UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

 

 

FORM 10-Q

 

 

 

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

For the quarterly period ended September 30, 2011

OR

 

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

For the transition period from                  to                 .

Commission File Number: 000-50855

 

 

Auxilium Pharmaceuticals, Inc.

(Exact name of registrant as specified in its charter)

 

Delaware		23-3016883
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

40 Valley Stream Parkway, Malvern, PA 19355

(Address of principal executive offices) (Zip Code)

(484) 321-5900

(Registrant’s telephone number, including area code)

 

 

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

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

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

 

Large accelerated filer		x		Accelerated filer		¨
Non-accelerated filer		¨		Smaller reporting company		¨

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

As of November 1, 2011, the number of shares outstanding of the issuer’s common stock, $0.01 par value, was 48,113,857.

 

 

 

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PART I FINANCIAL INFORMATION					3
Item 1.		Unaudited Financial Statements			3
		Consolidated Balance Sheets			3
		Consolidated Statements of Operations			4
		Consolidated Statements of Cash Flows			5
		Consolidated Statement of Stockholders’ Equity			6
		Notes to Consolidated Financial Statements			7
Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations			16
Item 3.		Quantitative and Qualitative Disclosures About Market Risk			24
Item 4.		Controls and Procedures			25
PART II OTHER INFORMATION					25
Item 1.		Legal Proceedings			25
Item 1A.		Risk Factors			26
Item 2.		Unregistered Sales of Equity Securities and Use of Proceeds			26
Item 6.		Exhibits			26
SIGNATURES					28

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PART I. FINANCIAL INFORMATION

Item 1. Financial Statements.

AUXILIUM PHARMACEUTICALS, INC. AND SUBSIDIARIES

Consolidated Balance Sheets

(In thousands, except share and per share amounts)

(Unaudited)

 

		September 30, 2011				December 31, 2010
Assets
Current assets:
Cash and cash equivalents		$	51,073			$	128,207
Short-term investments			98,566				—
Accounts receivable, trade, net			37,697				32,624
Accounts receivable, other			8,157				909
Inventories			52,868				38,800
Prepaid expenses and other current assets			2,521				2,372
Total current assets			250,882				202,912
Property and equipment, net			30,340				29,936
Long-term investments			2,479				2,732
Other assets			13,880				8,324
Total assets		$	297,581			$	243,904
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable		$	3,486			$	5,085
Accrued expenses			68,107				51,272
Deferred revenue, current portion			7,820				6,828
Deferred rent, current portion			1,123				988
Total current liabilities			80,536				64,173
Deferred revenue, long-term portion			122,072				78,889
Deferred rent, long-term portion			5,687				6,399
Commitments and contingencies			—				—
Stockholders’ equity:
Preferred stock, $0.01 par value per share, 5,000,000 shares authorized, no shares issued or outstanding			—				—
Common stock, $0.01 par value per share; authorized 120,000,000 shares; issued 48,107,618 and 47,904,563 shares at September 30, 2011 and December 31, 2010, respectively			481				479
Additional paid-in capital			488,874				472,665
Accumulated deficit			(396,196	)			(375,143	)
Treasury stock at cost: 130,765 and 123,539 shares at September 30, 2011 and December 31, 2010, respectively			(3,226	)			(3,065	)
Accumulated other comprehensive income			(647	)			(493	)
Total stockholders’ equity			89,286				94,443
Total liabilities and stockholders’ equity		$	297,581			$	243,904

See accompanying notes to consolidated financial statements.

 

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Consolidated Statements of Operations

(In thousands, except share and per share amounts)

(Unaudited)

 

		Three Months Ended September 30,								Nine Months Ended September 30,
		2011				2010				2011				2010
Net revenues		$	66,731			$	53,633			$	191,037			$	149,600
Operating expenses*:
Cost of goods sold			13,527				11,573				39,159				32,561
Research and development			14,161				14,429				43,230				34,050
Selling, general and administrative			43,262				40,337				129,789				117,668
Total operating expenses			70,950				66,339				212,178				184,279
Loss from operations			(4,219	)			(12,706	)			(21,141	)			(34,679	)
Interest income			179				53				285				127
Interest expense			(18	)			(101	)			(197	)			(282	)
Net loss		$	(4,058	)		$	(12,754	)		$	(21,053	)		$	(34,834	)
Basic and diluted net loss per common share		$	(0.08	)		$	(0.27	)		$	(0.44	)		$	(0.74	)
Weighted average common shares outstanding			47,933,447				47,592,975				47,843,570				47,346,119
*includes the following amounts of stock-based compensation expense:
Cost of goods sold		$	15			$	7			$	42			$	10
Research and development			836				58				2,406				1,415
Selling, general and administrative			2,989				3,427				9,691				10,489

See accompanying notes to consolidated financial statements.

 

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AUXILIUM PHARMACEUTICALS, INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)

 

		Nine Months Ended September 30,
		2011				2010
Cash flows from operating activities:
Net loss		$	(21,053	)		$	(34,834	)
Adjustments to reconcile net loss to net cash used in operating activities:
Stock-based compensation			12,139				11,914
Depreciation and amortization			5,742				4,282
Changes in operating assets and liabilities:
Increase in accounts receivable, trade and other			(12,321	)			(6,491	)
Increase in inventories			(12,538	)			(19,214	)
Increase in prepaid expenses and other assets			(4,697	)			(725	)
Increase (decrease) in accounts payable and accrued expenses			15,234				(2,473	)
Increase in deferred revenue			44,175				12,310
Decrease in deferred rent			(577	)			(332	)
Net cash provided by (used in) operating activities			26,104				(35,563	)
Cash flows from investing activities:
Purchases of short-term investments			(109,084	)			—
Redemptions of short-term investments			10,327				—
Purchases of property and equipment			(5,254	)			(8,784	)
Purchases of other assets			(1,900	)			—
Redemptions of long-term investments			300				600
Net cash used in investing activities			(105,611	)			(8,184	)
Cash flows from financing activities:
Proceeds from exercise of common stock options			1,516				3,972
Employee Stock Purchase Plan purchases			922				1,082
Payments in common stock			104				104
Treasury stock acquisition			(161	)			(928	)
Net cash provided by financing activities			2,381				4,230
Effect of exchange rate changes on cash			(8	)			(18	)
Decrease in cash and cash equivalents			(77,134	)			(39,535	)
Cash and cash equivalents, beginning of period			128,207				181,977
Cash and cash equivalents, end of period		$	51,073			$	142,442

See accompanying notes to consolidated financial statements.

