as well as tiered, double-digit royalties on global net sales of ridaforolimus.

In addition to our lead development programs, we have a focused drug discovery program centered on small-molecule therapies that are molecularly targeted to cell-signaling pathways implicated in cancer.

Critical Accounting Policies and Estimates

Our financial position and results of operations are affected by subjective and complex judgments, particularly in the areas of revenue recognition, the carrying value of intangible assets, accrued product development expenses and the fair value of warrants to purchase our common stock.

Revenue Recognition

We generate revenue from license and collaboration agreements with third parties related to use of our technology and/or development and commercialization of product candidates. Such agreements may provide for payment to us of up-front payments, periodic license payments, milestone payments and royalties. We also generate revenue from services provided under license agreements.

For the six months ended June 30, 2012, we reported total revenue of $399,000. Revenue is recognized when there is persuasive evidence that an arrangement exists, delivery has occurred, the price is fixed and determinable and collection is reasonably assured. Revenue arrangements with multiple elements are divided into separate units of accounting if certain criteria are met, including whether the delivered element has stand-alone value to the customer. When deliverables are separable, consideration received is allocated to the separate units of accounting based on the relative selling price of the elements and the appropriate revenue recognition principles are applied to each unit.

The assessment of multiple element arrangements requires judgment in order to determine the appropriate units of accounting and the points in time that, or periods over which, revenue should be recognized. Regarding our license agreement with Merck entered into in May 2010, the transition services are recognized in the period in which they are received or the services are rendered. Milestone payments under the license agreement are recognized when earned.

 

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Intangible Assets

At June 30, 2012, we reported $922,000 of intangible assets, consisting of capitalized costs related primarily to purchase and issued patents, patent applications and licenses, net of accumulated amortization. The carrying value of these intangible assets is evaluated for possible impairment, and losses are recorded when the evaluation indicates that the carrying value is not recoverable. This evaluation involves estimates of future net cash flows expected to be generated by the asset. Such estimates require judgment regarding future events and expected cash flows. Changes in these estimates, including decisions to discontinue using the technologies, could result in material changes to our balance sheet and charges to our statements of operations. If we were to abandon the ongoing development of the underlying product candidates or technologies or terminate our efforts to pursue collaborations or license agreements, or if our estimates of future net cash flows expected to be generated by the asset change, we may be required to write down or write off a portion of the carrying value of our intangible assets. In the three and six-month periods ended June 30, 2012, we recorded charges of $4.8 million in our statement of operations to reflect impairment of the intangible assets associated with ridaforolimus following the decision by the FDA not to approve the NDA filed by Merck for ridaforolimus for the treatment of patients with soft-tissue and bone sarcomas.

Accrued Product Development Expenses

We accrue expenses for our product development activities based on our estimates of services performed or progress achieved pursuant to contracts and agreements with multiple vendors including research laboratories, contract manufacturers, contract research organizations and clinical sites. These estimates are recorded in research and development expenses in our statement of operations and are reflected in accrued product development expenses on our balance sheet. At June 30, 2012, we reported accrued product development expenses of $10.0 million on our balance sheet.

Our estimates of services performed or progress achieved are based on all available information we have from reports, correspondence and discussions with our vendors. Our estimates of accrued expenses based on such information require judgment. Actual costs may vary from such estimates. When such variances become known, we adjust our expenses accordingly.

Fair Value of Warrants

Warrants outstanding at December 31, 2011 to purchase 5,805,843 shares of our common stock, issued on February 25, 2009 in connection with a registered direct offering of our common stock, were classified as a derivative liability. Accordingly, the fair value of the warrants was recorded on our balance sheet as a liability, and such fair value was adjusted in each financial reporting period with the adjustment to fair value reflected in our consolidated statement of operations. At December 31, 2011, we reported a warrant liability of $58.6 million on our balance sheet.

During the three-month period ended March 31, 2012, all 5,805,843 warrants that were outstanding at December 31, 2011 were exercised for proceeds to us of approximately $12.5 million. Upon the exercise of these remaining warrants, the balance of the warrant liability and the proceeds received upon exercise were credited to stockholders’ equity and the liability was eliminated.

The fair value of the warrants was determined using the Black-Scholes option valuation model. Fluctuations in the assumptions and factors used in the Black-Scholes model resulted in adjustments to the fair value of the warrants recorded on our balance sheet reflected through charges or credits in our statement of operations. The primary factor in the Black-Scholes model that impacted the fair value of the warrants was the market value of our common stock on the date of the valuation.

 

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Results of Operations

For the three months ended June 30, 2012 and 2011

Revenue

We recorded total revenue of $318,000 in the three-month period ended June 30, 2012, compared to $66,000 in the corresponding period in 2011. Total revenue in 2012 consisted of license revenue pursuant to a license agreement related to our ARGENT technology in accordance with our revenue recognition policy. Total revenue in 2011 consisted of license revenue of $39,000 pursuant to a license agreement related to our ARGENT technology and service revenue of $27,000, reflecting services provided to Merck pursuant to our license agreement for ridaforolimus. For the remainder of 2012, we expect to record limited licensing revenue and no service revenue. We cannot predict the timing or amount of any future revenue under our license agreement with Merck.

Operating Expenses

Research and Development Expenses

Research and development expenses increased by $20.6 million, or 110 percent, to $39.4 million in the three-month period ended June 30, 2012, compared to $18.8 million in the corresponding period in 2011, as described in further detail below. The research and development process necessary to develop a pharmaceutical product for commercialization is subject to extensive regulation by numerous governmental authorities in the United States and other countries. This process typically takes years to complete and requires the expenditure of substantial resources. Current requirements include:

 

 

preclinical toxicology, pharmacology and metabolism studies, as well as in vivo efficacy studies in relevant animal models of disease;

 

 

manufacturing of drug product for preclinical studies and clinical trials and ultimately for commercial supply;

 

 

submission of the results of preclinical studies and information regarding manufacturing and control and proposed clinical protocol to the U.S. Food and Drug Administration, or FDA, in an investigational new drug application or IND (or similar filings with regulatory agencies outside the United States);

 

 

conduct of clinical trials designed to provide data and information regarding the safety and efficacy of the product candidate in humans; and

 

 

submission of all the results of testing to the FDA in a new drug application, or NDA (or similar filings with regulatory agencies outside the United States).

