Attached files
file | filename |
---|---|
EX-32.2 - EXHIBIT 32.2 - HUMAN GENOME SCIENCES INC | c99602exv32w2.htm |
EX-31.1 - EXHIBIT 31.1 - HUMAN GENOME SCIENCES INC | c99602exv31w1.htm |
EX-32.1 - EXHIBIT 32.1 - HUMAN GENOME SCIENCES INC | c99602exv32w1.htm |
EX-12.1 - EXHIBIT 12.1 - HUMAN GENOME SCIENCES INC | c99602exv12w1.htm |
EX-31.2 - EXHIBIT 31.2 - HUMAN GENOME SCIENCES INC | c99602exv31w2.htm |
Table of Contents
FORM 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
OF THE SECURITIES EXCHANGE ACT OF 1934
For quarterly period ended March 31, 2010
Commission File Number 001-14169
HUMAN GENOME SCIENCES, INC.
(Exact name of registrant)
Delaware (State of organization) |
22-3178468 (I.R.S. Employer Identification Number) |
14200 Shady Grove Road, Rockville, Maryland 20850-7464
(Address of principal executive offices and zip code)
(Address of principal executive offices and zip code)
(301) 309-8504
(Registrants telephone number)
(Registrants telephone number)
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 þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period
that the registrant was required to submit and post such files).
Yes o No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer or a smaller reporting company. See the definitions of large accelerated
filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
Large accelerated filer o | Accelerated filer þ | Non-accelerated filer o | Smaller reporting company o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act).
Yes o No þ
The number of shares of the registrants common stock outstanding on March 31, 2010 was
187,346,343.
TABLE OF CONTENTS
Page | ||||||||
Number | ||||||||
Item 1. Financial Statements |
||||||||
3 | ||||||||
4 | ||||||||
5 | ||||||||
7 | ||||||||
19 | ||||||||
26 | ||||||||
27 | ||||||||
28 | ||||||||
45 | ||||||||
46 | ||||||||
Exhibit Index |
Exhibit Volume | |||||||
Exhibit 12.1 | ||||||||
Exhibit 31.1 | ||||||||
Exhibit 31.2 | ||||||||
Exhibit 32.1 | ||||||||
Exhibit 32.2 |
2
Table of Contents
PART I. FINANCIAL INFORMATION
HUMAN GENOME SCIENCES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
Three months ended March 31, | ||||||||
2010 | 2009 | |||||||
(in thousands, except share and per | ||||||||
share amounts) | ||||||||
Revenue: |
||||||||
Product sales |
$ | 13,547 | $ | 127,769 | ||||
Manufacturing and development services |
4,121 | 29,116 | ||||||
Research and development collaborative agreements |
28,846 | 20,392 | ||||||
Total revenue |
46,514 | 177,277 | ||||||
Costs and expenses: |
||||||||
Cost of product sales |
7,568 | 8,177 | ||||||
Cost of manufacturing and development services |
912 | 3,351 | ||||||
Research and development expenses |
57,471 | 53,675 | ||||||
General and administrative expenses |
18,336 | 14,279 | ||||||
Total costs and expenses |
84,287 | 79,482 | ||||||
Income (loss) from operations |
(37,773 | ) | 97,795 | |||||
Investment income |
4,616 | 4,296 | ||||||
Interest expense |
(14,666 | ) | (15,730 | ) | ||||
Gain on extinguishment of debt |
| 38,873 | ||||||
Gain on sale of long-term equity investment |
| 5,259 | ||||||
Other expense |
(54 | ) | (680 | ) | ||||
Income (loss) before taxes |
(47,877 | ) | 129,813 | |||||
Provision for income taxes |
| | ||||||
Net income (loss) |
$ | (47,877 | ) | $ | 129,813 | |||
Basic net income (loss) per share |
$ | (0.26 | ) | $ | 0.96 | |||
Diluted net income (loss) per share |
$ | (0.26 | ) | $ | 0.85 | |||
Weighted average shares outstanding, basic |
186,140,744 | 135,755,471 | ||||||
Weighted average shares outstanding, diluted |
186,140,744 | 163,423,487 | ||||||
The accompanying Notes to Consolidated Financial Statements are an integral part hereof.
3
Table of Contents
HUMAN GENOME SCIENCES, INC.
CONSOLIDATED BALANCE SHEETS
March 31, | December 31, | |||||||
2010 | 2009 | |||||||
(in thousands) | ||||||||
Assets |
||||||||
Current assets: |
||||||||
Cash and cash equivalents |
$ | 326,567 | $ | 567,667 | ||||
Short-term investments |
240,479 | 151,528 | ||||||
Collaboration receivables |
10,293 | 10,356 | ||||||
Accounts receivable |
18,270 | 23,892 | ||||||
Inventory |
20,225 | 20,149 | ||||||
Prepaid expenses and other current assets |
5,153 | 7,176 | ||||||
Total current assets |
620,987 | 780,768 | ||||||
Marketable securities |
483,307 | 384,028 | ||||||
Property, plant and equipment (net of accumulated depreciation) |
260,085 | 263,123 | ||||||
Restricted investments |
89,067 | 88,437 | ||||||
Long-term equity investments |
3,123 | 3,016 | ||||||
Other assets |
18,987 | 11,258 | ||||||
TOTAL ASSETS |
$ | 1,475,556 | $ | 1,530,630 | ||||
Liabilities and Stockholders Equity |
||||||||
Current liabilities: |
||||||||
Accounts payable and accrued expenses |
$ | 45,319 | $ | 42,369 | ||||
Accrued payroll and related taxes |
15,965 | 30,997 | ||||||
Accrued exit expenses |
2,233 | 2,227 | ||||||
Deferred revenues |
59,368 | 88,565 | ||||||
Total current liabilities |
122,885 | 164,158 | ||||||
Convertible subordinated debt |
355,383 | 349,807 | ||||||
Lease financing |
249,151 | 248,628 | ||||||
Deferred revenues, net of current portion |
3,383 | 1,978 | ||||||
Accrued exit expenses, net of current portion |
1,673 | 1,979 | ||||||
Deferred rent |
9,125 | 8,665 | ||||||
Total liabilities |
741,600 | 775,215 | ||||||
Stockholders equity: |
||||||||
Preferred stock |
| | ||||||
Common stock |
1,873 | 1,853 | ||||||
Treasury stock, at cost |
(1,025 | ) | | |||||
Additional paid-in capital |
2,959,018 | 2,932,863 | ||||||
Accumulated other comprehensive income |
8,633 | 7,365 | ||||||
Accumulated deficit |
(2,234,543 | ) | (2,186,666 | ) | ||||
Total stockholders equity |
733,956 | 755,415 | ||||||
TOTAL LIABILITIES AND STOCKHOLDERS EQUITY |
$ | 1,475,556 | $ | 1,530,630 | ||||
The accompanying Notes to Consolidated Financial Statements are an integral part hereof.
4
Table of Contents
HUMAN GENOME SCIENCES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three months ended March 31, | ||||||||
2010 | 2009 | |||||||
(in thousands) | ||||||||
Cash flows from operating activities: |
||||||||
Net income (loss) |
$ | (47,877 | ) | $ | 129,813 | |||
Adjustments to reconcile net income
(loss) to net cash provided by (used in) operating activities: |
||||||||
Stock-based compensation expense |
3,844 | 2,935 | ||||||
Depreciation and amortization |
5,260 | 5,332 | ||||||
Amortization of debt discount |
5,576 | 6,398 | ||||||
Accrued interest on short-term investments, marketable securities and
restricted investments |
163 | 1,186 | ||||||
Loss (Gain) on sale of investments and marketable securities |
216 | (889 | ) | |||||
Gain on extinguishment of debt |
| (38,873 | ) | |||||
Gain on sale of long-term equity investment |
| (5,259 | ) | |||||
Non-cash expenses and other |
443 | 1,407 | ||||||
Changes in operating assets and liabilities: |
||||||||
Collaboration receivables |
(8,035 | ) | 9,191 | |||||
Accounts receivable |
5,622 | (35,635 | ) | |||||
Inventory |
(76 | ) | | |||||
Prepaid expenses and other assets |
2,080 | 72 | ||||||
Accounts payable and accrued expenses |
2,793 | 13,957 | ||||||
Accrued payroll and related taxes |
(15,032 | ) | (4,046 | ) | ||||
Deferred revenues |
(27,792 | ) | (10,224 | ) | ||||
Accrued exit expenses |
(378 | ) | (1,323 | ) | ||||
Deferred rent |
433 | 505 | ||||||
Net cash provided by (used in) operating activities |
(72,760 | ) | 74,547 | |||||
Cash flows from investing activities: |
||||||||
Purchase of short-term investments and marketable securities |
(408,749 | ) | (36,393 | ) | ||||
Proceeds from sale and maturities of short-term investments and
marketable securities |
221,806 | 87,832 | ||||||
Capital expenditures property, plant, and equipment |
(1,783 | ) | (5,122 | ) | ||||
Proceeds from sale of long-term equity investment |
| 5,259 | ||||||
Release of restricted investments |
| 2,507 | ||||||
Net cash provided by (used in) investing activities |
(188,726 | ) | 54,083 | |||||
Cash flows from financing activities: |
||||||||
Purchase of restricted investments |
(8,361 | ) | (4,468 | ) | ||||
Proceeds from sale and maturities of restricted investments |
7,473 | 3,696 | ||||||
Proceeds from issuance of common stock |
22,299 | | ||||||
Purchase of treasury stock |
(1,025 | ) | (14 | ) | ||||
Extinguishment of long-term debt |
| (49,998 | ) | |||||
Net cash provided by (used in) financing activities |
20,386 | (50,784 | ) | |||||
Net increase (decrease) in cash and cash equivalents |
(241,100 | ) | 77,846 | |||||
Cash and cash equivalents beginning of period |
567,667 | 15,248 | ||||||
Cash and cash equivalents end of period |
$ | 326,567 | $ | 93,094 | ||||
The
accompanying Notes to Consolidated Financial Statements are an integral part hereof.
5
Table of Contents
SUPPLEMENTAL SCHEDULE OF CASH FLOW INFORMATION, NON-CASH OPERATING, INVESTING AND FINANCING
ACTIVITIES
Three months ended March 31, | ||||||||
2010 | 2009 | |||||||
(in thousands) | ||||||||
Cash paid during the period for: |
||||||||
Interest |
$ | 8,282 | $ | 9,029 | ||||
Income taxes |
$ | | $ | |
During the three months ended March 31, 2010 and 2009, lease financing increased with respect to
the Companys leases with BioMed Realty Trust, Inc. (BioMed) by $523 and $585, respectively, on a
non-cash basis. Because the payments are less than the amount of the calculated interest expense
for the first nine years of the leases, the lease financing balance will increase during this
period.
During the three months ended March 31, 2010 and 2009, the Company recorded non-cash accretion of
$78 and $152, respectively, related to its exit accrual for certain space.
The accompanying Notes to Consolidated Financial Statements are an integral part hereof.
6
Table of Contents
HUMAN GENOME SCIENCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Quarter Ended March 31, 2010
(dollars in thousands, except per share data)
Note 1. Summary of Significant Accounting Policies
Basis of presentation
The accompanying unaudited consolidated financial statements of Human Genome Sciences, Inc. (the
Company) have been prepared in accordance with U.S. generally accepted accounting principles
for interim financial information. In the opinion of the Companys management, the consolidated
financial statements reflect all adjustments necessary to present fairly the results of
operations for the three months ended March 31, 2010 and 2009, the Companys financial position
at March 31, 2010, and the cash flows for the three months ended March 31, 2010 and 2009. These
adjustments are of a normal recurring nature.
Certain notes and other information have been condensed or omitted from the interim consolidated
financial statements presented in this Quarterly Report on Form 10-Q. Therefore, these
financial statements should be read in conjunction with the Companys 2009 Annual Report on Form
10-K.
The results of operations for the three months ended March 31, 2010 are not necessarily
indicative of future financial results.
Recent accounting pronouncements
In January 2010, the Financial Accounting Standards Board (FASB) issued Accounting Standards
Update (ASU) 2010-06, Improving Disclosures about Fair Value Measurements (ASU 2010-06). ASU
2010-06 requires disclosing the amounts of significant transfers in and out of Level 1 and 2
fair value measurements and to describe the reasons for the transfers. The disclosures were
effective for reporting periods beginning after December 15, 2009, and had no material impact on
the Companys financial statements for the period ended March 31, 2010. Additionally,
disclosures of the gross purchases, sales, issuances and settlements activity in Level 3 fair
value measurements will be required for fiscal years beginning after December 15, 2010. The
Company does not expect the provisions of ASU 2010-06 to have a material effect on its
consolidated results of operations, financial position or liquidity.
In February 2010, FASB issued ASU 2010-09, Subsequent Events (Topic 855): Amendments to Certain
Recognition and Disclosure Requirements (ASU 2010-09), which among other things amended FASB
Accounting Standards Codification (ASC) 855 to remove the
requirement for a Securities and Exchange Commission filer to
disclose the date through which subsequent events have been evaluated. The Company has
incorporated this guidance into this filing.
7
Table of Contents
HUMAN GENOME SCIENCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Quarter Ended March 31, 2010
(dollars in thousands, except per share data)
Note 2. Comprehensive Income (Loss)
The Companys unrealized gains or losses on available-for-sale short-term investments,
marketable securities and long-term equity investments and cumulative foreign currency
translation adjustment activity are required to be included in other
comprehensive income (loss).
During the three months ended March 31, 2010 and 2009, total comprehensive income (loss)
amounted to:
Three months ended March 31, | ||||||||
2010 | 2009 | |||||||
Net income (loss) |
$ | (47,877 | ) | $ | 129,813 | |||
Net unrealized gains (losses): |
||||||||
Short-term investments and marketable securities |
1,204 | 345 | ||||||
Long-term equity investment in VIA Pharmaceuticals |
2 | | ||||||
Restricted investments |
(11 | ) | 84 | |||||
Foreign currency translation |
(29 | ) | 547 | |||||
Subtotal |
1,166 | 976 | ||||||
Reclassification adjustments for (gains) losses realized
in net income (loss) |
102 | (887 | ) | |||||
Total comprehensive income (loss) |
$ | (46,609 | ) | $ | 129,902 | |||
The effect of income taxes on items in other comprehensive income is $0 for all periods
presented.