 

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AUXILIUM PHARMACEUTICALS, INC. AND SUBSIDIARIES

Consolidated Statement of Stockholders’ Equity

Nine Months Ended September 30, 2011

(In thousands, except share amounts)

(Unaudited)

 

		Common stock								Additional paid-in capital				Accumulated deficit				Treasury Stock								Accumulated other comprehensive loss				Total
		Shares				Amount												Shares				Cost
Balance, January 1, 2011			47,904,563			$	479			$	472,665			$	(375,143	)			123,539			$	(3,065	)		$	(493	)		$	94,443
Exercise of common stock options			140,364				1				1,515				—				—				—				—				1,516
Employee Stock Purchase Plan purchases			55,292				1				921				—				—				—				—				922
Stock-based compensation			1,750				—				13,669				—				—				—				—				13,669
Payments in common stock			5,649				—				104				—				—				—				—				104
Treasury stock acquisition			—				—				—				—				7,226				(161	)			—				(161	)
Other comprehensive income			—				—				—				—				—				—				(154	)			(154	)
Net loss			—				—				—				(21,053	)			—				—				—				(21,053	)
Balance, September 30, 2011			48,107,618			$	481			$	488,874			$	(396,196	)			130,765			$	(3,226	)		$	(647	)		$	89,286

See accompanying notes to consolidated financial statements.

 

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AUXILIUM PHARMACEUTICALS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2011

(Unaudited)

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

(a) Basis of Presentation

The accompanying unaudited consolidated financial statements include the accounts of Auxilium Pharmaceuticals, Inc. and its wholly owned subsidiaries (the Company), and have been prepared in accordance with U.S. generally accepted accounting principles for interim financial information and pursuant to the rules and regulations of the Securities and Exchange Commission (SEC) pertaining to Form 10-Q. Certain disclosures required for complete annual financial statements are not included herein. All significant intercompany accounts and transactions have been eliminated in consolidation. The information at September 30, 2011, and for the respective three and nine month periods ended September 30, 2011 and 2010, is unaudited but includes all adjustments (consisting only of normal recurring adjustments) which, in the opinion of the Company’s management, are necessary to state fairly the financial information set forth herein. The December 31, 2010 balance sheet amounts and disclosures included herein have been derived from the Company’s December 31, 2010 audited consolidated financial statements. The interim results are not necessarily indicative of results to be expected for the full fiscal year. These unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements for the year ended December 31, 2010 included in the Company’s Annual Report on Form 10-K filed with the SEC.

(b) Short-term Investments

Short-term investments as of September 30, 2011 are stated at fair value. The following table provides the composition and duration of these investments (in thousands).

 

		Fair value				Duration of one year or less				Duration of one year to two years
Commercial paper		$	24,885			$	24,885			$	—
U.S. Treasury securities			20,452				19,409				1,043
Corporate notes			16,428				4,231				12,197
U.S. government agency obligations			36,801				28,123				8,678
		$	98,566			$	76,648			$	21,918

The Company considers its short-term investments to be “available for sale” and accordingly classifies them as current, as management can sell these investments at any time at their option. The cost basis of short-term investments held at September 30, 2011 approximated the fair value of these securities. Related unrealized gains and losses are recorded as a component of accumulated other comprehensive income (loss) in the equity section of the accompanying balance sheet. The amount of unrealized loss on short-term investments amounted to $191,000 as of September 30, 2011.

 

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(c) Net Loss Per Common Share

The basic net loss per common share is computed by dividing the net loss for the period by the weighted average number of common shares outstanding during the period reduced, where applicable, for unvested outstanding restricted shares.

The following table sets forth the computation of basic and diluted net loss per common share (in thousands, except share and per share amounts):

 

		Three Months Ended September 30,								Nine Months Ended September 30,
		2011				2010				2011				2010
Numerator:
Net loss		$	(4,058	)		$	(12,754	)		$	(21,053	)		$	(34,834	)
Denominator:
Weighted-average common shares outstanding			47,960,861				47,651,114				47,876,376				47,458,975
Weighted-average unvested restricted common shares subject to forfeiture			(27,414	)			(58,139	)			(32,806	)			(112,856	)
Shares used in calculating net loss per common share			47,933,447				47,592,975				47,843,570				47,346,119
Basic and diluted net loss per common share		$	(0.08	)		$	(0.27	)		$	(0.44	)		$	(0.74	)

Diluted net loss per common share is computed giving effect to all potentially dilutive securities, including stock options and warrants. Diluted net loss per common share for all periods presented is the same as basic net loss per common share because the potential common stock is anti-dilutive. Anti-dilutive common shares not included in diluted net loss per common share are summarized as follows:

 

		September 30,
		2011				2010
Common stock options			7,014,550				6,205,530
Restricted stock and stock unit awards			88,630				40,828
			7,103,180				6,246,358