Upon approval by the appropriate regulatory authorities, including in some countries approval of product pricing, we may commence commercial marketing and distribution of the product.

We group our research and development, or R&D, expenses into two major categories: direct external expenses and all other R&D expenses. Direct external expenses consist of costs of outside parties to conduct laboratory studies, to develop manufacturing processes and manufacture product candidates, to conduct and manage clinical trials and similar costs related to our clinical and preclinical studies. These

 

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costs are accumulated and tracked by product candidate. All other R&D expenses consist of costs to compensate personnel, to purchase lab supplies and services, to lease, operate and maintain our facility, equipment and overhead and similar costs of our research and development efforts. These costs apply to our clinical and preclinical candidates as well as our discovery research efforts. Direct external expenses are further categorized as costs for clinical programs and costs for preclinical programs. Preclinical programs include product candidates undergoing toxicology, pharmacology, metabolism and efficacy studies and manufacturing process development required before testing in humans can begin. Product candidates are designated as clinical programs once we have filed an IND with the FDA, or a similar filing with regulatory agencies outside the United States, for the purpose of commencing clinical trials in humans.

Our R&D expenses for the three-month period ended June 30, 2012, as compared to the corresponding period in 2011, were as follows:

 

     Three months ended June 30,      Increase/  
In thousands    2012      2011      (decrease)  

Direct external expenses:

        

Clinical programs

   $ 17,547       $ 8,078       $       9,469   

Preclinical programs

     —           786         (786

All other R&D expenses

     21,878         9,890         11,988   
  

 

 

    

 

 

    

 

 

 
   $ 39,425       $ 18,754       $ 20,671   
  

 

 

    

 

 

    

 

 

 

In 2012, our clinical programs consisted of (i) ponatinib, our pan BCR-ABL inhibitor, for which we are conducting a pivotal Phase 2 clinical trial and other trials, and (ii) AP26113, our ALK and EGFR inhibitor for which we filed an IND in June 2011 and commenced a Phase 1/2 clinical trial in the third quarter of 2011. AP26113 was categorized as a preclinical program in 2011 until the commencement of the Phase 1/2 clinical trial in the third quarter of 2011.

Direct external expenses for ponatinib were $16.6 million in the three-month period ended June 30, 2012, an increase of $8.5 million as compared to the corresponding period in 2011. The increase is due to increases in clinical trial costs of $3.6 million, contract manufacturing costs of $3.2 million, and supporting non-clinical costs of $1.7 million. Clinical trials costs increased primarily due to increased enrollment and treatment of patients in our pivotal Phase 2 clinical trial and start-up costs related to our Phase 3 clinical trial in newly diagnosed CML patients, including purchases of the comparator drug, imatinib, for use in this trial, offset in part by a decrease in costs of our on-going Phase 1 clinical trial as treatment of patients and other activities in this trial have decreased over this time period. Contract manufacturing costs increased due primarily to the conduct of product and process development and qualification initiatives to support regulatory filings for this product candidate, as well as the production of ponatinib for use in our clinical trials. Supporting non-clinical costs increased due primarily to increased quality and stability studies and initiatives to develop and commercialize a companion diagnostic test to identify patients with the T315I mutation of the BCR-ABL gene. We expect that our direct external expenses for ponatinib will continue to increase in 2012 as we continue to treat patients in our ongoing Phase 1 and Phase 2 clinical trials, initiate additional clinical trials of this product candidate, conduct additional studies to support continued development of ponatinib, and prepare and file applications for regulatory approval of this product candidate.

Direct external expenses for AP26113 were $992,000 in the three-month period ended June 30, 2012, which were entirely included in clinical programs in 2012 in the table above, reflecting the transfer of this program to a clinical development status in the third quarter of 2011. Direct external expenses for AP26113 were $786,000 for the three-month period ended June 30, 2011, which were entirely included in preclinical programs. The increase in expenses for AP26113 was due primarily to costs of the Phase 1/2 clinical trial initiated in the third quarter of 2011, offset in part by the completion of toxicology studies and product development initiatives required for filing of the IND. We expect that our direct external expenses for AP26113 will continue to increase in 2012 as we continue to enroll patients in our on-going clinical trial of this product candidate and conduct additional studies to support continued development of AP26113.

 

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All other R&D expenses increased by $12.0 million in the three-month period ended June 30, 2012, as compared to the corresponding period in 2011. This increase is primarily due to an increase in personnel costs of $3.3 million due primarily to an increase in number of employees to support expanding R&D activities, salary increases, a newly instituted cash bonus program, and an increase in recruiting costs; an increase in professional services of $1.9 million due primarily to initiatives to upgrade systems and technology used in our business; an increase in stock-based compensation expense of $0.7 million as a result of the impact of a significant increase in the market value of our common stock on the value of stock-based compensation awards in 2011 and 2012; an impairment charge related to ridaforolimus intangible assets of $4.8 million; an increase in rent expense of $1.0 million as a result of an amendment to our building lease; and an increase in lab and general expenses of $0.8 million. Except for the one-time $4.8 million impairment charge related to ridaforolimus, we expect that all other R&D expenses will continue to increase in 2012 to support the expanding development of ponatinib and AP26113, the preparation and filing of applications for regulatory approval of ponatinib in the United States and Europe, and our ongoing discovery research efforts.

The successful development of our product candidates is uncertain and subject to a number of risks. We cannot be certain that any of our product candidates will prove to be safe and effective or will meet all of the applicable regulatory requirements needed to receive and maintain marketing approval. Data from preclinical studies and clinical trials are susceptible to varying interpretations that could delay, limit or prevent regulatory approval. We, the FDA or other regulatory authorities may suspend clinical trials at any time if we or they believe that the patients participating in such trials are being exposed to unacceptable risks or if such regulatory agencies find deficiencies in the conduct of the trials or other problems with our products under development. Delays or rejections may be encountered based on additional governmental regulation, legislation, administrative action or changes in FDA or other regulatory policy during development or the review process. Other risks associated with our product development programs are described in the section entitled “Risk Factors” in Part I, Item 1A of our Annual Report on Form 10-K as updated from time to time in our other periodic and current reports filed with the SEC. Due to these uncertainties, accurate and meaningful estimates of the ultimate cost to bring a product to market, the timing of completion of any of our drug development programs and the period in which material net cash inflows from any of our drug development programs will commence are unavailable.