8
Table of Contents
HUMAN GENOME SCIENCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Quarter Ended March 31, 2010
(dollars in thousands, except per share data)
Note 3. Investments
Available-for-sale investments, including accrued interest, at March 31, 2010 and December 31,
2009 were as follows:
March 31, 2010 | ||||||||||||||||
Gross | Gross | |||||||||||||||
Amortized | Unrealized | Unrealized | Fair | |||||||||||||
Cost | Gains | Losses | Value | |||||||||||||
U.S. Treasury and agencies |
$ | 8,037 | $ | 3 | $ | | $ | 8,040 | ||||||||
Government-sponsored enterprise securities |
108,499 | 1,008 | (27 | ) | 109,480 | |||||||||||
Corporate debt securities |
121,836 | 1,191 | (68 | ) | 122,959 | |||||||||||
Subtotal Short-term investments |
238,372 | 2,202 | (95 | ) | 240,479 | |||||||||||
Government-sponsored enterprise securities |
198,005 | 1,549 | (379 | ) | 199,175 | |||||||||||
Corporate debt securities |
281,411 | 2,859 | (138 | ) | 284,132 | |||||||||||
Subtotal Marketable securities |
479,416 | 4,408 | (517 | ) | 483,307 | |||||||||||
Cash and cash equivalents |
6,850 | | | 6,850 | ||||||||||||
U.S. Treasury and agencies |
1,298 | 1 | | 1,299 | ||||||||||||
Government-sponsored enterprise securities |
21,831 | 374 | (3 | ) | 22,202 | |||||||||||
Corporate debt securities |
57,398 | 1,328 | (10 | ) | 58,716 | |||||||||||
Subtotal Restricted investments |
87,377 | 1,703 | (13 | ) | 89,067 | |||||||||||
Total |
$ | 805,165 | $ | 8,313 | $ | (625 | ) | $ | 812,853 | |||||||
December 31, 2009 | ||||||||||||||||
Gross | Gross | |||||||||||||||
Amortized | Unrealized | Unrealized | Fair | |||||||||||||
Cost | Gains | Losses | Value | |||||||||||||
U.S. Treasury and agencies |
$ | 7,997 | $ | 32 | $ | | $ | 8,029 | ||||||||
Government-sponsored enterprise securities |
34,667 | 672 | (29 | ) | 35,310 | |||||||||||
Corporate debt securities |
107,283 | 1,099 | (193 | ) | 108,189 | |||||||||||
Subtotal Short-term investments |
149,947 | 1,803 | (222 | ) | 151,528 | |||||||||||
Government-sponsored enterprise securities |
172,191 | 2,009 | (673 | ) | 173,527 | |||||||||||
Corporate debt securities |
208,824 | 2,106 | (429 | ) | 210,501 | |||||||||||
Subtotal Marketable securities |
381,015 | 4,115 | (1,102 | ) | 384,028 | |||||||||||
Cash and cash equivalents |
6,693 | | | 6,693 | ||||||||||||
Government-sponsored enterprise securities |
20,316 | 394 | (17 | ) | 20,693 | |||||||||||
Corporate debt securities |
59,612 | 1,470 | (31 | ) | 61,051 | |||||||||||
Subtotal Restricted investments |
86,621 | 1,864 | (48 | ) | 88,437 | |||||||||||
Total |
$ | 617,583 | $ | 7,782 | $ | (1,372 | ) | $ | 623,993 | |||||||
9
Table of Contents
HUMAN GENOME SCIENCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Quarter Ended March 31, 2010
(dollars in thousands, except per share data)
Note 3. Investments (continued)
See Note 9, Fair Value Measurements, for the fair value of the Companys financial assets and
liabilities.
The Companys restricted investments with respect to its headquarters (Traville) and
large-scale manufacturing facility (LSM) leases will serve as collateral for a security
deposit for the duration of the leases, although the Company has the ability to reduce the
restricted investments that are in the form of securities for the Traville and LSM facility
leases by substituting cash security deposits. For the Traville and LSM leases, the Company is
required to maintain restricted investments of at least $46,000, or $39,500 if in the form of
cash, in order to satisfy the security deposit requirements of these leases.
In addition, the Company is also required to maintain $34,300 in restricted investments with
respect to two leases with the Maryland Economic Development Corporation (MEDCO) for its
small-scale manufacturing facility. The facility was financed primarily through a combination
of bonds issued by MEDCO (MEDCO Bonds) and loans issued to MEDCO by certain State of Maryland
agencies. The MEDCO Bonds are secured by letters of credit issued for the account of MEDCO
which expire in December 2011. The Company is required to maintain restricted investments which
serve as security for the MEDCO letters of credit reimbursement obligation.
The Companys restricted investments were $89,067 and $88,437 as of March 31, 2010 and December
31, 2009, respectively.
Short-term investments, Marketable securities and Restricted investments unrealized losses
The Companys gross unrealized losses and fair value of investments with unrealized losses were
as follows:
March 31, 2010 | ||||||||||||||||||||||||
Loss Position | Loss Position | |||||||||||||||||||||||
for Less Than | for Greater Than | |||||||||||||||||||||||
Twelve Months | Twelve Months | Total | ||||||||||||||||||||||
Fair | Unrealized | Fair | Unrealized | Fair | Unrealized | |||||||||||||||||||
Value | Losses | Value | Losses | Value | Losses | |||||||||||||||||||
Government-sponsored enterprise securities |
$ | 62,968 | $ | (27 | ) | $ | | $ | | $ | 62,968 | $ | (27 | ) | ||||||||||
Corporate debt securities |
63,918 | (54 | ) | 5,489 | (14 | ) | 69,407 | (68 | ) | |||||||||||||||
Subtotal Short-term investments |
126,886 | (81 | ) | 5,489 | (14 | ) | 132,375 | (95 | ) | |||||||||||||||
Government-sponsored enterprise securities |
152,686 | (379 | ) | | | 152,686 | (379 | ) | ||||||||||||||||
Corporate debt securities |
58,493 | (122 | ) | 960 | (16 | ) | 59,453 | (138 | ) | |||||||||||||||
Subtotal Marketable securities |
211,179 | (501 | ) | 960 | (16 | ) | 212,139 | (517 | ) | |||||||||||||||
Government-sponsored enterprise securities |
3,165 | (3 | ) | | | 3,165 | (3 | ) | ||||||||||||||||
Corporate debt securities |
4,502 | (10 | ) | | | 4,502 | (10 | ) | ||||||||||||||||
Subtotal Restricted investments |
7,667 | (13 | ) | | | 7,667 | (13 | ) | ||||||||||||||||
Total |
$ | 345,732 | $ | (595 | ) | $ | 6,449 | $ | (30 | ) | $ | 352,181 | $ | (625 | ) | |||||||||
10
Table of Contents
HUMAN GENOME SCIENCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Quarter Ended March 31, 2010
(dollars in thousands, except per share data)
Note 3. Investments (continued)
December 31, 2009 | ||||||||||||||||||||||||
Loss Position | Loss Position | |||||||||||||||||||||||
for Less Than | for Greater Than | |||||||||||||||||||||||
Twelve Months | Twelve Months | Total | ||||||||||||||||||||||
Fair | Unrealized | Fair | Unrealized | Fair | Unrealized | |||||||||||||||||||
Value | Losses | Value | Losses | Value | Losses | |||||||||||||||||||
Government-sponsored enterprise securities |
$ | 23,026 | $ | (29 | ) | $ | | $ | | $ | 23,026 | $ | (29 | ) | ||||||||||
Corporate debt securities |
24,751 | (181 | ) | 4,474 | (12 | ) | 29,225 | (193 | ) | |||||||||||||||
Subtotal Short-term investments |
47,777 | (210 | ) | 4,474 | (12 | ) | 52,251 | (222 | ) | |||||||||||||||
Government-sponsored enterprise securities |
154,032 | (673 | ) | | | 154,032 | (673 | ) | ||||||||||||||||
Corporate debt securities |
76,595 | (405 | ) | 1,231 | (24 | ) | 77,826 | (429 | ) | |||||||||||||||
Subtotal Marketable securities |
230,627 | (1,078 | ) | 1,231 | (24 | ) | 231,858 | (1,102 | ) | |||||||||||||||
Government-sponsored enterprise securities |
7,317 | (17 | ) | 14 | | 7,331 | (17 | ) | ||||||||||||||||
Corporate debt securities |
6,212 | (31 | ) | | | 6,212 | (31 | ) | ||||||||||||||||
Subtotal Restricted investments |
13,529 | (48 | ) | 14 | | 13,543 | (48 | ) | ||||||||||||||||
Total |
$ | 291,933 | $ | (1,336 | ) | $ | 5,719 | $ | (36 | ) | $ | 297,652 | $ | (1,372 | ) | |||||||||
The Company has evaluated its investments and has determined that no investments have an
other-than-temporary impairment, as it has no intent to sell securities with unrealized losses
and it is not more likely than not that the Company will be required to sell any additional
securities with unrealized losses, given the Companys current and anticipated financial
position.
The Company owned 197 available-for-sale U.S Treasury obligations, government-sponsored
enterprise securities and corporate debt securities at March 31, 2010. Of these 197 securities,
76 had unrealized losses at March 31, 2010.
The Companys equity investments in privately-held companies for which no readily available fair
value information is available are carried at cost. There were no events or circumstances
during the three months ended March 31, 2010 that would have a significant adverse effect on the
fair value of these investments. Long-term equity investments of publicly-traded companies are
carried at market value based on quoted market prices and unrealized gains and losses for these
investments are reported as a separate component of stockholders equity until realized.
11
Table of Contents
HUMAN GENOME SCIENCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Quarter Ended March 31, 2010
(dollars in thousands, except per share data)
Note 3. Investments (continued)
Other Information
The following table summarizes maturities of the Companys short-term investments, marketable
securities and restricted investments at March 31, 2010:
Short-term | Marketable | Restricted | ||||||||||||||||||||||
Investments | Securities | Investments | ||||||||||||||||||||||
Amortized | Fair | Amortized | Fair | Amortized | Fair | |||||||||||||||||||
Cost | Value | Cost | Value | Cost | Value | |||||||||||||||||||
Less than one year |
$ | 238,372 | $ | 240,479 | $ | | $ | | $ | 36,948 | $ | 37,497 | ||||||||||||
Due in year two through year three |
| | 276,956 | 279,722 | 42,407 | 43,204 | ||||||||||||||||||
Due in year four through year five |
| | 87,290 | 88,044 | 7,301 | 7,624 | ||||||||||||||||||
Due after five years |
| | 115,170 | 115,541 | 721 | 742 | ||||||||||||||||||
Total |
$ | 238,372 | $ | 240,479 | $ | 479,416 | $ | 483,307 | $ | 87,377 | $ | 89,067 | ||||||||||||
The Companys short-term investments include mortgage-backed securities with an aggregate
cost of $23,476 and an aggregate fair value of $24,078 at March 31, 2010. The Companys
marketable securities include mortgage-backed securities with an aggregate cost of $47,180 and
an aggregate fair value of $48,390 at March 31, 2010. The Companys restricted investments
include mortgage-backed securities with an aggregate cost of $6,216 and an aggregate fair value
of $6,324 at March 31, 2010. These securities have no single maturity date and, accordingly,
have been allocated on a pro rata basis to each maturity range based on each maturity ranges
percentage of the total value.
Realized gains and losses on securities sold before maturity, which are included in the
Companys investment income for the three months ended March 31, 2010 and 2009, and their
respective net proceeds were as follows:
Three months ended March 31, | ||||||||
2010 | 2009 | |||||||
Proceeds on sale of investments prior to maturity |
$ | 177,425 | $ | 91,003 | ||||
Realized gains |
325 | 1,633 | ||||||
Realized losses |
(428 | ) | (742 | ) |
The cost of the securities sold is based on the specific identification method.
12
Table of Contents
HUMAN GENOME SCIENCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Quarter Ended March 31, 2010
(dollars in thousands, except per share data)
Note 4. Collaborations and U.S. Government Agreement
Collaboration Agreement with Novartis
During 2006, the Company entered into an agreement with Novartis International Pharmaceutical
Ltd. (Novartis) for the co-development and commercialization of ZALBINTM. Under
the agreement, the Company and Novartis will co-commercialize ZALBIN in the United States, and
will share U.S. commercialization costs and U.S. profits equally. Novartis will be responsible
for commercialization outside the U.S. and will pay the Company a royalty on those sales. The
Company will have primary responsibility for the bulk manufacture of ZALBIN, and Novartis will
have primary responsibility for commercial manufacturing of the finished drug product. The
Company is entitled to payments aggregating up to approximately $507,500, including a
non-refundable up-front license fee, upon the successful attainment of certain milestones. The
Company and Novartis will share clinical development costs. As of March 31, 2010, the Company
has contractually earned and received payments aggregating $207,500. The Company is recognizing
these payments as revenue ratably over the estimated remaining development period, currently
estimated to end in late 2010. The Company recognized revenue of $27,602 and $8,852 for the
three months ended March 31, 2010 and 2009, respectively.
Collaboration Agreement with GSK
During 2006, the Company entered into a license agreement with GlaxoSmithKline (GSK) for the
co-development and commercialization of BENLYSTATM arising from an option GSK
exercised in 2005, relating to an earlier collaboration agreement. The agreement grants GSK a
co-development and co-commercialization license, under which both companies will jointly conduct
activities related to the development and sale of products in the United States and abroad. The
Company and GSK share Phase 3 and 4 development costs, and will share sales and marketing
expenses and profits of any product commercialized under the agreement. The Company will have
primary responsibility for bulk manufacturing and for commercial manufacturing of the finished
drug product. In partial consideration of the rights granted to GSK in this agreement, the
Company received a non-refundable payment of $24,000 during 2006 and is recognizing this payment
as revenue over the remaining clinical development period, currently estimated to end in late 2010. The
Company recognized revenue of $1,033 and $1,636 for the three months ended March 31, 2010 and
2009, respectively, relating to this payment.
Collaboration reimbursements
Research and development expenses for the three months ended March 31, 2010 and 2009 are net of
$15,753 and $12,505, respectively, of costs reimbursed or reimbursable by Novartis and GSK. The
Company shares certain research and development costs including personnel costs, outside
services, manufacturing, and overhead with Novartis and GSK under cost sharing provisions in the
collaboration agreements.
U.S. Government Agreement
During 2006, the U.S. Government (USG) exercised its option under the second phase of a 2005
contract to purchase 20,001 doses of raxibacumab for its Strategic National Stockpile (SNS).
During 2009, the Company delivered all of the 20,001 doses. The Company recognized $127,769 in
product revenue and $25,997 in manufacturing and development services revenue for the three
months ended March 31, 2009 related to this order. In addition, the Company expects to receive
approximately $10,000 from this first order if the Company obtains licensure by the U.S. Food
and Drug Administration (FDA).
13
Table of Contents
HUMAN GENOME SCIENCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Quarter Ended March 31, 2010
(dollars in thousands, except per share data)
Note 4. Collaborations and U.S. Government Agreement (continued)
In 2009, the USG agreed to purchase 45,000 additional doses of raxibacumab for the SNS, to be
delivered over a three-year period, beginning in 2009. The Company expects to receive
approximately $142,000 from this order as deliveries are completed, including $17,693 and
$13,547 earned and recognized as product revenue during 2009 (all in the fourth quarter) and the
three months ended March 31, 2010, respectively, as well as approximately $10,000 from this
order if the Company obtains licensure by the FDA.
Aegera Agreement
During 2007, the Company entered into a collaboration and license agreement with Aegera
Therapeutics, Inc. (Aegera) of Montreal, Canada under which the Company acquired exclusive
worldwide rights (excluding Japan) to develop and commercialize certain oncology molecules and
related backup compounds to be chosen during a three-year research period. Aegera will be
entitled to receive up to $295,000 in development and commercial milestone payments, including a
$5,000 milestone payment made by the Company during 2008. Aegera will receive royalties on net
sales in the Companys territory. In North America, Aegera will have the option to co-promote
with the Company, under which Aegera will share certain expenses and profits in lieu of its
royalties. The Company incurred and expensed research costs of $590 and $587 related to the
Aegera agreement during the three months ended March 31, 2010 and 2009, respectively.
Note 5. Other Financial Information
Collaboration Receivables
Collaboration receivables of $10,293 includes $9,757 in unbilled receivables from Novartis and
GSK in connection with the Companys cost-sharing agreements, and other billed and unbilled
receivables. The $9,757 in unbilled receivables primarily relates to net cost reimbursements due
for the three months ended March 31, 2010. An additional $15,018 and $6,920 receivable from
Novartis and GSK is included in Other assets on the consolidated balance sheets as of March 31,
2010 and December 31, 2009, respectively. These non-current collaboration receivables relate to
amounts due to the Company by Novartis and GSK for manufacturing costs incurred to produce
pre-launch commercial product.
Inventory
Inventories consist of the following, which are all related to raxibacumab:
March 31, 2010 | December 31, 2009 | |||||||
Raw materials |
$ | 7,461 | $ | 4,293 | ||||
Work-in-process |
7,375 | 9,512 | ||||||
Finished goods |
5,389 | 6,344 | ||||||
$ | 20,225 | $ | 20,149 | |||||
14
Table of Contents
HUMAN GENOME SCIENCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Quarter Ended March 31, 2010
(dollars in thousands, except per share data)
Note 6. Commitments and Other Matters
The Company is party to various claims and legal proceedings from time to time. The Company is
not aware of any legal proceedings that it believes could have, individually or in the
aggregate, a material adverse effect on its results of operations, financial condition or
liquidity.