(d) XIAFLEX Revenue Recognition

Up-front and milestone payments-

Asahi

On March 22, 2011, the Company entered into a development, commercialization and supply agreement with Asahi Kasei Pharma Corporation (Asahi) (the Asahi agreement). See Note 5 for a summary of the contract terms. For accounting purposes, the Company has determined that the Asahi agreement includes multiple deliverables, including development and commercialization rights and manufacturing and product supply. In accordance with the accounting guidance on revenue recognition for multiple-element agreements, the product supply element of the Asahi agreement meets the criteria for separation. Therefore, it is being treated as a single unit of accounting and, accordingly, the associated royalties on net sales of the product will be recognized as revenue when earned. All other deliverables

 

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under the contract are being accounted for as one unit of accounting since each of these elements do not have stand-alone value to Asahi. The up-front payment of $15,000,000 received from Asahi and all potential future milestone payments are considered to relate to this one combined unit of accounting and will be amortized to revenue on a straight-line basis over the estimated life of the Asahi agreement, which is estimated to be 20 years. When future milestones are earned, the Company will record as revenue a cumulative catch-up adjustment on the date each milestone is earned for the period of time since contract commencement through the date the milestone.

The Company paid BioSpecifics Technologies Corp. (BioSpecifics) $750,000 for its share of the up-front payment received from Asahi. This amount is being amortized as cost of goods sold on a straight-line basis over the estimated life of the Asahi agreement. As potential future milestone payments are received from Asahi, the required payments to BioSpecifics for their share of such milestone payments will be recognized as cost of goods sold, or as deferred costs, in proportion to the related milestone revenue or deferral, respectively.

Pfizer

For accounting purposes, the Company has determined that the Pfizer agreement includes multiple deliverables, including development and commercialization rights and manufacturing and product supply. In accordance with the accounting guidance on revenue recognition for multiple-element agreements, the product supply element of the Pfizer agreement meets the criteria for separation. Therefore, it is being treated as a single unit of accounting and, accordingly, the associated royalties on net sales of the product are being recognized as revenue when earned. All other deliverables under the contract are being accounted for as one unit of accounting since each of these elements do not have stand-alone value to Pfizer. The up-front and milestone payments earned under the Pfizer agreement through September 30, 2011, and all potential future milestone payments, are considered to relate to this one combined unit of accounting and will be amortized to revenue on a straight-line basis over the estimated life of the Pfizer agreement, which is estimated to be 20 years. When milestones are earned, the Company records as revenue a cumulative catch-up adjustment on the date each milestone is earned for the period of time since contract commencement through the date the milestone.

During the first nine months of 2011, the Company achieved $45,000,000 of regulatory milestones upon the first sale of XIAPEX in Germany, Spain and the United Kingdom (UK) by Pfizer Inc. (Pfizer), its European partner. The $7,500,000 milestone amount related to Spain was included in Accounts receivable, other as of September 30, 2011, and this payment was received in October 2011. Through September 30, 2011, the Company received payments from Pfizer aggregating approximately $33,591,000. This amount represents $37,500,000 of milestones related to the UK and Germany, net of certain development and regulatory costs amounting to $3,909,000 that Pfizer was contractually allowed to recoup upon achievement of the UK milestone. Under the accounting model discussed above, a cumulative catch-up adjustment of $1,000,000 and $4,810,000 relating to these milestone payments was recorded as revenue for the three and the nine month periods ended September 30, 2011, respectively, and the balance of such payments is being recognized as revenue on a straight-line basis over the remaining estimated life of the contract. BioSpecifics’ share of the $45,000,000 Pfizer milestone payments amounts to $3,825,000, of which approximately $3,188,000 was paid to BioSpecifics prior to September 30, 2011, and the remainder paid in October 2011. The amounts payable to BioSpecifics have been recognized as cost of goods sold, or as deferred costs, in proportion to the related milestone revenue or deferral, respectively.

 

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Product sales-

In March 2010, the Company began shipping XIAFLEX to its specialty distributor and specialty pharmacy customers. As XIAFLEX was new to the marketplace, the Company could not reasonably assess the flow of product through its distribution channels, market acceptance and potential product returns. As a result, the Company deferred the recognition of revenues, and related product costs, on XIAFLEX product shipments until the time the product was shipped to physicians for administration to patients. Based on historical experience gathered through the end of the first quarter of 2011, the Company began in the first quarter of 2011 to recognize revenue for XIAFLEX sales at the time of shipment of the product to its specialty distributor, specialty pharmacy and wholesale customers. As a result of this change in revenue recognition, net revenues for the nine months ended September 30, 2011 include a benefit of $1,804,000 (representing revenue previously deferred, net of allowances of $59,000) and the net loss for the nine months ended September 30, 2011 includes a benefit of $1,743,000, or $0.04 per share (representing the net revenue benefit partially offset by the related cost of goods sold).

During the nine months ended September 30, 2011, Pfizer began offering XIAPEX for sale in the Austria, Denmark, Finland, Germany, Norway, Spain, Switzerland, Sweden, and the UK. Under the Pfizer agreement, the Company receives, on a quarterly basis consistent with Pfizer’s reporting calendar, a percentage of Pfizer XIAPEX net sales. As discussed above, these royalty payments are being recognized by the Company as revenue in payment for the product supplied to Pfizer. Since Pfizer’s reporting calendar is one month earlier than that of the Company, such royalty revenue is recognized on a one month lag.

(e) New Accounting Pronouncements

In September 2009, the Financial Accounting Standards Board (FASB) ratified the consensus reached by the Emerging Issues Task Force (EITF) that revises the authoritative guidance for revenue arrangements with multiple deliverables that contain more than one unit of accounting. The guidance addresses how to determine whether an arrangement involving multiple deliverables contains more than one unit of accounting and how the arrangement consideration should be allocated among the separate units of accounting. As required, the Company adopted this guidance on a prospective basis effective January 1, 2011. Application of this new guidance did not have a material effect on the Company’s results of operation for three and nine month periods ended September 30, 2011, as compared to the corresponding prior year periods.