General and Administrative Expenses

General and administrative expenses increased by $6.0 million, or 97 percent, to $12.2 million in the three-month period ended June 30, 2012, compared to $6.2 million in the corresponding period in 2011. This increase was due primarily to an increase in personnel costs of $2.2 million due primarily to an increase in number of employees to support expanding business activities and to prepare for potential commercial launch of ponatinib, salary increases, a newly instituted cash bonus program and an increase in recruiting costs; an increase in professional services of $2.1 million as a result of an increase in corporate and commercial development initiatives to plan and prepare for the potential commercial launch of ponatinib; an increase in stock-based compensation expense of $0.9 million due to the impact of a significant increase in the market value of our common stock on the value of stock-based compensation awards in 2011 and 2012; as well as an increase in travel costs, insurance costs and other miscellaneous costs. We expect that general and administrative expenses will continue to increase in 2012 as we prepare for potential commercial launch of ponatinib in the United States and in Europe, including the hiring of sales, marketing and commercial operations personnel and the establishment of our European headquarters and operations, and support our expanding research and development activities.

 

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We expect that our operating expenses in total will continue to increase substantially in 2012 for the reasons described above. Operating expenses may fluctuate from quarter to quarter. The actual amount of any increase in operating expenses will depend on, among other things, the status of regulatory reviews and timing of potential regulatory approvals of our product candidates, the costs to prepare for potential commercial launch of ponatinib in the United States and in Europe, the progress of our product development programs, including on-going and planned clinical trials, results of continuing non-clinical studies and the costs of product and process development activities and product manufacturing.

Other Income (Expense)

Interest Income/Expense

Interest income increased to $69,000 in the three-month period ended June 30, 2012 from $44,000 in the corresponding period in 2011, as a result of a higher average balance of funds invested in 2012.

Interest expense decreased to $50,000 in the three-month period ended June 30, 2012 from $63,000 in the corresponding period in 2011 as a result of lower average borrowings.

Operating Results

We reported a loss from operations of $51.3 million in the three-month period ended June 30, 2012 compared to a loss from operations of $24.8 million in the corresponding period in 2011, an increase of $26.5 million. We also reported a net loss of $51.3 million in the three-month period ended June 30, 2012, compared to a net loss of $47.8 million in the corresponding period in 2011, an increase of $3.5 million, and a net loss per share of $0.31 and $0.36, respectively. The increase in net loss is largely due to the increase in our operating expenses described above offset in part by the decrease of $22.9 million in charges related to our warrant liability. Our results of operations for the remaining quarters of 2012 will vary from those of the quarter ended June 30, 2012 and actual results will depend on a number of factors, including the progress of our product development programs, increases in number of employees and related personnel costs, preparations for anticipated commercial launch of our product candidate, ponatinib, the progress of our discovery research programs, the impact of any commercial and business development activities and other factors. The extent of changes in our results of operations will also depend on the sufficiency of funds on hand or available from time to time, which will influence the amount we will spend on operations and capital expenditures and the development timelines for our product candidates.

Results of Operations

For the six months ended June 30, 2012 and 2011

Revenue

We recorded total revenue of $399,000 in the six-month period ended June 30, 2012, compared to $122,000 in the corresponding period in 2011. Total revenue in 2012 consisted of license revenue pursuant to license agreements related to our ARGENT technology in accordance with our revenue recognition policy. Total revenue in 2011 consisted of license revenue of $39,000 and service revenue of $83,000, reflecting services provided to Merck pursuant to our license agreement for ridaforolimus.

 

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Operating Expenses

Research and Development Expenses

Research and development expenses increased by $34.9 million, or 105 percent, to $68.2 million in the six-month period ended June 30, 2012, compared to $33.3 million in the corresponding period in 2011.

Our R&D expenses for the six-month period ended June 30, 2012, as compared to the corresponding period in 2011, were as follows:

 

     Six months ended June 30,      Increase/  
In thousands    2012      2011      (decrease)  

Direct external expenses:

        

Clinical programs

   $ 28,433       $ 12,071       $   16,362   

Preclinical programs

     —           1,900         (1,900

All other R&D expenses

     39,765         19,358         20,407   
  

 

 

    

 

 

    

 

 

 
   $ 68,198       $ 33,329       $ 34,869   
  

 

 

    

 

 

    

 

 

 

In 2012, our clinical programs consisted of (i) ponatinib, our pan BCR-ABL inhibitor, for which we are conducting a pivotal Phase 2 clinical trial and other trials, and (ii) AP26113, our ALK and EGFR inhibitor for which we filed an IND in June 2011 and commenced a Phase 1/2 clinical trial in the third quarter of 2011. AP26113 was categorized as a preclinical program in 2011 until the commencement of the Phase 1/2 clinical trial in the third quarter of 2011.

Direct external expenses for ponatinib were $26.7 million in the six-month period ended June 30, 2012, an increase of $14.6 million as compared to the corresponding period in 2011. The increase is due to increases in clinical trial costs of $6.0 million, contract manufacturing costs of $5.7 million, and supporting non-clinical costs of $2.9 million. Clinical trials costs increased primarily due to increased enrollment and treatment of patients in our pivotal Phase 2 clinical trial and start-up costs related to our Phase 3 clinical trial in newly diagnosed CML patients, including purchases of the comparator drug, imatinib, for use in this trial, offset in part by a decrease in costs of our on-going Phase 1 clinical trial as treatment of patients and other activities in this trial have decreased over this time period. Contract manufacturing costs increased due primarily to the conduct of product and process development and qualification initiatives to support regulatory filings for this product candidate, as well as the production of ponatinib for use in our clinical trials. Supporting non-clinical costs increased due primarily to increased quality and stability studies and initiatives to develop and commercialize a companion diagnostic test to identify patients with the T315I mutation of the BCR-ABL gene.