Note 7. Facility-Related Exit Costs
As a result of the Companys facilities consolidation efforts, the Company has exited various
facility leases since 2004 and recorded exit and impairment charges relating to those exits.
The Company reviews the adequacy of its estimated exit accrual on an ongoing basis, and adjusts
its exit accrual as a result of changes in facts or assumptions.
The following table summarizes the activity related to the liability for exit charges for the
three months ended March 31, 2010, all of which is facilities-related:
Balance as of January 1, 2010 |
$ | 4,206 | ||
Accretion recorded |
78 | |||
Subtotal |
4,284 | |||
Cash items |
(378 | ) | ||
Balance as of March 31, 2010 |
3,906 | |||
Less current portion |
(2,233 | ) | ||
$ | 1,673 | |||
Note 8. Stock-Based Compensation
The Company has a stock incentive plan (the Incentive Plan) under which options to purchase
new shares of the Companys common stock may be granted to employees, consultants and directors
at an exercise price no less than the quoted market value on the date of grant. The Incentive
Plan also provides for awards in the form of stock appreciation rights, restricted (nonvested)
or unrestricted stock awards, stock-equivalent units or performance-based stock awards. The
Company issues both qualified and non-qualified options under the Incentive Plan. The Company
also has an Employee Stock Purchase Plan (the Purchase Plan).
Stock-based
compensation expense for the three months ended
March 31, 2010 is not necessarily representative of the level of stock-based compensation
expense in future periods due to, among other things, (1) the vesting period of the stock
options and other awards and (2) the fair value of additional
stock option grants and other awards in future years.
The Company recorded stock-based compensation expense pursuant to these plans of $3,844 and
$2,935 during the three months ended March 31, 2010 and 2009, respectively. Stock-based
compensation relates to stock options, restricted stock units and restricted stock awards
granted under the Incentive Plan.
Under the Incentive Plan, the Company issued 2,000,664 shares of common stock in conjunction
with stock option exercises during the three months ended March 31, 2010. The Company granted
3,637,011 stock options under the Incentive Plan during the same period, with a weighted-average
grant date fair value of $18.28 per share.
15
Table of Contents
HUMAN GENOME SCIENCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Quarter Ended March 31, 2010
(dollars in thousands, except per share data)
Note 8. Stock-Based Compensation (continued)
During the three months ended March 31, 2010, the Company awarded 81,722 restricted stock units
(RSUs) with a weighted-average grant date fair value of $31.91 per share. During the same
period, 79,982 RSUs vested and the Company issued 48,484 shares of common stock to employees,
net of 31,498 shares purchased to satisfy the employees tax liability related to the RSUs
vesting. The cost of this treasury stock was $1,025, which has been recorded on the
consolidated balance sheet as of March 31, 2010.
At March 31, 2010, the total authorized number of shares under the Incentive Plan, including
prior plans, was 54,778,056. Options available for future grant were 4,247,948 as of March 31,
2010.
Note 9. Fair Value Measurements
The FASB guidance regarding the fair value of all assets and liabilities defines fair value,
provides guidance for measuring fair value and requires certain disclosures. This guidance does
not require any new fair value measurements, but rather applies to all other accounting
pronouncements that require or permit fair value measurements. This guidance does not apply to
measurements related to share-based payments.
The
FASB ASC discusses valuation techniques, such as the market
approach (comparable market prices), the income approach (present value of future income or cash
flow), and the cost approach (cost to replace the service capacity of an asset or replacement
cost). The guidance utilizes a fair value hierarchy that prioritizes the inputs to valuation
techniques used to measure fair value into three broad levels. The following is a brief
description of those three levels:
Level 1: | Observable inputs such as quoted prices (unadjusted) in active
markets for identical assets or liabilities. |
Level 2: | Inputs other than quoted prices that are observable for the asset or
liability, either directly or indirectly. These include quoted prices for similar
assets or liabilities in active markets and quoted prices for identical or similar
assets or liabilities in markets that are not active. |
Level 3: | Unobservable inputs that reflect the reporting entitys own assumptions. |
Active markets are those in which transactions occur with sufficient frequency and volume to
provide pricing information on an ongoing basis. Inactive markets are those in which there are
few transactions for the asset, prices are not current, or price quotations vary substantially
either over time or among market makers, or in which little information is released publicly.
With regard to the Companys financial assets subject to fair value measurements, the Company
believes that all of the assets it holds are actively traded because there is sufficient
frequency and volume to obtain pricing information on an ongoing basis.
16
Table of Contents
HUMAN GENOME SCIENCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Quarter Ended March 31, 2010
(dollars in thousands, except per share data)
Note 9. Fair Value Measurements (continued)
The Companys assets and liabilities subject to fair value measurements on a recurring basis and
the related fair value hierarchy are as follows:
Fair Value | Fair Value Measurements as of March 31, 2010 | |||||||||||||||
as of | Using Fair Value Hierarchy | |||||||||||||||
Description | March 31, 2010 | Level 1 | Level 2 | Level 3 | ||||||||||||
Cash and cash equivalents |
$ | 326,567 | $ | 326,567 | $ | | $ | | ||||||||
Short-term investments |
240,479 | 8,029 | 232,450 | | ||||||||||||
Marketable securities |
483,307 | | 483,307 | | ||||||||||||
Restricted investments |
89,067 | 8,149 | 80,918 | | ||||||||||||
Total |
$ | 1,139,420 | $ | 342,745 | $ | 796,675 | $ | | ||||||||
The Company evaluates the types of securities in its investment portfolios to determine the
proper classification in the fair value hierarchy based on trading activity and the
observability of market inputs. The Companys Level 1 assets include cash, money market
instruments and U.S. Treasury securities. Level 2 assets include government-sponsored enterprise
securities, commercial paper, corporate bonds, asset-backed securities, and mortgage-backed
securities. The Companys privately-held equity investment is carried at cost and is not
included in the table above, and is reviewed for impairment at each reporting date.
The Company generally obtains a single quote or price per instrument from independent third
parties to help it determine the fair value of securities in Level 1 and Level 2 of the fair
value hierarchy. The Companys Level 1 cash and money market instruments are valued based on
quoted prices from third parties, and the Companys Level 1 U.S. Treasury securities are valued
based on broker quotes. The Companys Level 2 assets are valued using a multi-dimensional
pricing model that includes a variety of inputs including actual trade data, benchmark yield
data, non-binding broker/dealer quotes, issuer spread data, monthly payment information,
collateral performance and other reference information. These are all observable inputs. The
Company reviews the values generated by the multi-dimensional pricing model for reasonableness,
which could include reviewing other publicly available information.
The Company does not hold auction rate securities, loans held for sale, mortgage-backed
securities backed by sub-prime or Alt-A collateral or any other investments which require the
Company to determine fair value using a discounted cash flow approach. Therefore, the Company
does not need to adjust its analysis or change its assumptions specifically to factor
illiquidity in the markets into its fair values.
The fair value of the
Companys receivables, other assets, accounts payable,
accrued expenses and other payables approximate their carrying amount due to the
relatively short maturity of these items. The fair value of the Companys convertible
subordinated debt is based on quoted market prices. The quoted market price of the Companys
convertible subordinated debt was approximately $837,000 (book value of $355,383) as of March
31, 2010. With respect to its lease financing, the Company evaluated its incremental borrowing
rate as of March 31, 2010, based on the current interest rate environment and the Companys
credit risk. The fair value of the BioMed lease financing was approximately $261,000 (book
value of $249,151) as of March 31, 2010 based on a discounted cash flow analysis, and current
rates for corporate debt having similar characteristics and companies with similar
creditworthiness.
17
Table of Contents
HUMAN GENOME SCIENCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Quarter Ended March 31, 2010
(dollars in thousands, except per share data)
Note 10. Earnings (Loss) Per Share
Basic net income (loss) per share is computed based on the weighted average number of common
shares outstanding during the period. Diluted net income (loss) per share is computed based on
the weighted average number of common shares outstanding and, if there is net income during the
period, the dilutive impact of common stock equivalents outstanding during the period. Common
stock equivalents can result from the assumed exercise of outstanding stock options, the assumed
conversion of convertible subordinated debt and the vesting of unvested restricted stock units.
Common stock equivalents from stock options of 25,951,029 and 28,739,363 for the three months
ended March 31, 2010 and 2009, respectively, are excluded from the calculation of diluted income
(loss) per share because the effect is anti-dilutive. Common stock equivalents from shares
underlying the Companys convertible subordinated debt of 24,303,304 for the three months ended
March 31, 2010 are excluded from the calculation of diluted loss per share because the effect is
anti-dilutive. Common stock equivalents from restricted stock units of 207,477 for the three
months ended March 31, 2010 are excluded from the calculation of diluted loss per share because
the effect is anti-dilutive.
Diluted net income (loss) per share for the three months ended March 31, 2010 and 2009 was
determined as follows:
Three months ended March 31, | ||||||||
2010 | 2009 | |||||||
Numerator: |
||||||||
Net income (loss) |
$ | (47,877 | ) | $ | 129,813 | |||
Interest on convertible subordinated debt, if converted |
| 9,249 | ||||||
Net income used for diluted net income (loss) per share |
$ | (47,877 | ) | $ | 139,062 | |||
Denominator: |
||||||||
Weighted average shares outstanding |
186,140,744 | 135,755,471 | ||||||
Effect of dilutive securities: |
||||||||
Convertible subordinated debt |
| 27,375,405 | ||||||
Employee stock options and restricted stock units |
| 292,611 | ||||||
Weighted average shares used for diluted net income
(loss) per share |
186,140,744 | 163,423,487 | ||||||
Diluted net income (loss) per share |
$ | (0.26 | ) | $ | 0.85 | |||
18
Table of Contents
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Three months ended March 31, 2010 and 2009
Overview
Human Genome Sciences, Inc. (HGS) is a commercially focused biopharmaceutical company
advancing toward the market with three products in late-stage development: BENLYSTA for systemic
lupus erythematosus (SLE), ZALBIN for chronic hepatitis C, and raxibacumab for inhalation
anthrax.
In July and November 2009, we reported that BENLYSTA met its primary endpoints in two Phase 3
clinical trials in patients with systemic lupus. In April, 2010, we reported additional results of
the BLISS 76 trial. At week 76 in the BLISS-76 trial, BENLYSTA plus standard of care showed higher
response rates compared with placebo plus standard of care, but this secondary endpoint result did
not reach statistical significance. We and GlaxoSmithKline (GSK) plan to submit marketing
applications for BENLYSTA in the United States and Europe in the second quarter of 2010.
In March 2009, we reported that ZALBIN successfully met its primary endpoint in the second of
two Phase 3 clinical trials in chronic hepatitis C. HGS submitted a Biologics License Application
(BLA) for ZALBIN in the United States in November 2009, and Novartis submitted a Marketing
Authorization Application (MAA) under the brand name JOULFERON® in Europe in December
2009. We received confirmation from the U.S. Food and Drug Administration (FDA) in February 2010
that the BLA submission was accepted for filing with a Prescription Drug User Fee Act (PDUFA)
date of October 4, 2010. In April 2010, Novartis withdrew the MAA. The decision to withdraw the
application was based on feedback from European regulatory authorities in preliminary response to
the MAA, indicating that additional new data would be requested which could not reasonably be
generated within the timeframe allowed in the European Centralized Procedure. The feedback
included whether the therapeutic benefit offered by the product dosed every two weeks was
sufficient relative to the risk.
In the first half of 2009 we achieved our first product sales and recognized $162.5 million in
product sales and manufacturing and development services revenue by delivering 20,001 doses of
raxibacumab to the U.S. Strategic National Stockpile (SNS). In July 2009, the U.S. Government
(USG) exercised its option to purchase 45,000 additional doses to be delivered over a three-year
period. We expect to receive a total of approximately $152.0 million from the second order,
including $17.7 million and $13.5 million in revenue recognized during 2009 and the first quarter
of 2010, respectively. In May 2009, we submitted a BLA to the FDA for raxibacumab for the
treatment of inhalation anthrax. We received a Complete Response Letter in November 2009, and we
continue to work closely with the FDA to determine the additional steps necessary to obtain
approval.
In addition to these products in our internal pipeline, we have substantial financial rights
to two novel drugs that GSK has advanced to late-stage development. In December 2009, GSK
initiated the second Phase 3 clinical trial of darapladib, which was discovered by GSK based on our
technology, to evaluate whether darapladib can reduce the risk of adverse cardiovascular events
such as a heart attack or stroke. With more than 27,000 patients enrolled, the Phase 3 clinical
program for darapladib is among the largest ever conducted to evaluate the safety and efficacy of
any cardiovascular medication. In the first quarter of 2009, we received a $9.0 million milestone
payment related to GSKs initiation of a Phase 3 program to evaluate the safety and efficacy of
Syncria® (albiglutide) in the long-term treatment of type 2 diabetes mellitus. We
created Syncria using our proprietary albumin-fusion technology and licensed it to GSK in 2004.
Six Phase 3 trials of Syncria are currently ongoing.
We also have several novel drugs in earlier stages of clinical development for the treatment
of cancer, led by our TRAIL receptor antibody mapatumumab and a small-molecule antagonist of IAP
(inhibitor of apoptosis) proteins.
Strategic partnerships are an important driver of our commercial success. We have
co-development and commercialization agreements with prominent pharmaceutical companies for both of
our lead products GSK for
BENLYSTA and Novartis for ZALBIN. Raxibacumab is being developed under a contract with the
Biomedical Advanced Research and Development Authority (BARDA) of the Office of the Assistant
Secretary for Preparedness and Response (ASPR), U.S. Department of Health and Human Services
(HHS). Our strategic partnerships with leading pharmaceutical and biotechnology companies allow
us to leverage our strengths and gain access to sales and marketing
infrastructure, as well as complementary technologies. Some of these partnerships provide us with
licensing or other fees, clinical development cost-sharing, milestone payments and rights to
royalty payments as products are developed and commercialized. In some cases, we are entitled to
certain commercialization, co-promotion, revenue-sharing and other product rights.
19
Table of Contents
Overview (continued)
During 2006, we entered into a collaboration agreement with Novartis. Under this agreement,
Novartis will co-develop and co-commercialize ZALBIN and share development costs, sales and
marketing expenses and profits of any product that is commercialized in the U.S. Novartis will be
responsible for commercialization outside the U.S. and will pay us a royalty on these sales. We
received a $45.0 million up-front fee from Novartis upon the execution of the agreement. Including
this up-front fee, we are entitled to payments aggregating up to $507.5 million upon the successful
attainment of certain milestones. As of March 31, 2010, we have contractually earned and received
payments aggregating $207.5 million. We are recognizing these payments as revenue ratably over the
estimated remaining development period, currently estimated to end in late 2010.
In 2005, GSK exercised its option to co-develop and co-commercialize BENLYSTA. In accordance
with a co-development and co-commercialization agreement signed during 2006, we and GSK will share
Phase 3 and 4 development costs, and will share equally in sales and marketing expenses and profits
of any product that is commercialized. We received a $24.0 million payment during 2006 as partial
consideration for entering into this agreement with respect to BENLYSTA and are recognizing this
payment as revenue ratably over the development period, currently estimated to end in late 2010.
We expect that any significant revenue or income through at least 2010 may be limited to
raxibacumab revenue, payments under collaboration agreements (to the extent milestones are met),
cost reimbursements from GSK and Novartis, payments from the license of product rights, payments
under manufacturing agreements, such as our agreement with Hospira, Inc., investment income and
other payments from other collaborators and licensees under existing or future arrangements, to the
extent that we enter into any future arrangements, and possibly initial sales of BENLYSTA and/or
ZALBIN. We expect to continue to incur substantial expenses relating to our research and
development efforts and increased expenses relating to our commercialization efforts. As a result,
we expect to incur losses over at least the next two years unless we are able to realize additional
revenues under existing or any future agreements or from product sales. The timing and amounts of
such revenues, if any, cannot be predicted with certainty and will likely fluctuate sharply.