In April 2011, the FASB amended the fair value measurement guidance in order to achieve common measurement and disclosure requirements between U.S. generally accepted accounting principles and the International Financial Reporting Standards. These amendments are also intended to provide increased transparency around valuation inputs and investment categorization and, for the Company, are effective for 2012 reporting. The adoption of this new guidance is not expected to have a material effect on the Company’s financial statements.

In June 2011, the FASB issued new guidance on the presentation of comprehensive income. Specifically, the new guidance eliminates the current option to report other comprehensive income within the statement of changes in equity and requires an entity to present the components of net income and other comprehensive income in one continuous statement, referred to as the statement of comprehensive income, or alternatively in two, but consecutive, statements. For the Company, the new guidance is effective for 2012 reporting. The adoption of this new guidance is not expected to have a material effect on the Company’s financial statements.

2. FAIR VALUE MEASUREMENTS

The authoritative literature for fair value measurements established a three-tier fair value hierarchy,

 

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which prioritizes the inputs in measuring fair value. These tiers are as follows: Level 1, defined as observable inputs such as quoted market prices in active markets; Level 2, defined as inputs other than the quoted prices in active markets that are either directly or indirectly observable; and Level 3, defined as significant unobservable inputs (entity developed assumptions) in which little or no market data exists.

As of September 30, 2011, the Company held certain investments that are required to be measured at fair value on a recurring basis. The following tables present the Company’s fair value hierarchy for these financial assets as of September 30, 2011 and December 31, 2010 (in thousands):

 

		September 30, 2011
		Fair Value				Level 1				Level 2				Level 3
Cash and cash equivalents		$	51,073			$	51,073			$	—			$	—
Short-term investments			98,566				20,452				78,114
Long-term investments:
Auction rate securities			2,479				—				—				2,479
Total financial assets		$	152,118			$	71,525			$	78,114			$	2,479
		December 31, 2010
		Fair Value				Level 1				Level 2				Level 3
Cash and cash equivalents		$	128,207			$	128,207			$	—			$	—
Long-term investments:
Auction rate securities			2,732				—				—				2,732
Total financial assets		$	130,939			$	128,207			$	—			$	2,732

Short-term investments as of September 30, 2011 classified above under Level 2 inputs represent commercial paper, corporate notes and U.S. government agency obligations as shown in Note 1 (b).

The following table summarizes the changes in the financial assets measured at fair value using Level 3 inputs for the three and nine months ended September 30, 2011 (in thousands):

 

Long-term Investments		Three Months Ended September 30, 2011				Nine Months Ended September 30, 2011
Beginning balance		$	2,794			$	2,732
Transfers into Level 3			—				—
Redemption of securities by issuer			(300	)			(300	)
Unrealized gain (loss)- included in other comprehensive income			(15	)			47
Ending balance		$	2,479			$	2,479

The securities classified as Level 3 are auction rate securities that are not actively traded. The Company determined the fair value of these securities based on a discounted cash flow model, which incorporated a discount period, coupon rate, liquidity discount and coupon history. In determining the fair value, the Company considered the rating of the securities by investment rating agencies and whether or not the securities were backed by the United States government.

 

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3. INVENTORIES

Inventories consist of the following (in thousands):

 

		September 30, 2011				December 31, 2010
Raw materials		$	7,139			$	7,163
Work-in-process			38,271				22,044
Finished goods			7,458				9,593
		$	52,868			$	38,800

Finished goods inventories at September 30, 2011 and December 31, 2010 above are net of a $1,066,000 and $3,900,000 reserve, respectively, for packaged XIAFLEX inventory that may expire prior to its expected sale date. The reduction in this reserve reflects the physical scrapping of expired finished goods inventory during the nine months ended September 30, 2011.

4. ACCRUED EXPENSES

Accrued expenses consist of the following (in thousands):

 

		September 30, 2011				December 31, 2010
Payroll and related expenses		$	11,982			$	11,538
Royalty expenses			8,459				6,457
Research and development expenses			4,173				2,982
Sales and marketing expenses			10,103				7,359
Rebates, discounts and returns accrual			30,870				19,129
Other expenses			2,520				3,807
		$	68,107			$	51,272

5. COLLABORATION AND LICENSE AGREEMENT

(a) BioSpecifics

On August 31, 2011, the Company and BioSpecifics Technologies Corp. (BioSpecifics) announced dismissal of all pending litigation and plans to develop additional indications using XIAFLEX. The Company announced plans to initiate a phase I study for the treatment of cellulite in the fourth quarter of 2012, and BioSpecifics announced plans to initiate studies for the treatment of human and canine lipomas in the near future. The Company also announced plans to initiate a phase IIb trial of XIAFLEX for the treatment of Frozen Shoulder syndrome in the fourth quarter of 2011. In connection with this settlement, the Company and BioSpecifics entered into the Second Amended and Restated Development and License Agreement which amended the Amended and Restated Development and License Agreement, dated as of December 17, 2008.

 

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(b) Asahi

Under the Asahi agreement, the Company granted Asahi the exclusive right to develop and commercialize XIAFLEX for the treatment of Dupuytren’s and Peyronie’s in Japan. Asahi also was granted the right of first negotiation to obtain exclusive rights to commercialize any new XIAFLEX indications in Japan during the term of the Asahi agreement. In addition to an up-front payment of $15,000,000 that the Company received in March 2011, Asahi may make up to $247,000,000 in potential payments, with $37,000,000 tied to development and regulatory milestones and $210,000,000 in milestones based on achievement of aggregate annual net sales thresholds. Further, the Asahi agreement provides for quarterly royalty payments based on a specified percentage of net sales of XIAFLEX in Japan. This royalty percentage increases upon the achievement of a specified threshold of aggregate annual net sales of XIAFLEX and decreases if a generic to XIAFLEX is marketed in Japan.