Direct external expenses for AP26113 were $1.8 million in the six-month period ended June 30, 2012, which were entirely included in clinical programs in 2012 in the table above, reflecting the transfer of this program to a clinical development status in the third quarter of 2011. Direct external expenses for AP26113 were $1.9 million for the six-month period ended June 30, 2011, which were entirely included in preclinical programs. The decrease in expenses for AP26113 was due primarily to the completion of toxicology studies and product development initiatives required for filing of the IND, offset in part by costs of the Phase 1/2 clinical trial initiated in the third quarter of 2011.

All other R&D expenses increased by $20.4 million in the six-month period ended June 30, 2012, as compared to the corresponding period in 2011. This increase is primarily due to an increase in personnel costs of $8.8 million due primarily to an increase in number of employees to support expanding R&D activities, salary increases, a newly instituted cash bonus program, and an increase in recruiting costs; an increase in professional services of $2.4 million due primarily to initiatives to upgrade systems and technology used in our business; an increase in stock-based compensation expense of $2.1 million as a result of the impact of a significant increase in the market value of our common stock on the value of stock-based compensation awards in 2011 and 2012; an impairment charge related to ridaforolimus intangible assets of $4.8 million; an increase in rent expense of $1.7 million as a result of an amendment to our building lease; and an increase in lab and general expenses of $1.2 million.

 

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General and Administrative Expenses

General and administrative expenses increased by $12.5 million, or 114 percent, to $23.5 million in the six-month period ended June 30, 2012, compared to $11.0 million in the corresponding period in 2011. This increase was due primarily to an increase in personnel costs of $5.5 million due primarily to an increase in number of employees to support expanding business activities and to prepare for potential commercial launch of ponatinib, salary increases, a newly instituted cash bonus program and an increase in recruiting costs; an increase in professional services of $3.6 million as a result of an increase in corporate and commercial development initiatives to plan and prepare for the potential commercial launch of ponatinib; an increase in stock-based compensation expense of $2.0 million due to the impact of a significant increase in the market value of our common stock on the value of stock-based compensation awards in 2011 and 2012; as well as an increase in travel costs, insurance costs and other miscellaneous costs.

Other Income (Expense)

Interest Income/Expense

Interest income increased to $137,000 in the six-month period ended June 30, 2012 from $99,000 in the corresponding period in 2011, as a result of a higher average balance of funds invested in 2012.

Interest expense decreased to $108,000 in the six-month period ended June 30, 2012 from $123,000 in the corresponding period in 2011 as a result of lower average borrowings.

Revaluation of Warrant Liability

During the six-month period ended June 30, 2012, all 5,805,843 warrants that were outstanding at December 31, 2011 were exercised for proceeds to us of approximately $12.5 million. During the first quarter of 2012, the value of the warrant liability on our balance sheet was adjusted, resulting in a non-cash charge of $15.9 million for the six-month period ended June 30, 2012, due primarily to the increase in the market price of our common stock from December 31, 2011 to the dates the warrants were exercised. The revaluation of our warrant liability in the corresponding period in 2011 resulted in a non-cash charge of $41.5 million. Upon exercise of those remaining warrants, the balance of the warrant liability and the associated exercise proceeds were credited to stockholders’ equity and the liability was eliminated.

Operating Results

We reported a loss from operations of $91.3 million in the six-month period ended June 30, 2012 compared to a loss from operations of $44.2 million in the corresponding period in 2011, an increase of $47.1 million, or 107 percent. We also reported a net loss of $107.2 million in the six-month period ended June 30, 2012, compared to a net loss of $85.7 million in the corresponding period in 2011, an increase in net loss of $21.5 million or 25 percent, and a net loss per share of $0.66 for both of the six-month periods ended June 30, 2012 and 2011. The increase in net loss is largely due to the increase in our operating expenses described above, offset in part by the decrease of $25.6 million in charges related to the revaluation of our warrant liability.

Liquidity and Capital Resources

We have financed our operations and investments to date primarily through sales of our common stock in public and private offerings, through the receipt of up-front and milestone payments from collaborations and licenses with pharmaceutical and biotechnology companies and, to a lesser extent, through issuances of our common stock pursuant to our stock option and employee stock purchase plans, supplemented by the borrowing of long-term debt from commercial lenders. We sell securities and incur debt when the terms of such transactions are deemed favorable to us and as necessary to fund our current

 

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and projected cash needs. We seek to balance the level of cash, cash equivalents and marketable securities on hand with our projected needs and to allow us to withstand periods of uncertainty relative to the availability of funding on favorable terms.

For the purpose of the following discussion, our funds consist of cash, cash equivalents and marketable securities as follows:

 

In thousands         June 30,     
2012
     December 31,
2011
 

Cash and cash equivalents

   $ 160,733       $ 306,256   

Marketable securities

     89,533         —     
  

 

 

    

 

 

 
   $ 250,266       $ 306,256   
  

 

 

    

 

 

 

We manage our marketable securities portfolio to maintain liquidity for payment of our obligations and to enhance yields. We purchase marketable securities to enhance our yield on invested funds and when such amounts are not needed for near-term payment of obligations. We generally hold our marketable securities to maturity. Upon maturity of such marketable securities, a portion may be retained as cash to provide for payment of current obligations while the remainder will be reinvested in accordance with our investment policy. For the six-month period ended June 30, 2012, we made purchases of marketable securities in the amount of $89.6 million. For the six-month period ended June 30, 2011, there were no purchases or sales of marketable securities.