Results of operations for any period may be unrelated to the results of operations for any other
period. In addition, historical results should not be viewed as indicative of future operating
results.
Critical Accounting Policies and the Use of Estimates
A critical accounting policy is one that is both important to the portrayal of our financial
condition and results of operations and that requires managements most difficult, subjective or
complex judgments. Such judgments are often the result of a need to make estimates about the
effect of matters that are inherently uncertain. The preparation of our financial statements in
conformity with accounting principles generally accepted in the United States requires management
to make estimates and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting period. Actual results could differ
materially from those estimates. Our accounting policies are described in more detail in Note B,
Summary of Significant Accounting Policies, to our consolidated financial statements included in
our 2009 Annual Report on Form 10-K.
20
Table of Contents
Results of Operations
Revenues. Revenues were $46.5 million for the three months ended March 31, 2010 compared to
revenues of $177.3 million for the three months ended March 31, 2009. Revenues for the three months
ended March 31, 2010 included $27.6 million recognized from Novartis related to straight-line
recognition of up-front license fees and milestones reached for
ZALBIN as well as $13.5 million in
raxibacumab product sales. Revenues for the three months ended March 31, 2009 included $127.8
million in raxibacumab product sales and $26.0 million related to certain raxibacumab development
services, as well as a $9.0 million milestone payment received from GSK related to Syncria.
Cost of sales. Cost of sales includes cost of product sales of $7.6 million for the three
months ended March 31, 2010 compared to $8.2 million for the three months ended March 31, 2009.
Cost of sales also includes cost of manufacturing and development services of $0.9 million for the
three months ended March 31, 2010 compared to $3.4 million for the three months ended March 31,
2009. Cost of product sales during the three months ended March 31, 2010 includes the cost of
manufacturing raxibacumab and royalties whereas the cost of product sales during the three months
ended March 31, 2009 included only royalties, as the manufacturing costs had been previously
expensed. Our manufacturing and development services costs include costs associated with contract
manufacturing services and raxibacumab development services costs. The decrease in manufacturing
and development services costs is primarily due to lower costs associated with contract
manufacturing services. After approval of a product, inventoriable costs are capitalized into
inventory and will be expensed as the inventory is sold.
Expenses. Research and development net expenses were $57.5 million for the three months ended
March 31, 2010 compared to $53.7 million for the three months ended March 31, 2009. Our research
and development expenses for the three months ended March 31, 2010 and 2009 are net of $15.8
million and $12.5 million, respectively, of costs reimbursed or reimbursable by Novartis and GSK.
We track our research and development expenditures by type of cost incurred research,
pharmaceutical sciences, manufacturing and clinical development.
Our research costs decreased to $4.7 million for the three months ended March 31, 2010 from
$5.0 million for the three months ended March 31, 2009. Our research costs for the three months
ended March 31, 2010 and 2009 are net of $1.0 million and $0.7 million, respectively, of cost
reimbursement from Novartis and GSK under cost sharing provisions in our collaboration agreements.
Our pharmaceutical sciences costs, where we focus on improving formulation, process
development and production methods, decreased to $6.6 million for the three months ended March 31,
2010 from $8.1 million for the three months ended March 31, 2009. This decrease is primarily due
to decreased activity related to contract manufacturing services and ZALBIN.
Our manufacturing costs increased to $29.9 million for the three months ended March 31, 2010
from $19.7 million for the three months ended March 31, 2009. This increase is primarily due to
increased BENLYSTA production. Our manufacturing costs for the three months ended March 31, 2010
and 2009 are net of $8.6 million and $0.2 million, respectively, of anticipated cost reimbursement
from Novartis and GSK under the commercial cost sharing provisions in our collaboration agreements.
Our manufacturing costs are expected to increase as we produce commercial product in anticipation
of launch. These costs are expensed as incurred until regulatory approval of the product is
obtained.
Our clinical development costs decreased to $16.3 million for the three months ended March 31,
2010 from $20.9 million for the three months ended March 31, 2009. The decrease is primarily due
to the completion of our first BENLYSTA Phase 3 clinical trial in 2009, wind down of our second
Phase 3 BENLYSTA clinical trial and decreased raxibacumab development activities. Our clinical
development expenses for the three months ended March 31, 2010 and 2009 are net of $6.3 million and
$11.4 million, respectively, of cost reimbursement from Novartis and GSK under cost sharing
provisions in our collaboration agreements.
General and administrative expenses increased to $18.3 million for the three months ended
March 31, 2010 from $14.3 million for the three months ended March 31, 2009. This increase is
primarily due to increased commercial readiness activities.
21
Table of Contents
Results of Operations (continued)
Investment income increased to $4.6 million for the three months ended March 31, 2010 from
$4.3 million for the three months ended March 31, 2009. The increase in investment income for the
three months ended March 31, 2010 was primarily due to higher average investment balances offset by
lower yields on our portfolio.
Interest expense decreased to $14.7 million for the three months ended March 31, 2010 compared
to $15.7 million for the three months ended March 31, 2009. Interest expense includes non-cash
interest expense related to amortization of debt discount of $5.6 million and $6.4 million for the
three months ended March 31, 2010 and 2009, respectively, as a result of the adoption of Financial
Accounting Standards Board Accounting Standards Codification Topic 470 which requires that the
liability and equity components of convertible debt instruments that may be settled in cash upon
conversion (including partial cash settlement) be separately accounted for in a manner that
reflects an issuers non-convertible debt borrowing rate. The decrease in interest expense is
primarily due to the February 2009 repurchase of convertible subordinated debt due in 2011 and
2012.
The gain on extinguishment of debt of $38.9 million for the three months ended March 31, 2009
relates to the repurchase of convertible subordinated debt due in 2011 and 2012 with a face value
of approximately $106.2 million for an aggregate cost of approximately $50.0 million plus accrued
interest. The gain on extinguishment of debt is net of write-offs of related debt discount of
$16.4 million and deferred financing charges of $0.9 million.
Our gain on sale of long-term equity investment during the three months ended March 31, 2009
of $5.3 million relates to the remaining amount due on the 2008 sale of our investment in
CoGenesys.
Net Income (Loss). We recorded a net loss of $47.9 million, or $0.26 per basic and diluted
share, for the three months ended March 31, 2010 compared to net income of $129.8 million, or $0.96
per basic share and $0.85 per diluted share, for the three months ended March 31, 2009. This
change from net income to net loss is primarily due to lower product sales and manufacturing and
development services revenue in 2010 versus 2009 and the gain on extinguishment of debt in the
first quarter of 2009.
Liquidity and Capital Resources
We had working capital of $498.1 million and $616.6 million at March 31, 2010 and December 31,
2009, respectively. The decrease in our working capital for the three months ended March 31, 2010
is primarily due to the use of working capital to fund our operations and the increase in
non-current marketable securities.
We expect to
continue to incur substantial expenses relating to our research and development
efforts, as we focus on clinical trials and manufacturing required for the development of our
active product candidates. We will also incur costs related to our pre-commercial launch
activities. In the event our working capital needs exceed our available working capital, we can
utilize our non-current marketable securities, which are classified as available-for-sale. In
2009, the USG agreed to purchase 45,000 additional doses of raxibacumab for the SNS, to be
delivered over a three-year period, which began in 2009. We expect to receive a total of
approximately $152.0 million from this order as deliveries are
completed, a total of $31.2 million of which
has been recognized as revenue through the first quarter of 2010. We may also receive payments under
collaboration agreements, to the extent milestones are met, which would further improve our working
capital position. We continue to evaluate our working capital position on an ongoing basis.
To minimize our exposure to credit risk, we invest in securities with strong credit ratings
and have established guidelines relative to diversification and maturity with the objectives of
maintaining safety of principal and liquidity. We do not invest in derivative financial instruments
or auction rate securities, and we generally hold our investments in debt securities until
maturity.
22
Table of Contents
Liquidity and Capital Resources (continued)
The amounts of expenditures that will be needed to carry out our business plan are subject to
numerous uncertainties, which may adversely affect our liquidity and capital resources. We
completed our fourth Phase 3 trial and have several ongoing Phase 1 and Phase 2 trials and expect
to initiate additional trials in the future. Completion of these trials may extend several years
or more, but the length of time generally varies considerably according to the type, complexity,
novelty and intended use of the drug candidate. We estimate that the completion periods for our
Phase 1, Phase 2, and Phase 3 trials could span one year, one to two years and two to four years,
respectively. Some trials may take considerably longer to complete. The duration and cost of our
clinical trials are a function of numerous factors such as the number of patients to be enrolled in
the trial, the amount of time it takes to enroll them, the length of time they must be treated and
observed, and the number of clinical sites and countries for the trial.
Our clinical
development expenses are dependent on the clinical phase of our drug candidates.
Our expenses increase as our drug candidates move to later phases of clinical development. The
status of our clinical projects is as follows:
Clinical Trial Status as of March 31, (2) | ||||||||||
Product Candidate (1) | Indication | 2010 | 2009 | |||||||
ZALBIN
|
Hepatitis C | Phase 3 (3) | Phase 3 | |||||||
BENLYSTA
|
Systemic Lupus Erythematosus | Phase 3 (4) | Phase 3 | |||||||
BENLYSTA
|
Rheumatoid Arthritis | Phase 2 (5) | Phase 2 (5) | |||||||
Raxibacumab
|
Anthrax | (6 | ) | (6 | ) | |||||
HGS1029
|
Cancer | Phase 1 | Phase 1 | |||||||
HGS-ETR1
|
Cancer | Phase 2 | Phase 2 | |||||||
HGS-ETR2
|
Cancer | (8 | ) | Phase 1 |
(1) | Includes only those candidates for which an Investigational New Drug
Application (IND) has been filed with the FDA. |
|
(2) | Clinical Trial Status defined as when patients are being dosed. |
|
(3) | Phase 3 results reported; BLA filed in 2009, MAA filed in 2009 and withdrawn in
2010. Phase 2 monthly dosing study underway. |
|
(4) | Results from two Phase 3 clinical trials reported; pre-BLA activities underway. |
|
(5) | Initial Phase 2 trial completed; treatment IND ongoing and further development
under review. |
|
(6) | BLA filed in 2009; Complete Response Letter received from FDA; additional work
ongoing. |
|
(7) | IND filed in December 2007 with respect to HGS1029 (formerly AEG40826). |
|
(8) | Ongoing Phase 1 trial by National Institutes of Health; further development not
anticipated. |
We identify our drug candidates by conducting numerous preclinical studies. We may conduct
multiple clinical trials to cover a variety of indications for each drug candidate. Based upon the
results from our trials, we may elect to discontinue clinical trials for certain indications or
certain drugs in order to concentrate our resources on more promising drug candidates.
We are advancing a number of drug candidates, including antibodies, an albumin fusion protein
and a small molecule, in part to diversify the risks associated with our research and development
spending. In addition, our manufacturing plants have been designed to enable multi-product
manufacturing capability.
We must receive regulatory clearance to advance each of our products into and through each
phase of clinical testing. Moreover, we must receive regulatory approval to launch any of our products commercially. In
order to receive such approval, the appropriate regulatory agency must conclude that our clinical
data establish safety and efficacy and that our products and the manufacturing facilities meet all
applicable regulatory requirements. We cannot be certain that we will establish sufficient safety
and efficacy data to receive regulatory approval for any of our drugs or that our drugs and the
manufacturing facilities will meet all applicable regulatory requirements.
23
Table of Contents
Liquidity and Capital Resources (continued)
Part of our business plan includes collaborating with others. For example, we entered into a
collaboration agreement in 2006 with Novartis to co-develop and co-commercialize ZALBIN. Under
this agreement, we will co-commercialize ZALBIN in the United States, and will share U.S.
commercialization costs and U.S. profits equally. Novartis will be responsible for
commercialization outside the U.S. and will pay us a royalty on those sales. We and Novartis share
clinical development costs. Including a non-refundable up-front license fee, we are entitled to
payments aggregating approximately $507.5 million upon successful attainment of certain milestones.
As of March 31, 2010, we have contractually earned and received milestones aggregating $207.5
million. In 2006, we entered into a collaboration agreement with GSK with respect to BENLYSTA and
received a payment of $24.0 million. We and GSK share Phase 3 and 4 development costs, and will
share sales and marketing expenses and profits of any product that is commercialized in accordance
with the collaboration agreement. During the three months ended March 31, 2010, we recorded
approximately $15.8 million due from Novartis and GSK with respect to our cost sharing agreements
as a reduction of research and development expenses. We are recognizing the up-front fees and
milestones received from Novartis and GSK as revenue ratably over the estimated remaining
development periods.
We have collaborators who have sole responsibility for product development. For example, GSK
is developing other products under separate agreements as part of our overall relationship with
them. We have no control over the progress of GSKs development plans. We cannot forecast with
any degree of certainty whether any of our current or future collaborations will affect our drug
development.
Because of the uncertainties discussed above, the costs to advance our research and
development projects are difficult to estimate and may vary significantly. We expect that our
existing funds, payments received under the raxibacumab contract and other agreements and
investment income will be sufficient to fund our operations for at least the next twelve months.
Our future capital requirements and the adequacy of our available funds will depend on many
factors, primarily including the scope and costs of our clinical development programs, the scope
and costs of our manufacturing and process development activities, the magnitude of our discovery
and preclinical development programs and the level of our pre-commercial launch activities. There
can be no assurance that any additional financing required in the future will be available on
acceptable terms, if at all.
Depending upon market and interest rate conditions, we are exploring, and, from time to time,
may take actions to strengthen further our financial position. We may undertake financings and may
repurchase or restructure some or all of our outstanding convertible debt instruments in the future
depending upon market and other conditions. During 2009 we repurchased approximately $106.2
million of our convertible subordinated debt due in 2011 and 2012 at a cost of approximately $50.0
million plus accrued interest. In August and December 2009 we completed public offerings of our
common stock, resulting in net cash proceeds of approximately $812.9 million.
We have certain contractual obligations which may have a future effect on our financial
condition, changes in financial condition, results of operations, liquidity, capital expenditures
or capital resources that are material to investors. Our operating leases, along with our
unconditional purchase obligations, are not recorded on our balance sheets. Debt associated with
the sale and accompanying leaseback of our LSM facility to BioMed in 2006 is recorded on our
balance sheet as of March 31, 2010 and December 31, 2009. We have an option to purchase the
Traville facility in 2016 for $303.0 million.
Our unrestricted and restricted funds may be invested in U.S. Treasury securities, government
agency obligations, high grade corporate debt securities and various money market instruments rated
A- or better. Such investments reflect our policy regarding the investment of liquid assets,
which is to seek a reasonable rate of return consistent with an emphasis on safety, liquidity and
preservation of capital.
24
Table of Contents
Off-Balance Sheet Arrangements
During 1997 and 1999, we entered into two long-term leases with the Maryland Economic
Development Corporation (MEDCO) expiring January 1, 2019 for a small-scale manufacturing facility
aggregating 127,000 square feet and built to our specifications. We have accounted for these
leases as operating leases. The facility was financed primarily through a combination of bonds
issued by MEDCO (MEDCO Bonds) and loans issued to MEDCO by certain State of Maryland agencies.
We have no equity interest in MEDCO.
Rent is based upon MEDCOs debt service obligations and annual base rent under the leases is
currently approximately $2.6 million. The MEDCO Bonds are secured by letters of credit issued for
the account of MEDCO which were renewed in December 2009. We are required to have restricted
investments of approximately $34.3 million which serve as security for the MEDCO letters of credit
reimbursement obligation. Upon default or early lease termination, the MEDCO Bond indenture
trustee can draw upon the letters of credit to pay the MEDCO Bonds as they are tendered. In such
an event, we could lose part or all of our restricted investments and could record a charge to
earnings for a corresponding amount. Alternatively, we have an option through the end of the lease
term to purchase this facility for an aggregate amount that declines from approximately $37.0
million in 2010 to approximately $21.0 million in 2019.