As provided in the Asahi agreement, Asahi is primarily responsible for the clinical development, regulatory and commercialization activities for the Japanese market and the Company will be reimbursed for all costs it may incur in connection with these activities. The Company retains the responsibility for development of XIAFLEX for the treatment of Peyronie’s outside the Japanese market, and will be responsible for all clinical and commercial manufacturing and supply of XIAFLEX for the Japanese market. Subject to each party’s termination rights, the term of the Asahi agreement extends on a product-by-product basis from the date of the agreement until the last to occur of (i) the date on which the product is no longer covered by a valid claim of a patent, (ii) the 15^th anniversary of the first commercial sale of the product, or (iii) a generic entry in the Japanese market.

6. REVOLVING CREDIT AGREEMENT

In August 2011, the $30,000,000 two-year revolving credit agreement with Silicon Valley Bank (SVB) expired under its terms. Under this agreement, the Company had drawn a letter of credit for $1,900,000 which was issued as a security deposit to the landlord of the Company’s manufacturing facility in Horsham, Pennsylvania. In order to maintain the letter of credit on expiration of the revolving credit agreement, the Company established and maintains a bank deposit with SVB of equal amount. This $1,900,000 bank deposit is included in other long-term assets at September 30, 2011.

7. STOCK OPTIONS AND STOCK AWARDS

Under the Company’s 2006 Employee Stock Purchase Plan, as approved by the stockholders of the Company, employees may purchase shares of the Company’s common stock at a 15% discount through payroll deductions. In June 2011, employees purchased 55,292 shares of common stock at a price of $16.66 per share, representing 85% of the closing price of the common stock on June 30, 2010, the purchase price for the last day of the purchase period. At September 30, 2011, there were 431,168 shares available for future grants under the plan.

Under the Company’s 2004 Equity Compensation Plan (the 2004 Plan), as approved by the stockholders of the Company, qualified and nonqualified stock options and stock awards may be granted to employees, non-employee directors and consultants and advisors who provide services to the Company. In June 2011, the stockholders approved the increase of shares authorized for issuance under the 2004 Plan to 14,400,000. As of September 30, 2011, the Company has granted non-qualified stock options and restricted stock under this plan. At September 30, 2011, there were 3,798,625 shares available for future grants under the 2004 Plan.

 

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(a) Stock Option Information

During the nine months ended September 30, 2011, the Company granted non-qualified stock options to purchase shares of the Company’s common stock pursuant to the 2004 Plan. These options expire ten years from date of grant. Their exercise prices represent the closing price of the common stock of the Company on the respective dates that the options were granted and they generally vest rateably over four years at one year intervals from the grant date, assuming continued employment of the grantee.

The following tables summarize stock option activity for the nine month period ended September 30, 2011:

 

		Nine Months Ended September 30, 2011
Stock options		Shares				Weighted average exercise price				Weighted average remaining contractual life (in years)				Aggregate intrinsic value
Options outstanding:
Outstanding at December 31, 2010			6,136,249			$	23.46
Granted			1,510,959				21.34
Exercised			(140,364	)			10.80
Forfeited			(492,294	)			27.54
Outstanding at September 30, 2011			7,014,550				22.97				7.17			$	9,176,000
Exercisable at September 30, 2011			3,771,217				20.67				5.95				9,126,000

The aggregate intrinsic values in the preceding table represent the total pre-tax intrinsic value, based on the Company’s stock closing price of $14.99 per share as of September 30, 2011, that would have been received by the option holders had all option holders exercised their options as of that date. During the nine months ended September 30, 2011, total intrinsic value of options exercised was $1,527,000. As of September 30, 2011, exercisable options to purchase 1,599,814 shares of the Company’s common stock were in-the-money.

(b) Stock Awards

During the nine months ended September 30, 2011, the Company granted performance-based restricted stock unit awards to certain officers. A total of 122,500 shares of restricted stock are subject to these awards and the amount of restricted stock ultimately earned (subject to vesting) is based on U.S. net sales of XIAFLEX in the year ending December 31, 2011. The number of shares of restricted stock earned will vest 33^1/3% on the date the performance goal is achieved with the balance vesting in two equal instalments thereafter on the first and second anniversary of the date the performance goal is achieved.

In addition, during the nine months ended September 30, 2011, the Company granted 67,853 restricted share units to certain employees. Of these restricted share units, 1,750 units vested immediately upon issuance, 1,750 vest upon the one year anniversary of the grant date, and the remainder vest rateably over four years at one year intervals from the grant date, assuming continued employment of the grantee. Upon vesting, each restricted share unit is converted into one share of the common stock of the Company. Through September 30, 2011, 4,887 of these restricted share units have been cancelled.

 

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(c) Restricted Stock

The following table summarizes the restricted stock activity for the nine-month period ended September 30, 2011:

 

		Shares				Weighted average grant-date fair value
Nonvested at December 31, 2010			50,828			$	26.21
Vested			(23,414	)			24.62
Cancelled			—
Nonvested at September 30, 2011			27,414				27.55

(d) Valuation Assumptions and Expense Information

Total stock-based compensation costs charged against income for the nine months ended September 30, 2011 and 2010 amounted to $12,139,000 and $11,914,000, respectively. Stock-based compensation costs capitalized as part of inventory amounted to $1,572,000 and $1,544,000 for nine months ended September 30, 2011 and 2010, respectively.

The fair value of each stock option award was estimated on the date of grant using the Black-Scholes model and applying the assumptions in the following table.