Sources of Funds

For the three and six-month periods ended June 30, 2012 and 2011, our sources of funds were as follows:

 

     Three Months Ended
June  30,
     Six Months Ended
June 30,
 
In thousands    2012      2011      2012      2011  

Sales/issuances of common stock:

           

Pursuant to warrant exercises

   $ —         $ —         $ 12,482       $ 7,580   

Pursuant to stock option and purchase plans

     2,304         2,257         5,681         3,659   

Proceeds from long-term borrowings

     —           —           —           4,375   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 2,304       $ 2,257       $ 18,163       $ 15,614   
  

 

 

    

 

 

    

 

 

    

 

 

 

The amount of funding we raise through sales of our common stock or other securities depends on many factors, including, but not limited to, the status and progress of our product development programs, projected cash needs, availability of funding from other sources, our stock price and the status of the capital markets.

On February 25, 2009, we sold 14,378,698 shares of our common stock in a registered direct offering to institutional investors, at a purchase price of $1.69 per share, resulting in net proceeds after fees and expenses of $22.8 million. The investors also received warrants to purchase an additional 10,784,024 shares of our common stock exercisable at a price of $2.15 per share in cash or pursuant to the net exercise provisions of the warrants. During the six-month period ended June 30, 2011, 3,525,777 warrants were exercised for proceeds to us of $7.6 million. During the six-month period ended June 30, 2012, all 5,805,843 warrants that remained outstanding at December 31, 2011 were exercised for proceeds to us of $12.5 million and no warrants remained outstanding as of June 30, 2012.

On December 20, 2011, we sold 24,725,000 shares of our common stock in an underwritten public offering at a purchase price of $10.42 per share. Net proceeds of this offering, after underwriting discounts and commissions and expenses, were $243.1 million.

 

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We have filed shelf registration statements with the U.S. Securities and Exchange Commission, or SEC, from time to time, to register shares of our common stock or other securities for sale, giving us the opportunity to raise funding when needed or otherwise considered appropriate. Under SEC rules, we currently qualify as a “well-known seasoned issuer,” which allows us to file shelf registration statements to register an unspecified amount of securities that are effective upon filing. On December 14, 2011, we filed such a shelf registration statement with the SEC for the issuance of an unspecified amount of common stock, preferred stock, various series of debt securities and/or warrants to purchase any of such securities, either individually or in units, from time to time at prices and on terms to be determined at the time of any such offering. This filing was effective upon filing and will remain in effect for up to three years from filing. In addition, before we qualified as a “well-known seasoned issuer,” we filed a shelf registration statement for various classes of securities under which we have approximately $65.8 million of securities remaining available for issuance prior to January 21, 2013.

In January 2011, we amended our existing term loan with a bank. The amendment increased the outstanding balance of the loan from $9.6 million at December 31, 2010 to $14.0 million, extended the maturity date from March 31, 2013 to December 31, 2015, and re-set the quarterly repayment provisions, with payments increasing from 2.5 percent of the principal amount in the first quarter, commencing on March 31, 2011, to 8.75 percent of the principal amount in the final quarter, together with interest throughout the term of the loan. All other provisions of our existing loan remain in full force and effect.

Uses of Funds

The primary uses of our cash are to fund our operations and working capital requirements and, to a lesser degree, to repay our long-term debt, to invest in intellectual property and to invest in our property and equipment as needed for our business. For the three and six-month periods ended June 30, 2012 and 2011, our uses of funds were as follows:

 

     Three Months Ended
June 30,
     Six Months Ended
June 30,
 
In thousands    2012      2011      2012      2011  

Net cash used in operating activities

   $ 37,596       $ 18,173       $ 68,157       $ 35,441   

Repayment of long term borrowings and capital leases

     364         364         729         738   

Investment in intangible assets

     270         171         465         412   

Investment in property and equipment

     1,050         554         1,966         977   

Payment of tax withholding obligations related to stock compensation

     313         503         2,615         827   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 39,593       $ 19,765       $ 73,932       $ 38,395   
  

 

 

    

 

 

    

 

 

    

 

 

 

The net cash used in operating activities is comprised of our net losses adjusted for non-cash expenses, changes in deferred revenue, and working capital requirements. As noted above, our net loss for the three and six-month periods ended June 30, 2012 increased by $3.5 million and $21.5 million, respectively, as compared to the corresponding periods in 2011, due primarily to the overall increases in operating expenses, offset in part by decreases in charges related to the revaluation of our warrant liability. Our net cash used in operating activities increased by $19.4 million and $32.7 million, respectively, in the three and six-month periods ended June 30, 2012 as compared to the corresponding periods in 2011, reflecting overall increases in operating expenses and changes in working capital. As noted above, we expect that we will continue to incur a net loss through the remainder of 2012 due to ongoing development of our product candidates and preparation for potential commercialization of ponatinib in the United States and Europe; and that our investment in property and equipment will increase in 2012 to support growth of our R&D and general and administrative functions.

 

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Off-Balance Sheet Arrangements

As part of our ongoing business, we do not participate in transactions that generate relationships with unconsolidated entities for financial partnerships, such as entities often referred to as structured finance or special purpose entities which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. As of June 30, 2012, we maintained an outstanding letter of credit of $749,000 in accordance with the terms of our long-term lease for our office and laboratory facility and for other purposes.

Contractual Obligations

We have substantial fixed contractual obligations under our long-term debt agreement, operating and capital lease agreements, employment agreements and benefit plans. These non-cancellable contractual obligations were comprised of the following as of June 30, 2012:

 

            Payments Due By Period  
In thousands    Total      In
2012
     2013
through
2015
     2016
through
2017
     After
2017
 

Long-term debt

   $ 11,900       $ 700       $ 11,200       $ —         $ —     

Lease agreements

     42,273         2,888         19,363         11,023         8,999   

Employment agreements

     5,004         3,466         1,538         —           —     

Other long-term obligations

     6,153         —           6,153         —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total fixed contractual obligations

   $ 65,330       $ 7,054       $ 38,254       $ 11,023       $ 8,999   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Long-term debt consists of scheduled principal payments on such debt. Interest on our long-term debt is based on variable interest rates. Assuming a constant interest rate of 1.49 percent, our average interest rate on our debt at June 30, 2012, over the remaining term of the debt, our interest payments would total approximately $86,000 for the remainder of 2012, and $309,000 in the period remaining from 2013 through 2015.