Safe Harbor Statement Under the Private Securities Litigation Reform Act of 1995
Certain statements contained in Managements Discussion and Analysis of Financial
Condition and Results of Operations are forward-looking statements within the meaning of Section
27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of
1934, as amended. The forward-looking statements are based on our current intent, belief and
expectations. These statements are not guarantees of future performance and are subject to certain
risks and uncertainties that are difficult to predict. Actual results may differ materially from
these forward-looking statements because of our unproven business model, our dependence on new
technologies, the uncertainty and timing of clinical trials and regulatory approvals, our ability
to develop and commercialize products, our dependence on collaborators for services and revenue,
our substantial indebtedness and lease obligations, our changing requirements and costs associated
with facilities, intense competition, the uncertainty of patent and intellectual property
protection, our dependence on key management and key suppliers, the uncertainty of regulation of
products, the impact of future alliances or transactions and other risks described in this filing
and our other filings with the Securities and Exchange Commission. Existing and prospective
investors are cautioned not to place undue reliance on these forward-looking statements, which
speak only as of todays date. We undertake no obligation to update or revise the information
contained in this announcement whether as a result of new information, future events or
circumstances or otherwise.
25
Table of Contents
Item 3. Quantitative and Qualitative Disclosures About Market Risk
We
do not currently have operations of a material nature that are subject to risks of foreign currency
fluctuations. We do not use derivative financial instruments in our operations or investment
portfolio. Our investment portfolio may be comprised of low-risk U.S. Treasuries,
government-sponsored enterprise securities, high-grade debt having at least an
A- rating at time of purchase and various money market instruments. The short-term nature
of these securities, which currently have an average term of approximately 12 months, decreases the
risk of a material loss caused by a market change related to interest rates.
We believe that a hypothetical 100 basis point adverse move (increase) in interest rates along
the entire interest rate yield curve would adversely affect the fair value of our cash, cash
equivalents, short-term investments, marketable securities and restricted investments by
approximately $11.3 million, or approximately 1.0% of the aggregate fair value of $1.1 billion, at
March 31, 2010. For these reasons, and because these securities are generally held to maturity, we
believe we do not have significant exposure to market risks associated with changes in interest
rates related to our debt securities held as of March 31, 2010. We believe that any interest rate
change related to our investment securities held as of March 31, 2010 is not material to our
consolidated financial statements. As of March 31, 2010, the yield on comparable one-year
investments was approximately 0.4%, as compared to our current portfolio yield of approximately
1.6%. However, given the short-term nature of these securities, a general decline in interest rates
may adversely affect the interest earned from our portfolio as securities mature and may be
replaced with securities having a lower interest rate.
To minimize our exposure to credit risk, we invest in securities with strong credit ratings
and have established guidelines relative to diversification and maturity with the objectives of
maintaining safety of principal and liquidity. We do not invest in derivative financial
instruments, auction rate securities, loans held for sale or mortgage-backed securities backed by
sub-prime or Alt-A collateral, and we generally hold our investments in debt securities until
maturity. However, adverse changes in the credit markets relating to credit risks would adversely
affect the fair value of our cash, cash equivalents, short-term investments, marketable securities
and restricted investments.
The facility leases we entered into during 2006 require us to maintain minimum levels of
restricted investments of approximately $46.0 million, or $39.5 million if in the form of cash, as
collateral for these facilities. Together with the requirement to maintain approximately $34.3
million in restricted investments with respect to our small-scale manufacturing facility leases,
our overall level of restricted investments is currently required to be approximately $80.3
million. Although the market value for these investments may rise or fall as a result of changes
in interest rates, we will be required to maintain this level of restricted investments in either a
rising or declining interest rate environment.
Our convertible subordinated notes bear interest at fixed rates. As a result, our interest
expense on these notes is not affected by changes in interest rates.
During 2002, we established a wholly-owned subsidiary, Human Genome Sciences Europe GmbH (HGS
Europe) that is assisting in our clinical trials and clinical research collaborations in European
countries. Although HGS Europes activities are denominated primarily in euros, we believe the
foreign currency fluctuation risks to be immaterial to our operations as a whole. During 2005, we
established a wholly-owned subsidiary, Human Genome Sciences Pacific Pty Ltd. (HGS Pacific) that
is sponsoring some of our clinical trials in the Asia/Pacific region. We currently do not
anticipate HGS Pacific to have any operational activity and therefore we do not believe we will
have any foreign currency fluctuation risks with respect to HGS Pacific.
26
Table of Contents
Item 4. Controls and Procedures
Disclosure Controls and Procedures
Our management, including our principal executive and principal financial officers, has
evaluated the effectiveness of our disclosure controls and procedures as of March 31, 2010. Our
disclosure controls and procedures are designed to provide reasonable assurance that the
information required to be disclosed in this Quarterly Report on Form 10-Q has been
appropriately recorded, processed, summarized and reported within the time periods specified in
the Securities and Exchange Commissions rules and forms, and that such information is
accumulated and communicated to our management, including our principal executive and principal
financial officers, to allow timely decisions regarding required disclosure. Based on that
evaluation, our principal executive and principal financial officers have concluded that our
disclosure controls and procedures are effective at the reasonable assurance level.
Changes in Internal Control
Our management, including our principal executive and principal financial officers, has
evaluated any changes in our internal control over financial reporting that occurred during the
quarterly period ended March 31, 2010, and has concluded that there was no change that occurred
during the quarterly period ended March 31, 2010 that has materially affected, or is reasonably
likely to materially affect, our internal control over financial reporting.
27
Table of Contents
PART II. OTHER INFORMATION
Item 1A. Risk Factors
There are a number of risk factors that could cause our actual results to
differ materially from those that are indicated by forward-looking statements. Those factors
include, without limitation, those listed below and elsewhere herein.
RISKS RELATED TO OUR BUSINESS
If we are unable to commercialize our Phase 3 and earlier development molecules, we may not be
able to recover our investment in our product development, manufacturing and marketing efforts.
We have invested significant time and resources to isolate and study genes and determine
their functions. We now devote most of our resources to developing proteins, antibodies and
small molecules for the treatment of human disease. We are also devoting substantial resources
to our own manufacturing capabilities, to support clinical testing, to supply raxibacumab to the
U.S. Strategic National Stockpile (SNS) and for potential commercialization of our other
products. We expect to devote substantial resources to establish and maintain a marketing
capability for any of our products that are approved by the U.S. Food and Drug Administration
(FDA). We have made and are continuing to make substantial expenditures in advance of
commercializing any products. Before we can commercialize a product, we must rigorously test the
product in the laboratory and complete extensive human studies. We cannot assure you that the
tests and studies will yield products approved for marketing by the FDA in the United States or
similar regulatory authorities in other countries, or that any such products will be profitable.
We will incur substantial additional costs to continue these activities. If we are not
successful in commercializing our Phase 3 and earlier development molecules, we may be unable to
recover the large investment we have made in research, development, manufacturing and marketing
efforts.
If we are unable to obtain marketing approval for BENLYSTATM, our results of
operations and business will be materially and adversely affected.
In July 2009, we reported the results from the first of our two Phase 3 clinical trials for
BENLYSTA. In that trial BENLYSTA met its primary efficacy endpoint. In November 2009, we
reported the 52-week results from the second of our two Phase 3 clinical trials for BENLYSTA. In
that trial, BENLYSTA at a dose of 10 mg/kg also met its primary efficacy endpoint. Although the
primary efficacy endpoint of the BLISS-76 trial was assessed after 52 weeks, we continued to
collect additional data from this trial for an additional 24 weeks. In April 2010, we reported
the results of the BLISS 76 trial for these additional weeks. At week 76 in the BLISS-76 trial,
BENLYSTA plus standard of care showed higher response rates compared with placebo plus standard
of care, but this difference was not statistically significant. We do not know what, if any,
effect these 76-week results may have on our ability to obtain regulatory approval for BENLYSTA.
We currently expect to file a Biologics License Application (BLA) in the United States in
the second quarter of 2010. Despite our determination that the results from the two BENLYSTA
trials were positive, the FDA or similar regulatory authorities may determine that the results
from the two trials do not support marketing approval or are insufficient to obtain marketing
approval. In addition, our partner GlaxoSmithKline (GSK) may determine that the results of
these trials do not warrant further development or commercialization and may terminate its
collaboration agreement. If we are unable to obtain marketing approval for BENLYSTA or if
marketing approval is delayed or if our partner terminates its collaboration agreement, our
results of operations and business will be materially adversely affected.
28
Table of Contents
If we are unable to obtain marketing approval for ZALBINTM, our results of operations
and business will be materially and adversely affected.
In March 2009, we reported the results from the second of our two Phase 3 clinical trials
for ZALBIN. In that trial, as well as the trial we reported on in December 2008, ZALBIN met its
primary efficacy endpoint. In January 2008, we modified the dosing in our two ZALBIN Phase 3
clinical trials. Patients who had been receiving the 1200-mcg dose were moved to the 900-mcg
dose based on a recommendation made by our independent data monitoring committee. The
recommendation was based on the incidence rate of serious pulmonary adverse events in the
1200-mcg arm of the two ZALBIN trials. In November 2009, we filed a BLA with the FDA on ZALBIN
and, in December 2009, our partner Novartis filed a Marketing Authorization Application (MAA)
under the brand name JOULFERON® with the European Medicines Agency. In April 2010,
Novartis withdrew the MAA. The decision to withdraw the application was based on feedback from
European regulatory authorities in preliminary response to the MAA, indicating that additional
new data would be requested which could not reasonably be generated within the timeframe allowed
in the European Centralized Procedure. The feedback included whether the therapeutic benefit
offered by the product dosed every two weeks was sufficient relative to the risk. In the United
States, despite our determination that the results from the two ZALBIN trials were positive, the
FDA may determine that the results do not support marketing approval or are insufficient to
obtain marketing approval. We do not know what, if any, effect the preliminary response to the
MAA and Novartis decision to withdraw the application may have on the BLA filed with the FDA.
We will be seeking further guidance from FDA. In addition, our partner Novartis may determine
that the results of these trials do not warrant further development or commercialization and may
terminate its collaboration agreement. If we are unable to obtain marketing approval for ZALBIN
products or if marketing approval is delayed or if our partner terminates its collaboration
agreement, our results of operations and business will be materially adversely affected.
We may be unable to successfully establish commercial manufacturing capability and may be unable
to obtain required quantities of our product candidates for commercial use.
We have not yet manufactured any products approved for commercial use and, except for
raxibacumab, have limited experience in manufacturing materials suitable for commercial use. We
have only limited experience manufacturing in a large-scale manufacturing facility built to
increase our capacity for protein and antibody drug production. The FDA must inspect and license
our facilities to determine compliance with current good manufacturing practices (cGMP)
requirements for commercial production. We may not be able to successfully establish sufficient
manufacturing capabilities or manufacture our products economically or in compliance with cGMPs
and other regulatory requirements. For example, we believe that we have sufficient manufacturing
capacity to launch BENLYSTA, if it is approved by the FDA, and to supply commercial quantities
of BENLYSTA to approximately 45,000 to 55,000 patients. If the demand for BENLYSTA exceeds our
capacity to supply BENLYSTA to patients, we will need to contract for additional manufacturing
capacity with a third-party manufacturer or buy or build additional manufacturing capacity. We
believe that engaging a third-party manufacturer or buying or building additional manufacturing
capacity will take between two and five years or longer due, in part, to the required regulatory
approvals and will require substantial expenditures. We may not be able to contract with a
third-party manufacturer on commercially reasonable terms, or at all, or find or build such
capacity in the timeframe to meet demand, and our revenues may be limited from BENLYSTA if we
are unable to do so successfully.
Currently each of our products, BENLYSTA, ZALBIN and raxibacumab, is produced at a single
manufacturing site. BENLYSTA is produced at our large-scale manufacturing facility in
Rockville, Maryland and ZALBIN and raxibacumab are produced in separate parts of our small-scale
manufacturing facility, which is also in Rockville, Maryland. Each of these facilities is the
sole source for these products. We cannot guarantee that one or more of these manufacturing
plants will not encounter problems, including but not limited to loss of power, equipment
failure or viral or microbial contamination, which could impact our ability to deliver adequate
supply of one or more of these products to the market.
While we have expanded our manufacturing capabilities, we have previously contracted
and expect to contract with third-party manufacturers or develop products with collaboration
partners and use the collaboration partners manufacturing capabilities. If we use others to
manufacture our products, we will depend on those parties to comply with cGMPs, and other
regulatory requirements and to deliver materials on a timely basis. These parties may not
perform adequately, or comparability between the licensed product and that produced at the
third-party may not be established successfully. Any failures by these third parties may delay
our development of products or the submission of these products for regulatory approval.
29
Table of Contents
Because we currently have only a limited marketing capability and in light of various
factors, we may be unable to price or sell any of our products effectively.
We do not have any marketed products, although we have sold raxibacumab to the U.S.
Government. If we receive approval for products that can be marketed, we intend to market the
products either independently or together with collaborators or strategic partners. GSK,
Novartis and others have co-commercialization rights with respect to certain of our products. If
we decide to market any products, either independently or together with partners, we will incur
significant additional expenditures and commit significant additional management resources to
establish a sales force. For any products that we market together with partners, we will rely,
in whole or in part, on the marketing capabilities of those parties. We may also contract with
third parties to market certain of our products. Ultimately, we and our partners may not be
successful in marketing our products. In addition, the prices for our products may be impacted
by various factors, including economic analyses of the burden of the applicable disease, the
perceived value of the product and third party reimbursement policies. We can provide no
assurance as to the price at which we may be able to sell any of our products, or that we will
be able to price any of our products at a level that is consistent with other similar products.
If we are unable to expand label usage of BENLYSTA, we may not recognize the full value of the
product candidate and there may be adverse effects on our expected financial and operating
results.
BENLYSTA is a
human monoclonal antibody that recognizes and inhibits the biological
activity of B-lymphocyte stimulator, or BLyS, and is being developed as a potential treatment
for systemic lupus erythematosus (SLE). If the FDA or
other regulatory agencies approve BENLYSTA for the treatment of SLE,
we intend to seek expansion of the approved uses, or labeled uses, of
BENLYSTA in the U.S. and elsewhere.
However, we may be unable to obtain approval for such label expansion in full or in part. If we
are not able to obtain approval for expansion of the labeled uses for BENLYSTA, or if we are
otherwise unable to fulfill our marketing, sales and distribution plans for BENLYSTA, sales of
BENLYSTA may be limited. We may conduct new clinical trials for
additional approved uses of BENLYSTA. There can be no guarantee that these trials will be
successful or that the FDA or other regulatory agencies will approve expansion of the labeled uses for
BENLYSTA.
Because our product development efforts depend on new technologies, we cannot be certain that
our efforts will be successful.
Our work depends on new technologies and on the marketability and profitability of
innovative products. Commercialization involves risks of failure inherent in the development of
products based on innovative technologies and the risks associated with drug development
generally. These risks include the possibility that:
| these technologies or any or all of the Phase 3 and earlier development
molecules based on these technologies will be ineffective or toxic, or otherwise
fail to receive necessary regulatory clearances; |
||
| the products, even if safe and effective, will be difficult to manufacture
on a large scale or uneconomical to market; |
||
| proprietary rights of third parties will prevent us or our collaborators
from exploiting technologies or marketing products; and |
||
| third parties will market superior or equivalent products. |
Because we are a late-stage development company, we cannot be certain that we can develop
our business or achieve profitability.
We expect to continue to incur losses and we cannot assure you that we will ever become
profitable on a sustainable basis. A number of our products are in late-stage development;
however, it could be one or more years, if ever, before we are likely to receive continuing
revenue from product sales or substantial royalty payments. We will continue to incur
substantial expenses relating to research, development and manufacturing efforts and human
studies. Depending on the stage of development, our products may require significant further
research, development, testing and regulatory approvals. We may not be able to develop products
that will be commercially successful or that will generate revenue in excess of the cost of
development.
30
Table of Contents
We are continually evaluating our business strategy, and may modify this strategy in light of
developments in our business and other factors.