 

		Three Months Ended September 30,								Six Months Ended September 30,
		2011				2010				2011				2010
Weighted average assumptions:
Expected life of options (in years)			6.25				6.25				6.29				6.18
Risk-free interest rate			1.29	%			1.99	%			2.37	%			2.68	%
Expected volatility			50.51	%			50.83	%			50.44	%			50.02	%
Expected dividend yield			0.00	%			0.00	%			0.00	%			0.00	%

During the nine months ended September 30, 2011, the weighted-average grant-date fair value of options granted was $10.92. As of September 30, 2011, there was approximately $28,875,000 of total unrecognized stock-based compensation cost related to all share-based payments that will be recognized over the weighted-average period of 2.50 years.

8. OTHER COMPREHENSIVE LOSS

Total comprehensive loss was as follows (in thousands):

 

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		Three Months Ended September 30,								Nine Months Ended September 30,
		2011				2010				2011				2010
Net loss		$	(4,058	)		$	(12,754	)		$	(21,053	)		$	(34,834	)
Other comprehensive loss:
Unrealized gain (loss) on available for sale securities			(206	)			143				(144	)			279
Foreign currency translation			(13	)			6				(10	)			(19	)
Comprehensive loss		$	(4,277	)		$	(12,605	)		$	(21,207	)		$	(34,574	)

The unrealized gain on available for sale securities relates to the Company’s short and long-term investments. The foreign currency translation amounts relate to the Company’s foreign subsidiary.

9. CONTINGENCIES

The Company is party to various actions and claims arising in the normal course of business. The Company believes that amounts accrued for awards or assessments in connection with all such matters are adequate and that the ultimate resolution of these matters will not have a material adverse effect on the Company’s financial position or the manner in which the Company conducts its business. However, there exists a reasonable possibility of loss in excess of the amounts accrued, the amount of which cannot currently be estimated. While the Company does not believe that the amount of such excess loss could be material to Company’s financial position, any such loss could have a material adverse effect on Company’s results of operations or the manner in which the Company conducts its business in the period(s) during which the underlying matters are resolved.

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

The following discussion is qualified in its entirety by, and should be read in conjunction with, the more detailed information set forth in the consolidated financial statements and the notes thereto appearing elsewhere in this report.

Special Note Regarding Forward-Looking Statements

Certain statements in this “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and elsewhere in this Quarterly Report 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, including statements made with respect to our strategy, progress and timing of development programs and related trials, the timing of actions to be taken by regulatory authorities, the commercial benefits available to us as a result of our agreements with third parties, future operations, future financial position, future revenues, projected costs, the size of addressable markets, prospects, plans and objectives of management and other statements regarding matters that are not historical facts.

In some cases you can identify forward-looking statements by terminology such as “may,” “will,” “should,” “would,” “expect,” “intend,” “plan,” “anticipate,” “believe,” “estimate,” “predict,” “potential,” “seem,” “seek,” “future,” “continue,” or “appear” or the negative of these terms or similar expressions, although not all forward-looking statements contain these identifying words. Forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause actual results, performance, achievements or prospects to be materially different from any future results, performance,

 

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achievements or prospects expressed in or implied by such forward-looking statements. Such risks and uncertainties include, among other things:

 

•

the commercial success in the United States (U.S.) of XIAFLEX® (collagenase clostridium histolyticum) for the treatment of adult Dupuytren’s contracture (Dupuytren’s) patients with a palpable cord;

 

•

the continuing launch and commercial success in the European Union (EU) of XIAPEX® (EU tradename for XIAFLEX) for Dupuytren’s;

 

•

the success of the development and commercialization in the U.S. and EU of XIAFLEX and XIAPEX, respectively, for Peyronie’s disease;

 

•

the success of the development and commercialization in Japan of XIAFLEX;

 

•

achieving market acceptance of XIAFLEX by physicians and patients;

 

•

obtaining and maintaining third-party payor coverage and reimbursement for XIAFLEX, Testim® and our product candidates;

 

•

the size of addressable markets for XIAFLEX, Testim and our other product candidates;

 

•

achieving market acceptance of Testim by physicians and patients and competing effectively with other Testosterone Replacement Therapy (TRT) products;

 

•

growth in sales of Testim;

 

•

growth of the overall androgen market;

 

•

the ability to manufacture or have manufactured XIAFLEX, Testim and other product candidates in commercial quantities at reasonable costs and compete successfully against other products and companies;

 

•

the availability of and ability to obtain additional funds through public or private offerings of debt or equity securities;

 

•

obtaining and maintaining all necessary patents or licenses;

 

•

purchasing ingredients and supplies necessary to manufacture XIAFLEX, Testim and our product candidates at terms acceptable to us;

 

•

the costs associated with acquiring and the ability to acquire additional product candidates or approved products;

 

•

the ability to enroll patients in clinical trials for XIAFLEX in the expected timeframes;

 

•

the ability to obtain authorization from the U.S. Food and Drug Administration (FDA) or other regulatory authority to initiate clinical trials of XIAFLEX within the expected timeframes;

 

•

demonstrating the safety and efficacy of product candidates at each stage of development;

 

•

results of clinical trials;

 

•

meeting applicable regulatory standards, filing for and receiving required regulatory approvals;

 

•

complying with the terms of our licenses and other agreements;

 

•

changes in industry practice;

 

•

changes in the markets for, acceptance by the medical community of, and exclusivity protection for, our products and product candidates as a result of the Patient Protection and Affordable Care Act and the associated reconciliation bill or any amendments thereto or any full or partial repeal thereof; and

 

•

one-time events.