Leases consist of payments to be made on our lease for our office and laboratory facility, the term of which extends to July 2019, and on agreements for certain assets acquired under capital leases which expire at various dates into 2013. Employment agreements represent base salary payments under agreements with officers that extend for terms ranging from one to two years. Other long-term obligations are comprised primarily of our obligations under our deferred executive compensation plan.

Liquidity

At June 30, 2012, we had cash, cash equivalents and marketable securities totaling $250.3 million and working capital of $218.8 million, compared to cash and cash equivalents totaling $306.3 million and working capital of $282.2 million at December 31, 2011. For the six-month period ended June 30, 2012, we reported a net loss of $107.2 million and cash used in operating activities of $68.2 million. Based on our current operating plan, we believe that our cash and cash equivalents at June 30, 2012 will be sufficient to fund our operations to the fourth quarter of 2013.

We do not have significant recurring revenue streams and have historically incurred operating losses and net losses related to our research and development activities. We expect to continue to incur significant operating expenses and that our operating expenses will increase substantially during the remainder of

 

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2012 and beyond. We plan to expand our development of our product candidates, ponatinib and AP26113, and to conduct additional clinical trials, including a Phase 3 clinical trial of ponatinib in newly diagnosed CML that we have initiated, and continue manufacturing-related and other activities in support of these efforts. Subject to our filing for and receipt of marketing approval, we plan to commercialize ponatinib and future product candidates on our own in the United States, Europe and other select markets worldwide, which will require increased spending to establish sales, marketing and distribution capabilities in these markets. We also plan to continue to invest in discovery research and add to our pipeline of product candidates through these activities. There are many factors that will affect our level of spending on these activities, including the number, size and complexity of, and rate of enrollment of patients in, our clinical trials for ponatinib and AP26113, the extent of other development activities for ponatinib and AP26113, including product and process development, the progress of our preclinical and discovery research programs, the status of regulatory reviews and timing of potential regulatory approvals, in the United States, Europe and other markets of ponatinib and other product candidates, the size of the workforce and required systems and infrastructure necessary to support commercialization of our product candidates in multiple markets and other factors.

We currently have no drug products approved for sale. Until such time, if ever, that we receive regulatory approval for our product candidates and generate significant revenues from sales of our product candidates, we plan to continue to fund our operations through the potential receipt of milestone payments under our existing licenses, by issuing common stock, debt or other securities in public or private offerings, or by incurring additional debt from commercial lenders.

Under our license agreement with Merck, we are eligible to receive milestone payments for specified regulatory filings and approvals to sell ridaforolimus in multiple cancer indications. In addition to milestone payments, if ridaforolimus receives regulatory approval, Merck has agreed to pay us tiered double-digit royalties on global net sales of ridaforolimus. There can be no assurance that such regulatory approvals will be obtained or that we will receive any additional milestone or other payments under our license agreement with Merck. For example, we had anticipated receiving up to $40 million in milestone payments from Merck for regulatory approvals of ridaforolimus for metastatic soft-tissue and bone sarcomas (consisting of $25 million for approval in the United States, $10 million for approval in the European Union and $5 million for approval in Japan). However, in June 2012, the FDA issued a complete response letter regarding the NDA filed by Merck, stating that the FDA cannot approve the application in its present form and that additional clinical trial(s) would need to be conducted to further assess safety and efficacy of ridaforolimus in this indication. Merck has announced that it is in ongoing discussions with health authorities in Europe and other countries as part of their application procedures for ridaforolimus for the treatment of metastatic soft-tissue or bone sarcomas in patients who had a favorable response to chemotherapy, and that Merck is studying ridaforolimus in combination with other mechanisms in several tumor types. We cannot predict the timing or amount of any future revenue under our license agreement with Merck.

In addition to the license agreement with Merck, we also have existing license agreements with two companies, Medinol Ltd. and ICON Medical Corporation, for the development and commercialization of ridaforolimus-eluting stents, and other licenses of our ARGENT technology. If Medinol, ICON or the other licensees are successful in the development or commercialization of potential products or otherwise generate revenue from these licenses, we will be eligible to receive milestone payments and/or royalties on sales of products.

We may also seek to raise funds by issuing common stock, debt or other securities in one or more public or private offerings, as market conditions permit, or through the incurrence of additional debt from commercial lenders. To the extent that we raise additional capital through the sale of equity or convertible debt securities, the ownership interest of our existing stockholders will be diluted, and the terms may include liquidation or other preferences that adversely affect the rights of our stockholders. Debt financing, if available, may involve agreements that include covenants limiting or restricting our ability to take specific actions, such as incurring debt, making capital expenditures or declaring dividends.

 

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There can be no assurance that additional funds will be available when we need them on terms that are acceptable to us, or at all. If adequate funds are not available to us on a timely basis, we may be required to: (1) delay, limit, reduce or terminate preclinical studies, clinical trials or other clinical development activities for one or more of our product candidates; (2) delay, limit, reduce or terminate our discovery research or preclinical development activities; or (3) delay, limit, reduce or terminate our establishment of sales and marketing capabilities or other activities that may be necessary to commercialize our product candidates.

Securities Litigation Reform Act

Safe harbor statement under the Private Securities Litigation Reform Act of 1995: This Quarterly Report on Form 10-Q, contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements in connection with any discussion of future operations or financial performance are identified by the use of words such as “may,” “anticipate,” “estimate,” “expect,” “project,” “intend,” “plan,” “believe,” and other words and terms of similar meaning. Such statements are based on management’s expectations and are subject to certain factors, risks and uncertainties that may cause actual results, outcome of events, timing and performance to differ materially from those expressed or implied by such forward-looking statements. These risks and uncertainties include, but are not limited to, the costs associated with our research, development, manufacturing and other activities, the conduct and results of pre-clinical and clinical studies of our product candidates, difficulties, delays or failures in obtaining regulatory approvals to market products resulting from our or our partners’ development efforts, pre-clinical data and early-stage clinical data that may not be replicated in later stage clinical trials, the timing of development and potential market opportunity for our product candidates, our ability to establish sales, marketing and distribution capabilities to support the planned commercialization of our product candidates, our reliance on strategic partners and licensees and other key parties for the successful development, manufacture and commercialization of products, the adequacy of our capital resources and the availability of additional funding, patent protection and third-party intellectual property claims relating to our and any partner’s product candidates, the timing, scope, cost and outcome of legal proceedings, future capital needs, risks related to key employees, markets, economic conditions, prices, reimbursement rates, competition and other factors detailed under the heading “Risk Factors” in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2011, as updated in Part II, Item 1A of this Quarterly Report on Form 10-Q and as may be further updated in our other periodic and current reports filed with the U.S. Securities and Exchange Commission. The information contained in this document is believed to be current as of the date of original issue. We do not intend to update any of the forward-looking statements after the date of this document to conform these statements to actual results or to changes in our expectations, except as required by law.