We continue to evaluate our business strategy and, as a result, may modify this strategy in
the future. In this regard, we may, from time to time, focus our product development efforts on
different products or may delay or halt the development of various products. In addition, as a
result of changes in our strategy, we may also change or refocus our existing drug discovery,
development, commercialization and manufacturing activities. This could require changes in our
facilities and personnel and the restructuring of various financial arrangements. For example,
in March 2009, we reduced the scope of efforts in a number of our programs resulting in cost
savings for fiscal year 2009, a portion of which came from a reduction in headcount. However, we
cannot assure you that changes will occur or that any changes that we implement will be
successful.
Several years ago, we sharpened our focus on our most promising drug candidates. We
reduced the number of drugs in early development and focused our resources on the drugs that
address the greatest unmet medical needs with substantial growth potential. In 2006, we spun off
our CoGenesys division (CoGenesys) as an independent company, in a transaction that was
treated as a sale for accounting purposes. In 2008, CoGenesys was acquired by Teva
Pharmaceuticals Industries, Ltd. (Teva) and became a wholly-owned subsidiary of Teva called
Teva Biopharmaceuticals USA, Inc. (Teva Bio).
Our ability to discover and develop new products will depend on our internal research
capabilities and our ability to acquire products. Our internal research capability was reduced
when we completed the spin-off of CoGenesys. Although we continue to conduct research and
development activities on products, our limited resources for new products may not be sufficient
to discover and develop new drug candidates.
PRODUCT DEVELOPMENT RISKS
Because we have limited experience in developing and commercializing products, we may be
unsuccessful in our efforts to do so.
Although we are conducting human studies with respect to a number of products, we have
limited experience with these activities and may not be successful in developing or
commercializing these or other products. Our ability to develop and commercialize products based
on proteins, antibodies and small molecules will depend on our ability to:
| successfully complete laboratory testing and human studies; |
||
| obtain and maintain necessary intellectual property rights to our products; |
||
| obtain and maintain necessary regulatory approvals related to the efficacy
and safety of our products; |
||
| maintain production facilities meeting all regulatory requirements or enter
into arrangements with third parties to manufacture our products on our behalf; and |
||
| deploy sales and marketing resources effectively or enter into arrangements
with third parties to provide these functions. |
Because clinical trials for our products are expensive and protracted and their outcome is
uncertain, we must invest substantial amounts of time and money that may not yield viable
products.
Conducting clinical trials is a lengthy, time-consuming and expensive process. Before
obtaining regulatory approvals for the commercial sale of any product, we must demonstrate
through laboratory, animal and human studies that the product is both effective and safe for use
in humans. We will incur substantial additional expense for and devote a significant amount of
time to conducting ongoing trials and initiating new trials.
Before a drug may be marketed in the United States, a drug must be subject to rigorous
preclinical testing. The results of this testing must be submitted to the FDA as part of an
Investigational New Drug Application (IND), which is reviewed by the FDA before clinical
testing in humans can begin. The results of preclinical studies do not predict clinical success.
A number of potential drugs have shown promising results in early testing but subsequently
failed to obtain necessary regulatory approvals. Data obtained from tests are susceptible to
varying interpretations, which may delay, limit or prevent regulatory approval. Regulatory
authorities may refuse or delay approval as a result of many other factors, including changes in
regulatory policy during the period of product development.
31
Table of Contents
Completion of clinical trials may take many years. The time required varies substantially
according to the type, complexity, novelty and intended use of the product candidate. The
progress of clinical trials is monitored by both the FDA and independent data monitoring
committees, which may require the modification, suspension or termination of a trial if it is
determined to present excessive risks to patients. Our rate of commencement and completion of
clinical trials may be delayed by many factors, including:
| our inability to manufacture sufficient quantities of materials for use in
clinical trials; |
||
| variability in the number and types of patients available for each study; |
||
| difficulty in maintaining contact with patients after treatment, resulting
in incomplete data; |
||
| unforeseen safety issues or side effects; |
||
| poor or unanticipated effectiveness of products during the clinical trials;
or |
||
| government or regulatory delays. |
To date, data obtained from our clinical trials may not be sufficient to support an
application for regulatory approval without further studies. Studies conducted by us or by third
parties on our behalf may not demonstrate sufficient effectiveness and safety to obtain the
requisite regulatory approvals for these or any other potential products. For example, we have
submitted BLAs to the FDA for raxibacumab and ZALBIN, but the studies we have conducted to date
may not be sufficient to obtain FDA approval. In November 2009, we received a Complete Response
Letter from the FDA related to our BLA for raxibacumab. In this letter, the FDA determined that
it cannot approve the BLA its present form and requested additional studies
and data that would be needed prior to the FDA making a decision as to whether or not to approve
the raxibacumab BLA. We may not be able to complete the requested studies or to generate the
required data in a timely manner, if at all. If the FDA requires that we complete the additional
studies and generate the additional data requested in the Complete Response Letter, we may be
required to withdraw our existing BLA and resubmit our BLA after completion of such studies.
This will start a new review cycle. Even if we could complete such studies and generate such
data, the studies and data may not be sufficient for FDA approval. In addition, based on the
results of a human study for a particular product candidate, regulatory authorities may not
permit us to undertake any additional clinical trials for that product candidate. The clinical
trial process may also be accompanied by substantial delay and expense and there can be no
assurance that the data generated in these studies will ultimately be sufficient for marketing
approval by the FDA. In February 2010, the FDA accepted our ZALBIN BLA filing with a PDUFA
action date of October 4, 2010. In April 2010, our partner
Novartis withdrew a MAA for JOULFERON (ZALBIN in the U.S.), previously filed with the
European Medicines Agency. The decision to withdraw the application
was based on feedback from European regulatory authorities in preliminary response to the MAA,
indicating that additional new data would be requested which could not reasonably be generated
within the timeframe allowed in the European Centralized Procedure. The feedback included
whether the therapeutic benefit offered by the product dosed every two weeks was sufficient
relative to the risk.
The development programs for ZALBIN and BENLYSTA have each involved two large-scale,
multi-center Phase 3 clinical trials and have been more expensive than our Phase 1 and Phase 2
clinical trials. In December 2008 and March 2009, we announced that we had completed the Phase 3
clinical studies for ZALBIN; in both studies, ZALBIN met its primary efficacy endpoint of
non-inferiority to peginterferon alfa-2a. In November 2009, we filed a BLA for ZALBIN with the
FDA. In July 2009, we reported the results from the first of our two Phase 3 clinical trials for
BENLYSTA. In that trial, BENLYSTA met its primary efficacy endpoint. In November, 2009, we
reported the 52 week data from the second Phase 3 clinical trial for BENLYSTA. In that trial,
BENLYSTA at a dose of 10 mg/kg also met its primary efficacy endpoint. Although the primary
efficacy endpoint of the BLISS-76 study was assessed after 52 weeks, we continued to collect
additional data from this trial for an additional 24 weeks. In April 2010, we reported the
results of the BLISS 76 trial for these additional weeks. At week 76 in the BLISS-76 trial,
BENLYSTA plus standard of care showed higher response rates compared with placebo plus standard
of care, but this difference was not statistically significant. We do not know what, if any
effect, these 76-week results may have on our ability to obtain regulatory approval for
BENLYSTA. We currently expect to file a BLA in the United States in the second quarter of
2010.
We may not be able to obtain FDA or other regulatory approval of ZALBIN or BENLYSTA. Even
if FDA or other regulatory approval is obtained, it may include limitations on the indicated
uses for which ZALBIN and/or BENLYSTA may be marketed.
32
Table of Contents
We face risks in connection with our raxibacumab product in addition to risks generally
associated with drug development.
The development of raxibacumab presents risks beyond those associated with the development
of our other products. Numerous other companies and governmental agencies are known to be
developing biodefense pharmaceuticals and related products to combat anthrax disease. These
competitors may have financial or other resources greater than ours, and may have easier or
preferred access to the likely distribution channels for biodefense products. In addition, since
the primary purchaser of biodefense products is the U.S. Government and its agencies, the
success of raxibacumab will depend on government spending policies and pricing restrictions. The
funding of government biodefense programs is dependent, in part, on budgetary constraints,
political considerations and military developments. In the case of the U.S. Government,
executive or legislative action could attempt to impose production and pricing requirements on
us. We have entered into a two-phase contract, which may be terminated at any time, to supply
raxibacumab, a human monoclonal antibody developed for use in the treatment of anthrax disease,
to the U.S. Government. Under the first phase of the contract, we supplied ten grams of
raxibacumab to the HHS for comparative in vitro and in vivo testing. Under the second phase of
the contract, the U.S. Government ordered 20,001 doses of raxibacumab for the U.S. SNS for use
in the treatment of anthrax disease. We completed delivery of these doses and the U.S.
Government accepted our deliveries. In July 2009, the U.S. Government agreed to purchase 45,000
additional doses. We, therefore, have future deliveries to make and ongoing obligations under
the contract, including the obligation to obtain FDA approval. We will continue to face risks
related to the requirements of the contract. If we are unable to meet our obligations associated
with this contract, the U.S. Government will not be required to make future payments related to
that order. Although we have received U.S. Government approval for two orders of raxibacumab, we
cannot assure you we will receive additional orders. In November 2009, we received a Complete
Response Letter from the FDA related to our BLA for raxibacumab. In this letter, the FDA
determined that it cannot approve our BLA for raxibacumab in its present form and requested
additional studies and data that would be needed prior to the FDA making a decision as to
whether or not to approve the raxibacumab BLA. We may not be able to complete the requested
studies or to generate the required data in a timely manner, if at all. If the FDA requires that
we complete the additional studies and generate the additional data requested in the Complete
Response Letter, we may be required to withdraw our existing BLA and resubmit our BLA after
completion of such studies. This will start a new review cycle. Even if we could complete such
studies and generate such data, the studies and data may not be sufficient for FDA approval.
Although the government has accepted shipment of raxibacumab subsequent to the receipt of the
FDAs Complete Response Letter, we cannot assure you that the government will continue to accept
future shipments or place additional orders.
Because neither we nor any of our collaboration partners have received marketing approval for
any product candidate resulting from our research and development efforts, and because we may
never be able to obtain any such approval, it is possible that we may not be able to generate
any product revenue other than with respect to raxibacumab.
Although we have submitted BLAs for two of our products (raxibacumab and ZALBIN), we cannot
assure you that any of these products will receive marketing approval. It is possible that we
will not receive FDA marketing approval for any of our product candidates even if the results of
clinical trials are positive. All products being developed by our collaboration partners will
also require additional research and development, preclinical studies and extensive clinical
trials and regulatory approval prior to any commercial sales. In some cases, the length of time
that it takes for our collaboration partners to achieve various regulatory approval milestones
may affect the payments that we are eligible to receive under our collaboration agreements. We
and our collaboration partners may need to successfully address a number of technical challenges
in order to complete development of our products. Moreover, these products may not be effective
in treating any disease or may prove to have undesirable or unintended side effects, toxicities
or other characteristics that may preclude obtaining regulatory approval or prevent or limit
commercial use.
33
Table of Contents
RISK FROM COLLABORATION RELATIONSHIPS AND STRATEGIC ACQUISITIONS
Our plan to use collaborations to leverage our capabilities and to grow in part through the
strategic acquisition of other companies and technologies may not be successful if we are unable
to integrate our partners capabilities or the acquired companies with our operations or if our
partners capabilities do not meet our expectations.
As part of our strategy, we intend to continue to evaluate strategic partnership
opportunities and consider acquiring complementary technologies and businesses. In order for our
future collaboration efforts to be successful, we must first identify partners whose
capabilities complement and integrate well with ours. Technologies to which we gain access may
prove ineffective or unsafe. Our current agreements that grant us access to such technology may
expire and may not be renewable or could be terminated if we or our partners do not meet our
obligations. These agreements are subject to differing interpretations and we and our partners
may not agree on the appropriate interpretation of specific requirements. Our partners may prove
difficult to work with or less skilled than we originally expected. In addition, any past
collaborative successes are no indication of potential future success.
In order to achieve the anticipated benefits of an acquisition, we must integrate the
acquired companys business, technology and employees in an efficient and effective manner. The
successful combination of companies in a rapidly changing biotechnology industry may be more
difficult to accomplish than in other industries. The combination of two companies requires,
among other things, integration of the companies respective technologies and research and
development efforts. We cannot assure you that this integration will be accomplished smoothly or
successfully. The difficulties of integration may be increased by any need to coordinate
geographically separated organizations and address possible differences in corporate cultures
and management philosophies. The integration of certain operations will require the dedication
of management resources which may temporarily distract attention from the day-to-day operations
of the combined companies. The business of the combined companies may also be disrupted by
employee retention uncertainty and lack of focus during integration. The inability of management
to integrate successfully the operations of the two companies, in particular, the integration
and retention of key personnel, or the inability to integrate successfully two technology
platforms, could have a material adverse effect on our business, results of operations and
financial condition.
We reacquired rights to HGS-ETR1 from GSK, as well as all GSK rights to other TRAIL Receptor
antibodies. We may be unsuccessful in developing and commercializing products from these
antibodies without a collaborative partner.
As part of our September 1996 agreement with GSK, we granted a 50/50 co-development and
co-commercialization option to GSK for certain human therapeutic products that successfully
completed Phase 2a clinical trials. In August 2005, we announced that GSK had exercised its
option to develop and commercialize HGS-ETR1 (mapatumumab) jointly with us. In April 2008, we
announced that we had reacquired all rights to our TRAIL receptor antibodies (including rights
to HGS-ETR1 and HGS-ETR2) from GSK, in return for a reduction in royalties due to us if
Syncria®, a GSK product for which we would be owed royalties, is commercialized. We also
announced that our agreement with the pharmaceutical division of Kirin Brewery Company, Ltd. for
joint development of antibodies to TRAIL receptor 2 had been terminated. Takeda Pharmaceutical
Company, Ltd. has the right to develop HGS-ETR1 in Japan. As a result of these actions, we have
assumed full responsibility for the development and commercialization of products based on these
antibodies, except for HGS-ETR1 in Japan. We have ongoing development programs related to
HGS-ETR1 (mapatumumab), but do not anticipate further development of HGS-ETR2.
Our ability to receive revenues from the assets licensed in connection with our CoGenesys
transaction will depend on Teva Bios ability to develop and commercialize those assets.
We will depend on Teva Bio to develop and commercialize the assets licensed as part of the
spin-off of CoGenesys. If Teva Bio is not successful in its efforts, we will not receive any
revenue from the development of these assets. In addition, our relationship with Teva Bio will
be subject to the risks and uncertainties inherent in our other collaborations.
Because we currently depend on our collaboration partners for substantial revenue, we may
not become profitable on a sustainable basis if we cannot increase the revenue from our
collaboration partners or other sources.
We have received substantial revenue from payments made under collaboration agreements with
GSK and Novartis, and to a lesser extent, other agreements. The research term of our initial GSK
collaboration agreement and many of our other collaboration agreements expired in 2001. None of
the research terms of these collaboration agreements was renewed and we may not be able to enter
into additional collaboration agreements. While our partners under our initial GSK collaboration
agreement have informed us that they have been pursuing research programs involving different
genes for the creation of small molecule, protein and antibody drugs, we cannot assure you that
any of these programs will be continued or will result in any approved drugs.
34
Table of Contents
Under our present collaboration agreements, we are entitled to certain development and
commercialization payments based on our development of the applicable product or certain
milestone and royalty payments based on our partners development of the applicable product. We
may not receive payments under these agreements if we or our collaborators fail to:
| develop marketable products; |
||
| obtain regulatory approvals for products; or |
||
| successfully market products. |
Further, circumstances could arise under which one or more of our collaboration partners
may allege that we breached our agreement with them and, accordingly, seek to terminate our
relationship with them. Our collaboration partners may also terminate these agreements without
cause or if competent scientific evidence or safety risks do not justify moving the applicable
product forward. If any one of these agreements terminates, this could adversely affect our
ability to commercialize our products and harm our business.