 

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These risks and uncertainties are not exhaustive. For a more detailed discussion of risks and uncertainties, see “Item 1A – Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2010 and “Item 1A – Risk Factors” of Part II of this Quarterly Report. Other sections of this Quarterly Report and our other SEC filings, verbal or written statements and presentations may include additional factors which could materially and adversely impact our future results, performance, achievements and prospects. Moreover, we operate in a very competitive and rapidly changing environment. Given these risks and uncertainties, we cannot guarantee that the future results, performance, achievements and prospects reflected in forward-looking statements will be achieved or occur. Therefore, you should not place undue reliance on forward-looking statements. We undertake no obligation to update publicly any forward-looking statement other than as required under the federal securities laws. We qualify all forward-looking statements by these cautionary statements.

Special Note Regarding Market and Clinical Data

We obtained the market data used throughout this Quarterly Report from our own research, surveys and/or studies conducted by third parties and industry or general publications. Industry publications and surveys generally state that they have obtained information from sources believed to be reliable, but do not guarantee the accuracy and completeness of such information. While we believe that each of these studies and publications is reliable, we have not independently verified such data. Similarly, we believe our internal research is reliable but it has not been verified by any independent sources.

This Quarterly Report may include discussion of certain clinical studies relating to our products and/or product candidates. These studies typically are part of a larger body of clinical data relating to such products or product candidates, and the discussion herein should be considered in the context of the larger body of data.

Overview

We are a specialty biopharmaceutical company with a focus on developing and marketing products to predominantly specialist audiences, such as urologists, endocrinologists, certain targeted primary care physicians, hand surgeons, subsets of orthopedic, general, and plastic surgeons who focus on the hand, and rheumatologists. We currently have approximately 540 employees, including a sales and marketing organization of over 300 people.

We currently market two products in the United States (U.S.):

XIAFLEX^® (collagenase clostridium histolyticum) is a proprietary, injectable collagenase enzyme for the treatment of Dupuytren’s contracture (Dupuytren’s). XIAFLEX received approval from the U.S. Food and Drug Administration (FDA) on February 2, 2010 for the treatment of adult Dupuytren’s patients with a palpable cord. Dupuytren’s is a condition that affects the connective tissue that lies beneath the skin in the palm. The disease is progressive in nature. Typically, nodules develop in the palm as collagen deposits accumulate. As the disease progresses, the collagen deposits form a cord that stretches from the palm of the hand to the base of the finger. Once this cord develops, the patient’s fingers contract and the function of the hand is impaired. Prior to approval of XIAFLEX, surgery was the only effective treatment. We launched XIAFLEX for the treatment of adult Dupuytren’s patients with a palpable cord in the U.S. in March 2010. We have partnered with Pfizer Inc. (Pfizer) for development and commercialization of XIAPEX^® (European Union (EU) tradename for XIAFLEX) for Dupuytren’s and Peyronie’s disease in Europe and certain Eurasian countries. Pfizer received marketing authorization by the European Commission on February 28, 2011 for the treatment of Dupuytren’s in adult patients with a palpable cord and began sales in the EU in April 2011. We have partnered with Asahi Kasei Pharma Corporation for development and commercialization of XIAFLEX for Dupuytren’s contracture and Peyronie’s disease in Japan. We are seeking a partner or partners for development and commercialization in the rest of the world.

 

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Testim^® testosterone gel is a proprietary, topical 1% testosterone once-a-day gel indicated for the treatment of hypogonadism. Hypogonadism is defined as reduced or absent secretion of testosterone which can lead to symptoms such as low energy, loss of libido, adverse changes in body composition, irritability and poor concentration. Testim is approved in the U.S., Belgium, Canada, Denmark, Finland, Germany, Greece, Iceland, Ireland, Italy, Luxembourg, the Netherlands, Norway, Portugal, Spain, Sweden and the United Kingdom (U.K.). Ferring International Center S.A. (Ferring) and Paladin Labs Inc. (Paladin) market Testim on our behalf in certain European countries and Canada, respectively.

Our current product pipeline includes:

Phase III:

 

•

XIAFLEX for the treatment of Peyronie’s disease (Peyronie’s)

Phase II:

 

•

XIAFLEX for the treatment of Adhesive Capsulitis (Frozen Shoulder syndrome)

Phase I:

 

•

XIAFLEX for the treatment of edematous fibrosclerotic Panniculopathy (cellulite)

In addition to the above, we have an exclusive option for the exclusive rights to pursue any additional indications for XIAFLEX (other than dermal formulations labeled for topical administration). We also have rights to develop other products for the treatment of pain, urologic disease and hormone replacement using our transmucosal film delivery system.

The product candidates in our pipeline are at various stages of preclinical and clinical development. The path to regulatory approval includes several phases of nonclinical and clinical study to collect data to support an application to regulatory authorities to allow us to market a product for treatment of a specified disease indication. There are many difficulties and uncertainties inherent in research and development and the introduction of new products. There is a high rate of failure inherent in new drug discovery and development. To bring a drug from the discovery phase to regulatory approval, and ultimately to market, takes many years and incurs significant cost. Failure can occur at any point in the process, including after the product is approved based on post-market factors. New product candidates that appear promising in development may fail to reach the market or may have only limited commercial success because of efficacy or safety concerns, inability to obtain necessary regulatory approvals, limited scope of approved uses, reimbursement challenges, difficulty or excessive costs to manufacture, or infringement of the patents or intellectual property rights of others. Delays and uncertainties in the FDA approval process and the approval processes in other countries can result in delays in product launches and lost market opportunity. Consequently, it can be very difficult to predict which products will ultimately be submitted for approval, which have the highest likelihood of obtaining approval, and which will be commercially viable and generate profits for the Company. Successful results in preclinical or Phase I/II clinical studies may not be an accurate predictor of the ultimate safety or effectiveness of a drug or product candidate.

Phase I Clinical Trials

Phase I human clinical trials begin when regulatory agencies allow a request to initiate clinical investigations of a new drug or product candidate and usually involve small numbers of healthy volunteers or subjects. The trials are designed to determine the safety, metabolism, dosing and pharmacologic actions of a drug in humans, the potential side effects of the product candidates associated with increasing drug doses and, if possible, to gain early evidence of the product candidate’s effectiveness. Phase I clinical studies generally take from 6 to 12 months or more to complete.