 

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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We invest our available funds in accordance with our investment policy to preserve principal, maintain proper liquidity to meet operating needs and maximize yields. Our investment policy specifies credit quality standards for our investments and limits the amount of credit exposure to any single issue, issuer or type of investment.

We invest cash balances in excess of operating requirements first in short-term, highly liquid securities, with maturities of 90 days or less, and money market accounts. Depending on our level of available funds and our expected cash requirements, we may invest a portion of our funds in marketable securities, consisting generally of corporate debt and U.S. government and agency securities. Maturities of our marketable securities are generally limited to periods necessary to fund our liquidity needs and may not in any case exceed three years. These securities are classified as available-for-sale.

Available-for-sale securities are recorded on the balance sheet at fair value with unrealized gains or losses reported as a separate component of stockholders’ equity (accumulated other comprehensive income or loss).

Our investments are sensitive to interest rate risk. We believe, however, that the effect, if any, of reasonable possible near-term changes in interest rates on our financial position, results of operations and cash flows generally would not be material due to the short-term nature and high credit quality of these investments. In particular, at June 30, 2012, because our available funds are invested solely in securities with remaining maturities of eighteen months or less, we believe that our risk of loss due to changes in interest rates is not material.

At June 30, 2012, we had $11.9 million outstanding under a bank term note which bears interest at prime or, alternatively, LIBOR + 1.25 percent to 2.25 percent. This note is sensitive to interest rate risk. In the event of a hypothetical 10 percent increase in the interest rate on which the loan is based (15 basis points at June 30, 2012), we would incur approximately $17,000 of additional interest expense per year based on expected balances over the next twelve months.

 

ITEM 4. CONTROLS AND PROCEDURES

(a) Evaluation of Disclosure Controls and Procedures. Our principal executive officer and principal financial officer, after evaluating the effectiveness of our disclosure controls and procedures (as defined in paragraph (e) of Rules 13a-15 and 15d-15 under the Securities Exchange Act of 1934) as of the end of the period covered by this Quarterly Report on Form 10-Q, have concluded that, based on such evaluation, our disclosure controls and procedures were effective to ensure that information required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms and is accumulated and communicated to management, including the Chief Executive Officer and Chief Financial Officer, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure, particularly during the period in which this Quarterly Report on Form 10-Q was being prepared.

In designing and evaluating our disclosure controls and procedures, our management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and our management necessarily is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

(b) Changes in Internal Controls. There were no changes in our internal control over financial reporting, identified in connection with the evaluation of such internal control that occurred during our last fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

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PART II. OTHER INFORMATION

 

ITEM 1A. RISK FACTORS

There have been no material changes to the risk factors included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2011, except as follows:

We have no product candidates that have been approved by the FDA or any foreign regulatory authority, and we and our collaborators may never succeed in obtaining regulatory approval for any products, developing marketable products or generating product revenues.

We do not currently have any products on the market and have no product revenues. All of our products are in various stages of clinical development by us or our collaboration partners. Our success is substantially dependent on (1) our ability to successfully complete clinical development and obtain marketing approval for ponatinib, AP26113 and our other product candidates, (2) the ability of Merck to obtain marketing approval for ridaforolimus for cancer indications, and (3) the ability of our collaborators, Medinol and ICON, to obtain marketing approval for stents or other medical devices delivering ridaforolimus.

As with all scientific endeavors, we face much trial and error, and we and our collaborators may fail at numerous stages along the way, which would inhibit us and our collaborators from successfully developing, obtaining approval for and marketing our drug candidates. For example, Merck had submitted applications for approval of ridaforolimus in the United States and in Europe in 2011 for the treatment of metastatic soft-tissue or bone sarcomas in patients who had a favorable response to chemotherapy. In June 2012, the FDA issued a complete response letter regarding the NDA filed by Merck, stating that the FDA could not approve the application in its present form and that additional clinical trial(s) would need to be conducted to further assess safety and efficacy of ridaforolimus in this indication. Merck has announced that is in ongoing discussions with health authorities in Europe and other countries as part of their application procedures for ridaforolimus for the treatment of metastatic soft-tissue or bone sarcomas in patients who had a favorable response to chemotherapy, and that Merck is studying ridaforolimus in combination with other mechanisms in several tumor types.

Factors which could affect the timing and the ability to obtain regulatory approval and to achieve market acceptance and gain market share for ponatinib, AP26113, ridaforolimus and any other product candidate include, among other factors, product formulation, dose, dosage regimen, the ability to obtain timely and sufficient patient enrollment in clinical trials, the risk of occurrence of adverse side effects in patients participating in clinical trials, the receipt of clinical data that is sufficient to support regulatory approval, the ability to manufacture, directly or indirectly, sufficient quantities of product candidates at commercially reasonable costs, the ability to fund commercial development and to build or access a sales force in the marketplace, the ability to successfully differentiate product candidates from competitive product(s), the ability to educate physicians and build awareness about our product candidates, and the ability to sell, market and distribute, directly or indirectly, such product candidates.

Subject to receipt of marketing approval, we do not expect to commence sales of ponatinib before the beginning of 2013, at the earliest. We may not receive regulatory approvals within this timeframe, or at all, and ultimately we and our collaborators may not succeed in developing or commercializing any products which will generate revenues for our company. We cannot predict the timing or amount of any future revenue under our license agreement with Merck for ridaforolimus. If we and our collaborators are not successful in developing or marketing our product candidates, we will not be profitable.