If one of our collaborators pursues a product that competes with our products, there could be a
conflict of interest and we may not receive milestone or royalty payments.
Each of our collaborators is developing a variety of products, some with other partners.
Our collaborators may pursue existing or alternative technologies to develop drugs targeted at
the same diseases instead of using our licensed technology to develop products in collaboration
with us. Our collaborators may also develop products that are similar to or compete with
products they are developing in collaboration with us. If our collaborators pursue these other
products instead of our products, we may not receive milestone or royalty payments. For example,
GSK has been developing for the treatment of insomnia an orexin inhibitor based on our
technology and to which we are entitled to milestones, royalties and co-promotion rights. In
July 2008, GSK announced a collaboration with Actelion Ltd. to co-develop and co-commercialize a
different orexin inhibitor. While GSK has stated publicly that it intends to continue work on
the inhibitor derived from our technology, there can be no assurance that it will continue to do
so or that such work will lead to a commercial product.
REGULATORY RISKS
Because we are subject to extensive changing government regulatory requirements, we may be
unable to obtain government approval of our products in a timely manner.
Regulations in the United States and other countries have a significant impact on our
research, product development and manufacturing activities and will be a significant factor in
the marketing of our products. All of our products require regulatory approval prior to
commercialization. In particular, our products are subject to rigorous preclinical and clinical
testing and other premarket approval requirements by the FDA and similar regulatory authorities
in other regions, such as Europe and Asia. Various statutes and regulations also govern or
influence the manufacturing, safety, labeling, storage, record keeping and marketing of our
products. The lengthy process of seeking these approvals, and the subsequent compliance with
applicable statutes and regulations, require the expenditure of substantial resources. Any
failure by us to obtain, or any delay in obtaining, regulatory approvals could materially
adversely affect our ability to commercialize our products in a timely manner, or at all.
Marketing Approvals.
Before a product can be marketed in the United States,
the results of the preclinical and clinical testing must be submitted to the FDA for approval.
This submission will be either a new drug application or a biologics license application,
depending on the type of drug. In responding to a new drug application or a BLA, the FDA may
grant marketing approval, request additional information or deny the application if it
determines that the application does not provide an adequate basis for approval. We cannot
assure you that any approval required by the FDA will be obtained on a timely basis, or at all.
For example, in November 2009, we received a Complete Response Letter from the FDA related to
our BLA for raxibacumab. In this letter, the FDA determined that it cannot approve our BLA in its present form and requested additional studies and data that would be needed
prior to the FDA making a decision as to whether or not to approve the raxibacumab BLA. We may
not be able to complete the requested studies or to generate the required data in a timely
manner if at all. If the FDA requires that we complete the additional studies and generate the
additional data requested in the Complete Response Letter, we may be required to
resubmit our BLA after completion of such studies. This will start a new review
cycle. Even if we could complete such studies and generate such data, the studies and data may
not be sufficient for FDA approval. In addition, based on the results of a human study for a
particular product candidate, regulatory authorities may not permit us to undertake any
additional clinical trials for that product candidate.
35
Table of Contents
In November 2009, we filed a BLA with the FDA for ZALBIN. In February 2010, the FDA
accepted our ZALBIN BLA filing with a PDUFA action date of October 4, 2010. We plan to file a
BLA with the FDA for BENLYSTA in the second quarter of 2010 and to request priority review of
that application. The FDA may not grant priority review of our BENLYSTA BLA and may not act on
our BLAs in a timely manner. The FDA may determine that our BLAs are insufficient to support
marketing approval or may deny our BLAs for either or both products, either of which would
materially adversely affect our results of operations and business.
The FDA may condition marketing approval on the conduct of specific post-marketing studies
to further evaluate safety and efficacy. Rigorous and extensive FDA regulation of pharmaceutical
products continues after approval, particularly with respect to compliance with cGMPs, reporting
of adverse effects, advertising, promotion and marketing. Discovery of previously unknown
problems or failure to comply with the applicable regulatory requirements may result in
restrictions on the marketing of a product or withdrawal of the product from the market as well
as possible civil or criminal sanctions, any of which could materially adversely affect our
business.
Foreign Regulation. We must obtain regulatory approval by governmental agencies in other
countries prior to commercialization of our products in those countries. Foreign regulatory
systems may be just as rigorous, costly and uncertain as in the United States. In December
2009, our partner Novartis filed a MAA for JOULFERON (ZALBIN in the
U.S.) with the European Medicines Agency. In April 2010,
Novartis withdrew the MAA. The decision to withdraw the application was based on feedback from
European regulatory authorities in preliminary response to the MAA, indicating that additional
new data would be requested which could not reasonably be generated within the timeframe allowed
in the European Centralized Procedure. The feedback included whether the therapeutic benefit
offered by the product dosed every two weeks was sufficient relative to the risk.
Because we are subject to environmental, health and safety laws, we may be unable to conduct our
business in the most advantageous manner.
We are subject to various laws and regulations relating to safe working conditions,
laboratory and manufacturing practices, the experimental use of animals, emissions and
wastewater discharges, and the use and disposal of hazardous or potentially hazardous substances
used in connection with our research, including radioactive compounds and infectious disease
agents. We also cannot accurately predict the extent of regulations that might result from any
future legislative or administrative action. Any of these laws or regulations could cause us to
incur additional expense or restrict our operations.
INTELLECTUAL PROPERTY RISKS
If our patent applications do not result in issued patents or if patent laws or the
interpretation of patent laws change, our competitors may be able to obtain rights to and
commercialize our discoveries.
Our pending patent applications, including those covering full-length genes and their
corresponding proteins, may not result in the issuance of any patents. Our applications may not
be sufficient to meet the statutory requirements for patentability in all cases or may be
subject to challenge, if they do issue. Important legal issues remain to be resolved as to the
extent and scope of available patent protection for biotechnology products and processes in the
United States and other important markets outside the United States, such as Europe and Japan.
For example, a recent U.S. district court decision involving Myriad Genetics expressed concerns
regarding the patentability of isolated human genes and gene-based diagnostic methods. In
addition, the United States Congress is considering significant changes to U.S. intellectual
property laws which could affect the extent and scope of existing protections for biotechnology
products and processes. Foreign markets may not provide the same level of patent protection as
provided under the U.S. patent system. We expect that litigation or administrative proceedings
will likely be necessary to determine the validity and scope of certain of our and others
proprietary rights. We are currently involved in a number of litigation and administrative
proceedings relating to the scope of protection of our patents and those of others in both the
United States and in the rest of the world.
36
Table of Contents
We have been involved in a number of interference proceedings brought by the United States
Patent and Trademark Office (PTO) and may be involved in additional interference proceedings
in the future. These proceedings determine the priority of inventions and, thus, the right to a
patent for technology in the U.S.
We are also involved in proceedings in connection with foreign patent filings, including
opposition and revocation proceedings and may be involved in other opposition proceedings in the
future. For example, we are involved in European opposition proceedings against an issued patent
of Biogen Idec. In this opposition, the European Patent Office (EPO) found the claims of
Biogen Idecs patent to be valid. The claims relate to a method of treating autoimmune diseases
using an antibody to BLyS (such as BENLYSTA). We and GSK have entered into a definitive license
agreement with Biogen Idec that provides for an exclusive license to this European patent. This
patent is still under appeal in Europe. We also have been involved in an opposition proceeding
brought by Eli Lilly and Company with respect to our European patent related to BLyS
compositions, including antibodies. In 2008, the Opposition Division of the EPO held our patent
invalid. We appealed this decision, and in October 2009, a Technical Board of Appeal of the EPO
reversed the Opposition Division decision and held that our European patent is valid. In
addition, Eli Lilly instituted a revocation proceeding against our United Kingdom patent that
corresponds to our BLyS European patent; in this proceeding the United Kingdom trial court found
the patent invalid. We appealed this decision and the UK Court of Appeal upheld the lower court
ruling that our United Kingdom patent was invalid. We are seeking leave to appeal this decision
to the UK Supreme Court.
We have also opposed European patents issued to Genentech, Inc. and Immunex Corporation
related to products based on TRAIL Receptor 2. Genentech, Inc. and Immunex Corporation also
opposed our European patent related to products based on TRAIL Receptor 2. HGS has withdrawn
this opposed European patent. Genentech, Inc. also opposed our Australian patent related to
products based on TRAIL Receptor 2. We have voluntarily terminated this opposition by
withdrawing our Australian patent. In addition, Genentech, Inc. has opposed our European patent
related to products based on TRAIL Receptor 1 (such as HGS-ETR1).
We cannot assure you that we will be successful in any of these proceedings. Moreover, any
such litigation or proceeding may result in a significant commitment of resources in the future
and could force us to do one or more of the following: cease selling or using any of our
products that incorporate the challenged intellectual property, which would adversely affect our
revenue; obtain a license from the holder of the intellectual property right alleged to have
been infringed, which license may not be available on reasonable terms, if at all; and redesign
our products to avoid infringing the intellectual property rights of third parties, which may be
time-consuming or impossible to do. In addition, such litigation or proceeding may allow others
to use our discoveries or develop or commercialize our products. Changes in, or different
interpretations of, patent laws in the United States and other countries may result in patent
laws that allow others to use our discoveries or develop and commercialize our products or
prevent us from using or commercializing our discoveries and products. We cannot assure you that
the patents we obtain or the unpatented technology we hold will afford us significant commercial
protection.
If others file patent applications or obtain patents similar to ours, then the United States
Patent and Trademark Office may deny our patent applications, or others may restrict the use of
our discoveries.
We are aware that others, including universities and companies working in the biotechnology
and pharmaceutical fields, have filed patent applications and have been granted patents in the
United States and in other countries that cover subject matter potentially useful or necessary
to our business. Some of these patents and patent applications claim only specific products or
methods of making products, while others claim more general processes or techniques useful in
the discovery and manufacture of a variety of products. The risk of third parties obtaining
additional patents and filing patent applications will continue to increase as the biotechnology
industry expands. We cannot predict the ultimate scope and validity of existing patents and
patents that may be granted to third parties, nor can we predict the extent to which we may wish
or be required to obtain licenses to such patents, or the availability and cost of acquiring
such licenses. To the extent that licenses are required, the owners of the patents could bring
legal actions against us to claim damages or to stop our manufacturing and marketing of the
affected products. We believe that there will continue to be significant litigation in our
industry regarding patent and other intellectual property rights. If we become involved in
litigation, it could consume a substantial portion of our resources.
37
Table of Contents
Because issued patents may not fully protect our discoveries, our competitors may be able to
commercialize products similar to those covered by our issued patents.
Issued patents may not provide commercially meaningful protection against competitors and
may not provide us with competitive advantages. Other parties may challenge our patents or
design around our issued patents or develop products providing effects similar to our products.
In addition, others may discover uses for genes, proteins or antibodies other than those uses
covered in our patents, and these other uses may be separately patentable. The holder of a
patent covering the use of a gene, protein or antibody for which we have a patent claim could
exclude us from selling a product for a use covered by its patent.
We rely on our collaboration partners to seek patent protection for the products they develop
based on our research.
A significant portion of our future revenue may be derived from royalty payments from our
collaboration partners. These partners face the same patent protection issues that we and other
biotechnology or pharmaceutical companies face. As a result, we cannot assure you that any
product developed by our collaboration partners will be patentable, and therefore, revenue from
any such product may be limited, which would reduce the amount of any royalty payments. We also
rely on our collaboration partners to effectively prosecute their patent applications. Their
failure to obtain or protect necessary patents could also result in a loss of royalty revenue to
us.
If we are unable to protect our trade secrets, others may be able to use our secrets to compete
more effectively.
We may not be able to meaningfully protect our trade secrets. We rely on trade secret
protection to protect our confidential and proprietary information. We believe we have acquired
or developed proprietary procedures and materials for the production of proteins and antibodies.
We have not sought patent protection for these procedures. While we have entered into
confidentiality agreements with employees and collaborators, we may not be able to prevent their
disclosure of these data or materials. Others may independently develop substantially equivalent
information and processes.
FINANCIAL AND MARKET RISKS
Because of our substantial indebtedness and lease obligations, we may be unable to adjust our
strategy to meet changing conditions in the future.
As of March 31, 2010, we had convertible subordinated debt of $355.4 million ($403.9
million on a face value basis) and a long-term lease financing for our large-scale manufacturing
facility of $249.2 million on our balance sheet. During the three months ended March 31, 2010 we
made cash interest payments on our convertible subordinated debt of $2.3 million. During the
three months ended March 31, 2010 we made cash payments on our long-term lease financing of $6.1
million. In addition, we have operating leases, primarily our long-term operating lease for our
headquarters, for which we made cash payments of $5.2 million during the three months ended
March 31, 2010. Our substantial debt and long-term lease obligations will have several important
consequences for our future operations. For instance:
| payments of interest on, and principal of, our indebtedness and our long-term
lease obligations will be substantial and may exceed then current income and
available cash; |
||
| we may be unable to obtain additional future financing for continued clinical
trials, capital expenditures, acquisitions or general corporate purposes; |
||
| we may be unable to withstand changing competitive pressures, economic
conditions and governmental regulations; and |
||
| we may be unable to make acquisitions or otherwise take advantage of
significant business opportunities that may arise. |
38
Table of Contents
We may not have adequate resources available to repay our Convertible Subordinated Notes due
2011 (2011 Notes) and our Convertible Subordinated Notes due 2012 (2012 Notes) at maturity.
As of March 31, 2010, we had $403.9 million in face value of convertible subordinated debt
outstanding, with $197.1 million and $206.8 million due in 2011 and 2012, respectively. Those
notes are convertible into our common stock at conversion prices of approximately $15.55 and
$17.78 per share, respectively. If our stock price does not exceed the applicable conversion
price of those notes, upon maturity, we may need to pay the note holders in cash or restructure
some or all of the debt. Our recent stock price has been above the conversion price and we
currently have sufficient unrestricted cash should note holders seek cash payment upon maturity.
However, since it may be one or more years, if ever, before we are likely to generate
significant positive cash flow from operations, we may not have enough cash, cash equivalents,
short-term investments and marketable securities available to repay our debt upon maturity.
To become a successful biopharmaceutical company, we may need additional funding in the future.
If we do not obtain this funding on acceptable terms, we may not be able to generate sufficient
revenue to repay our convertible debt, to launch and market successfully our products and to
continue our biopharmaceutical discovery and development efforts.
We continue to expend substantial funds on our research and development programs and human
studies on current and future drug candidates. We expect to expend significant funds to support
pre-launch and commercial marketing activities and acquire additional manufacturing capacity. We
may need additional financing to fund our operating expenses, including pre-commercial launch
activities, manufacturing activities, marketing activities, research and development and capital
requirements. In addition, even if our products are successful, if our stock price does not
exceed the applicable conversion price when our remaining convertible debt matures, we may need
to pay the note holders in cash or restructure some or all of the debt. If we are unable to
restructure the debt, we may not have enough cash, cash equivalents, short-term investments and
marketable securities available to repay the remaining debt. We may not be able to obtain
additional financing on acceptable terms either to fund operating expenses or to repay the
convertible debt. If we raise additional funds by issuing equity securities, equity-linked
securities or debt securities, the new equity securities may dilute the interests of our
existing stockholders and the new debt securities may contain restrictive financial covenants.
For example, in August 2009 and December 2009, we completed public offerings of 26,697,250 and
17,825,000 newly issued shares of common stock, respectively.
Our need for additional funding will depend on many factors, including, without limitation:
| the amount of revenue or cost sharing, if any, that we are able to obtain
from our collaborations, any approved products, and the time and costs required to
achieve those revenues; |
||
| the timing, scope and results of preclinical studies and clinical trials; |
||
| the size and complexity of our development programs; |
||
| the time and costs involved in obtaining regulatory approvals; |
||
| the timing and costs of increasing our manufacturing capacity; |
||
| the costs of launching our products; |
||
| the costs of commercializing our products, including marketing, promotional
and sales costs; |
||
| the commercial success of our products; |
||
| our stock price; |
||
| our ability to establish and maintain collaboration partnerships; |
||
| competing technological and market developments; |
39
Table of Contents
| the costs involved in filing, prosecuting and enforcing patent claims; and |
||
| scientific progress in our research and development programs. |
If we are unable to raise additional funds, we may, among other things:
| delay, scale back or eliminate some or all of our research and development
programs; |
||
| delay, scale back or eliminate some or all of our commercialization
activities; |
||
| lose rights under existing licenses; |
||
| relinquish more of, or all of, our rights to product candidates on less
favorable terms than we would otherwise seek; and |
||
| be unable to operate as a going concern. |
Our short-term investments, marketable securities and restricted investments are subject to
certain risks which could materially adversely affect our overall financial position.
We invest our cash in accordance with an established internal policy and customarily in
instruments which historically have been highly liquid and carried relatively low risk. However,
the capital and credit markets have experienced extreme volatility and disruption. Over the past
two years, the volatility and disruption reached unprecedented levels. We maintain a significant
portfolio of investments in short-term investments, marketable debt securities and restricted
investments, which are recorded at fair value. Certain of these transactions expose us to credit
risk in the event of default by the issuer. To minimize our exposure to credit risk, we invest
in securities with strong credit ratings and have established guidelines relative to
diversification and maturity with the objective of maintaining safety of principal and
liquidity. We do not invest in derivative financial instruments or auction rate securities, and
we generally hold our investments in debt securities until maturity. In recent years, certain
financial instruments, including some of the securities in which we invest, have sustained
downgrades in credit ratings and some high quality short-term investment securities have
suffered illiquidity or events of default. Deterioration in the credit market may have an
adverse effect on the fair value of our investment portfolio. Should any of our short-term
investments, marketable securities or restricted investments lose significant value or have
their liquidity impaired, it could materially and adversely affect our overall financial
position by imperiling our ability to fund our operations and forcing us to seek additional
financing sooner than we would otherwise. Such financing may not be available on commercially
attractive terms or at all.
Our insurance policies are expensive and protect us only from some business risks, which could
leave us exposed to significant, uninsured liabilities.
We do not carry insurance for all categories of risk that our business may encounter. We
currently maintain general liability, property, auto, workers compensation, product liability,
fiduciary and directors and officers insurance policies. We do not know, however, if we will
be able to maintain existing insurance with adequate levels of coverage. For example, the
premiums for our directors and officers insurance policy have increased in the past and may
increase in the future, and this type of insurance may not be available on acceptable terms or
at all in the future. Any significant uninsured liability may require us to pay substantial
amounts, which would adversely affect our cash position and results of operations.
40
Table of Contents
We may be subject to product liability or other litigation, which could result in an inefficient
allocation of our critical resources, delay the implementation of our business strategy and, if
successful, materially and adversely harm our business and financial condition as a result of
the costs of liabilities that may be imposed thereby.
Our business exposes us to the risk of product liability claims. If any of our product
candidates harm people, or are alleged to be harmful, we may be subject to costly and damaging
product liability claims brought against us by clinical trial participants, consumers, health
care providers, corporate partners or others. We have product liability insurance covering our
ongoing clinical trials and raxibacumab, but do not have insurance for any of our other
commercial activities. If we are unable to obtain insurance at an acceptable cost or otherwise
protect against potential product liability claims, we may be exposed to significant litigation
costs and liabilities, which may materially and adversely affect our business and financial
position. If we are sued for injuries allegedly caused by any of our product candidates, our
litigation costs and liability could exceed our total assets and our ability to pay. In
addition, we may from time to time become involved in various lawsuits and legal proceedings
which arise in the ordinary course of our business. Any litigation to which we are subject could
require significant involvement of our senior management and may divert managements attention
from our business and operations. Litigation costs or an adverse result in any litigation that
may arise from time to time may adversely impact our operating results or financial condition.
OTHER RISKS RELATED TO OUR BUSINESS
Many of our competitors have substantially greater capabilities and resources and may be able to
develop and commercialize products before we do or develop generic drugs that are similar to our
products.
We face intense competition from a wide range of pharmaceutical and biotechnology
companies, as well as academic and research institutions and government agencies.
Principal competitive factors in our industry include:
| the quality and breadth of an organizations technology; |
||
| the skill of an organizations employees and ability to recruit and retain
skilled employees; |
||
| an organizations intellectual property portfolio; |
||
| the range of capabilities, from target identification and validation to drug
discovery and development to manufacturing and marketing; and |
||
| the availability of substantial capital resources to fund discovery,
development and commercialization activities. |
Many large pharmaceutical and biotechnology companies have significantly larger
intellectual property estates than we do, more substantial capital resources than we have, and
greater capabilities and experience than we do in preclinical and clinical development, sales,
marketing, manufacturing and regulatory affairs.
We are aware of existing products and products in research or development by our
competitors that address the diseases we are targeting. Any of these products may compete with
our product candidates. Our competitors may succeed in developing their products before we do,
obtaining approvals from the FDA or other regulatory agencies for their products more rapidly
than we do, or developing products that are more effective than our products. These products or
technologies might render our technology or drugs under development obsolete or noncompetitive.
In addition, our albumin fusion protein product, ZALBIN, is designed to be a longer-acting
version of existing products. The existing products in many cases have an established market
that may make the introduction of ZALBIN more difficult.
If our products are approved and marketed, we may also face risks from generic drug
manufacturers. Legislation currently pending in the United States Congress and regulatory and
legislative activity in other countries may make it easier for generic drug manufacturers to
manufacture and sell in the United States biological drugs similar or identical to ZALBIN,
BENLYSTA and raxibacumab which might affect the profitability or commercial viability of our
products.
41
Table of Contents
If any of our product candidates for which we receive regulatory approval do not achieve broad
market acceptance (including as a result of failing to differentiate our products from
competitor products or as a result of failing to obtain reimbursement rates for our products
that are competitive from the healthcare providers perspective), the revenues we generate from
their sales will be limited and our business may not be profitable.
Our success will depend in substantial part on the extent to which our products for
which we obtain marketing approval from the FDA and comparable foreign regulatory authorities
are accepted by the medical community and reimbursed by third-party payors, including government
payors. The degree of market acceptance will depend upon a number of factors, including, among
other things:
| our products perceived advantages over existing treatment methods (including
relative convenience and ease of administration and prevalence and severity of any
adverse events, including any unexpected adverse events of which we become aware
after marketing approval); |
||
| claims or other information (including limitations or warnings) in our
products approved labeling; |
||
| reimbursement and coverage policies of government and other third-party
payors; |
||
| pricing and cost-effectiveness; |
||
| in the United States, the ability of group purchasing organizations, or GPOs
(including distributors and other network providers), to sell our products to their
constituencies; |
||
| the establishment and demonstration in the medical community of the safety
and efficacy of our products and our ability to provide acceptable evidence of
safety and efficacy; |
||
| availability of alternative treatments; and |
||
| the prevalence of off-label substitution of biologically equivalent products. |
We cannot predict whether physicians, patients, healthcare insurers or maintenance
organizations, or the medical community in general, will accept or utilize any of our products.
If our products are approved but do not achieve an adequate level of acceptance by these
parties, we may not generate sufficient revenues from these products to become or remain
profitable. In addition, our efforts to educate the medical community and third-party payors
regarding the benefits of our products may require significant resources and may never be
successful.
If the health care system or reimbursement policies change, the prices of our potential products
may be lower than expected and our potential sales may decline.
The levels of revenues and profitability of biopharmaceutical companies like ours may be
affected by the continuing efforts of government and third-party payors to contain or reduce the
costs of health care through various means. For example, in certain foreign markets, pricing or
profitability of therapeutic and other pharmaceutical products is subject to governmental
control. In the United States, there have been, and we expect that there will continue to be, a
number of federal and state proposals to implement similar governmental control. In addition,
the United States has recently enacted legislation establishing a regulatory pathway for
follow-on biologics, which could affect the prices and sales of our products in the future.
Recently enacted United States legislation also instituted significant changes to the United
States healthcare system. The enactment of such legislation could have a material adverse
effect on our business, financial condition and profitability and we cannot predict whether any
additional legislative or regulatory proposals may be adopted in the future. In addition, in the
United States and elsewhere, sales of therapeutic and other pharmaceutical products depend in
part on the availability of reimbursement to the consumer from third-party payors, such as
government and private insurance plans. Third-party payors are increasingly challenging the
prices charged for medical products and services. We cannot assure you that any of our products
will be considered cost effective or that reimbursement to the consumer will be available or
will be sufficient to allow us to sell our products on a competitive and profitable basis.
If we lose or are unable to attract key management or other personnel, we may experience delays
in product development.
We depend on our senior executive officers as well as other key personnel. If any key
employee decides to terminate his or her employment with us, this termination could delay the
commercialization of our products or prevent us from becoming profitable. Competition for
qualified employees is intense among pharmaceutical and biotechnology companies, and the loss of
qualified employees, or an inability to attract, retain and motivate additional highly skilled
employees required for the expansion of our activities, could hinder our ability to complete
human studies successfully and develop marketable products. The reduction in scope of some
programs in March 2009 included decreasing headcount. This reduction in headcount may adversely
affect our ability to attract, retain and motivate current and new employees.
42
Table of Contents
We may be unable to fulfill the terms of our agreement with Hospira, Inc. and other
agreements, if any, with potential customers for manufacturing process development and supply of
selected biopharmaceutical products.
We have entered into agreements for manufacturing process development, clinical and
commercial supply of certain biopharmaceutical products, including an agreement with Hospira,
Inc., and may enter into similar agreements with other potential customers. We may not be able
to successfully manufacture products under the agreement with Hospira or under other agreements,
if any. We have not yet manufactured any products approved for commercial use and, except for
raxibacumab, have limited experience in manufacturing materials suitable for commercial use. We
have limited experience manufacturing in a large-scale manufacturing facility built to increase
our capacity for protein and antibody drug production. The FDA must inspect and license our
facilities to determine compliance with cGMP requirements for commercial production. We may not
be able to enter into additional agreements with other customers. Hospira or any future customer
may decide to discontinue the products contemplated under the agreements, and therefore we may
not receive revenue from these agreements.
Because we depend on third parties to conduct many of our human studies, we may encounter delays
in or lose some control over our efforts to develop products.
We are dependent on third-party research organizations to conduct most of our human
studies. We have engaged contract research organizations to manage our global Phase 3 clinical
studies. If we are unable to obtain any necessary services on acceptable terms, we may not
complete our product development efforts in a timely manner. If we rely on third parties for the
management of these human studies, we may lose some control over these activities and become too
dependent upon these parties. These third parties may not complete the activities on schedule.
RISKS RELATED TO OWNERSHIP OF OUR COMMON STOCK
Because our stock price has been and will likely continue to be highly volatile, the market
price of our common stock may be lower or more volatile than you expected.
Our stock price, like the stock prices of many other biotechnology companies, has been
highly volatile. During the preceding twelve months, the closing price of our common stock has
been as low as $0.82 per share and as high as $32.68 per share. The market price of our common
stock could fluctuate widely because of:
| future announcements about our company or our competitors, including the
results of testing, clinical trials, technological innovations or new commercial
products; |
||
| negative regulatory actions with respect to our potential products or
regulatory approvals with respect to our competitors products; |
||
| changes in government regulations; |
||
| developments in our relationships with our collaboration partners; |
||
| developments affecting our collaboration partners; |
||
| announcements relating to health care reform and reimbursement levels for new
drugs; |
||
| our failure to acquire or maintain proprietary rights to the gene sequences
we discover or the products we develop; |
||
| litigation; and |
||
| public concern as to the safety of our products. |
43
Table of Contents
The stock market has experienced price and volume fluctuations that have particularly
affected the market price for many emerging and biotechnology companies. These fluctuations have
often been unrelated to the operating performance of these companies. These broad market
fluctuations may cause the market price of our common stock to be lower or more volatile than
you expected.
The issuance and sale of shares underlying our outstanding convertible debt securities and
options, as well as the sale of additional equity or equity-linked securities may materially and
adversely affect the price of our common stock.
Sales of substantial amounts of shares of our common stock or securities convertible into
or exchangeable for our common stock in the public market, or the perception that those sales
may occur, could cause the market price of our common stock to decline. We have used and may
continue to use our common stock or securities convertible into or exchangeable for our common
stock to acquire technology, product rights or businesses, or for other purposes. Our authorized
capital stock consists of 400,000,000 shares of common stock, par value $0.01 per share. As of
March 31, 2010, we had 187,346,343 shares of common stock outstanding, including an aggregate of
44,522,250 shares issued in public offerings in August and December 2009. In addition, an
aggregate of approximately 24,306,115 shares of our common stock are issuable upon conversion of
our outstanding 2011 Notes and outstanding 2012 Notes at an applicable conversion price of
$15.55 and $17.78 per share, respectively; 25,951,029 shares of our common stock are issuable
upon the exercise of options outstanding as of March 31, 2010, having a weighted-average
exercise price of $16.41 per share, including 3,621,011 stock options granted during the three
months ended March 31, 2010 with a weighted-average grant date fair value of $18.28 per share;
and 207,477 shares of our common stock are issuable upon the vesting of restricted stock unit
awards outstanding as of March 31, 2010. If we issue additional equity securities, including in
exchange for our outstanding convertible debt, the price of our common stock may be materially
and adversely affected and the holdings of our existing stockholders would be diluted. The
issuance and sale of shares issuable upon conversion of our outstanding convertible debt
securities and options or the sale of additional equity or equity-linked securities could
materially and adversely affect the price of our common stock.
Our certificate of incorporation and bylaws could discourage acquisition proposals, delay a
change in control or prevent transactions that are in your best interests.
Provisions of our certificate of incorporation and bylaws, as well as Section 203 of the
Delaware General Corporation Law, may discourage, delay or prevent a change in control of our
company that you as a stockholder may consider favorable and may be in your best interest. Our
certificate of incorporation and bylaws contain provisions that:
| authorize the issuance of up to 20,000,000 shares of blank check preferred
stock that could be issued by our board of directors to increase the number of
outstanding shares and discourage a takeover attempt; |
||
| limit who may call special meetings of stockholders; and |
||
| establish advance notice requirements for nomination of candidates for
election to the board of directors or for proposing matters that can be acted upon
by stockholders at stockholders meetings. |
44
Table of Contents
Item 6. Exhibits
12.1 | Ratio of Earnings to Fixed Charges. |
|||
31.1 | Rule 13a-14(a) Certification of Principal Executive Officer. |
|||
31.2 | Rule 13a-14(a) Certification of Principal Financial Officer. |
|||
32.1 | Section 1350 Certification of Principal Executive Officer. |
|||
32.2 | Section 1350 Certification of Principal Financial Officer. |
45
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.
HUMAN GENOME SCIENCES, INC. | ||||
BY: | /s/ H. Thomas Watkins | |||
H. Thomas Watkins | ||||
President and Chief Executive Officer | ||||
(Principal Executive Officer) | ||||
BY: | /s/ David P. Southwell | |||
David P. Southwell | ||||
Chief Financial Officer and Executive Vice President | ||||
(Principal Financial Officer and Principal Accounting Officer) |
Dated: April 29, 2010
46
Table of Contents
EXHIBIT INDEX
Exhibit Page Number
10.1 | * | Separation Agreement, dated March 2, 1010, with Timothy C. Barabe (Filed as
Exhibit 99.1 to the Registrants Form 8-K filed March 3, 2010). |
||
12.1 | Ratio of Earnings to Fixed Charges. |
|||
31.1 | Rule 13a-14(a) Certification of Principal Executive Officer. |
|||
31.2 | Rule 13a-14(a) Certification of Principal Financial Officer. |
|||
32.1 | Section 1350 Certification of Principal Executive Officer. |
|||
32.2 | Section 1350 Certification of Principal Financial Officer. |
* | Incorporated by reference |