 

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Risks Relating to Our Financial Position and Capital Requirements

Insufficient funding may jeopardize our research and development programs and may require us to reduce our operations or prevent commercialization of our products and technologies.

We have funded our operations to date through sales of equity securities, debt, the upfront and milestone payments received from Merck since July 2007, and, to a limited extent, operating revenues. Most of our operating revenue to date has been generated through previous collaborative research and development agreements and existing licenses.

As of June 30, 2012, we had cash, cash equivalents and marketable securities totaling $250.3 million. We estimate that our cash used in operations in 2012 will be in the range of $162 million to $167 million and that our net use of cash will be in the range of $159 million to $165 million. We will require substantial additional funding for our research and development programs (including pre-clinical development and clinical trials), for the pursuit of regulatory approvals and for establishing or accessing manufacturing, marketing and sales capabilities related to our product candidates. We will also require funding for our operating expenses (including intellectual property protection and enforcement) as well as capital expenditures to maintain and improve our facility, equipment and systems and provide for growth and expansion of our business.

We had anticipated receiving up to $40 million in near-term milestone payments from Merck for regulatory approvals of ridaforolimus for metastatic soft-tissue and bone sarcomas (consisting of $25 million for approval in the United States, $10 million for approval in the European Union and $5 million for approval in Japan). However, in June 2012, the FDA issued a complete response letter regarding the NDA filed by Merck, stating that the FDA cannot approve the application in its present form and that additional clinical trial(s) would need to be conducted to further assess safety and efficacy of ridaforolimus in this indication. We cannot predict the timing or amount of any future revenue under our license agreement with Merck.

We may from time to time access funding by issuing common stock or other securities in private placements or public offerings. We are currently a “well-known seasoned issuer” pursuant to rules of the U.S. Securities and Exchange Commission, or SEC, and have an active registration statement that allows us to sell additional shares of our common stock and other securities. We may also from time to time seek additional funding from technology licensing, or the issuance of debt or other structured funding alternatives. However, such additional funding may not be available at all, or on terms acceptable to us.

If we are not able to secure the significant funding which is required to maintain our operations or continue to fund current or future research and development programs at their current levels or at levels that may be required in the future, or establish or access capabilities necessary for commercialization of our product candidates, we may be required to reduce our operations or to delay, scale back, eliminate or terminate clinical trials for one or more of our product candidates. In addition, we may be required to enter into licenses, settlements or other arrangements with third parties on terms that may be unfavorable to us or to sell, license or relinquish rights to develop or commercialize our product candidates, approved products, technologies or intellectual property.

 

28


Table of Contents
ITEM 6. EXHIBITS

 

  10.1+    ARIAD Pharmaceuticals, Inc. 2006 Long-Term Incentive Plans, as amended (incorporated by reference to Appendix A of the Definitive Proxy Statement of ARIAD Pharmaceuticals, Inc. filed on April 30, 2012).
  31.1    Certification of the Chief Executive Officer.
  31.2    Certification of the Chief Financial Officer.
  32.1    Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101@    The following materials from ARIAD Pharmaceuticals, Inc.’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2012, formatted in XBRL (eXtensible Business Reporting Language): (i) the unaudited Condensed Consolidated Balance Sheets, (ii) the unaudited Condensed Consolidated Statements of Operations, (iii) the unaudited Condensed Consolidated Statement of Comprehensive Loss, (iv) the unaudited Condensed Consolidated Statements of Cash Flows, and (v) Notes to Unaudited Condensed Consolidated Financial Statements.

 

(+) Management contract or compensatory plan arrangement
(@) Users of the XBRL data are advised pursuant to Rule 406T of Regulation S-T that these interactive data files are deemed not filed or part of a registration statement or prospectus for purposes of sections 11 or 12 of the Securities Act of 1933, are deemed not filed for purposes of section 18 of the Securities Exchange Act of 1934, and otherwise are not subject to liability under these sections.

ARIAD and the ARIAD logo are our registered trademarks and ARGENT is our trademark. The domain name and website address www.ariad.com, and all rights thereto, are registered in the name of, and owned by, ARIAD. The information in our website is not intended to be part of this Quarterly Report on Form 10-Q. We include our website address herein only as an inactive textual reference and do not intend it to be an active link to our website.

 

29


Table of Contents

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

    ARIAD Pharmaceuticals, Inc.
    By:  

/s/ Harvey J. Berger, M.D.

      Harvey J. Berger, M.D.
      Chairman and Chief Executive Officer
    By:  

/s/ Edward M. Fitzgerald

      Edward M. Fitzgerald
      Executive Vice President, Chief Financial Officer
Date: August 9, 2012       (Principal financial officer and chief accounting officer)

 

30


Table of Contents

EXHIBIT INDEX

 

Exhibit
No.
   Title
  10.1+    ARIAD Pharmaceuticals, Inc. 2006 Long-Term Incentive Plans, as amended (incorporated by reference to Appendix A of the Definitive Proxy Statement of ARIAD Pharmaceuticals, Inc. filed on April 30, 2012).
  31.1    Certification of the Chief Executive Officer.
  31.2    Certification of the Chief Financial Officer.
  32.1    Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101@    The following materials from ARIAD Pharmaceuticals, Inc.’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2012, formatted in XBRL (eXtensible Business Reporting Language): (i) the unaudited Condensed Consolidated Balance Sheets, (ii) the unaudited Condensed Consolidated Statements of Operations, (iii) the unaudited Condensed Consolidated Statement of Comprehensive Loss, (iv) the unaudited Condensed Consolidated Statements of Cash Flows, and (v) Notes to Unaudited Condensed Consolidated Financial Statements.

 

(+) Management contract or compensatory plan arrangement
(@) Users of the XBRL data are advised pursuant to Rule 406T of Regulation S-T that these interactive data files are deemed not filed or part of a registration statement or prospectus for purposes of sections 11 or 12 of the Securities Act of 1933, are deemed not filed for purposes of section 18 of the Securities Exchange Act of 1934, and otherwise are not subject to liability under these sections.

 

31

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