Phase II Clinical Trials

Phase II clinical trials are conducted on a limited number of patients with the targeted disease, usually involving no more than several hundred patients, to evaluate appropriate dosage and the effectiveness of a drug for a particular indication or indications and to determine the common short-term side effects and risks associated with the drug. An initial evaluation of the drug’s effectiveness on patients is performed and additional information on the drug’s safety and dosage range is obtained. Our Phase II clinical trials typically include up to 200 patients and may take approximately two years to complete.

Phase III Clinical Trials

Phase III clinical trials are performed after preliminary evidence suggesting effectiveness of a drug has been obtained. Phase III clinical trials are intended to gather additional information about the effectiveness and safety that is needed to evaluate the overall benefit-risk relationship of the drug and to provide an adequate basis for physician labeling. They typically include controlled multi-center trials and involve a larger target patient population, typically including from several hundred to several thousand patients to ensure that study results are statistically significant. During Phase III clinical trials, physicians monitor patients to determine efficacy and to gather further information on safety. These trials are generally global in nature and are designed to generate data necessary to submit the product to regulatory agencies for marketing approval. Phase III testing varies and can often last from 2 to 5 years.

Regulatory Review

If a product successfully completes a Phase III clinical trial and is submitted to governmental regulators, such as the FDA in the United States or the EMA in the European Union, the time to final marketing approval can vary from six months (for a U.S. filing that is designated for priority review by the FDA) to several years, depending on a number of variables, such as the disease state, the strength and complexity of the data presented, the novelty of the target or compound, risk-management approval and the time required for the agency(ies) to evaluate the submission. There is no guarantee that a potential treatment will receive marketing approval, or that decisions on marketing approvals or indications will be consistent across geographic areas.

Recent Developments

On October 3, 2011, we announced that the first patient had been enrolled in a XIAFLEX phase IIIb Dupuytren’s contracture multicord study. The study is anticipated to enroll approximately 60 patients and top-line results are expected in the second half of 2012.

On August 31, 2011, we and BioSpecifics Technologies Corp. (BioSpecifics) announced dismissal of all pending litigation and plans to develop additional indications using XIAFLEX. We announced plans to initiate a phase I study for the treatment of cellulite in the fourth quarter of 2012 and BioSpecifics announced plans to initiate studies for the treatment of human and canine lipomas in the near future. We also announced plans to initiate a phase IIb trial of XIAFLEX for the treatment of Frozen Shoulder syndrome in the fourth quarter of 2011. In connection with this settlement, we and BioSpecifics entered into the Second Amended and Restated Development and License Agreement (the Second Amended and Restated BioSpecifics Agreement), which amended the Amended and Restated Development and License Agreement, dated as of December 17, 2008, between BioSpecifics and; us (the Amended and Restated BioSpecifics Agreement). For a further description of the Second Amended and Restated BioSpecifcs Agreement, see our Current Report on Form 8-K, dated September 1, 2011.

On September 1, 2011, the Company announced that the active dosing phase for the double-blind placebo-controlled phase III program of XIAFLEX for the treatment of Peyronie’s disease was completed by the end of August. Top-line data is expected in the second quarter of 2012.

In the third quarter, we earned a $7.5 million regulatory milestone from our EU partner, Pfizer for the first sale of XIAPEX^® for the treatment of Dupuytren’s contracture in Spain. This $7.5 million payment was received in October 2011.With this payment, we have received $41.1 million in regulatory milestones from Pfizer, representing $45.0 million of regulatory milestones offset by $3.9 million in costs incurred by Pfizer for the development of XIAPEX which costs were permitted, by contract, to be deducted from such sales milestones. XIAPEX is now available for sale in Austria, Denmark, Finland, Germany, Norway, Spain, Switzerland, Sweden, and the UK. We are eligible to

 

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receive up to $15 million in additional regulatory milestone payments for this indication, which will be paid in $7.5 million increments, following Pfizer’s first sale of XIAPEX in each of the remaining two major markets of the EU.

Results of Operations

Change in XIAFLEX Revenue Recognition

As discussed in Note 1 (d) to the Company’s consolidated financial statements contained herein, in the first quarter of 2011 the Company began recognizing revenue for XIAFLEX sales at the time of shipment to its specialty distributor, specialty pharmacy and wholesale customers. In 2010, the Company deferred the recognition of revenues, and related product costs, on XIAFLEX product shipments until the time the product was shipped to physicians for administration to patients. As a result of this change in revenue recognition, net revenues for the nine months ended September 30, 2011 include a benefit of $1.8 million (representing revenue previously deferred, net of allowances of $0.1 million) and the net loss for nine months ended September 30, 2011 includes a benefit of $1.7 million, or $0.04 per share (representing the net revenue benefit partially offset by the related cost of goods sold).

Three Months Ended September 30, 2011 and 2010

Net revenues. Net revenues for the three months ended September 30, 2011 and 2010 comprise the following:

 

		Three months ended September 30,												% Change
		2011				2010				Change
		(in millions)
Testim revenues-
Net U.S. revenues		$	52.9			$	47.4			$	5.5				12	%
International product shipments			0.5				0.4				0.1				27	%
International contract revenues			0.2				0.1				0.1				100	%
			53.6				47.9				5.7				12	%
XIAFLEX revenues-
Net U.S. revenues			10.3				4.6				5.7				124	%
International contract revenues			2.8				1.1				1.7				160	%
			13.1				5.7				7.4				131	%
Total net revenues		$	66.7			$	53.6			$	13.1				24	%
Revenue allowances as a percentage of gross U.S. revenues			30	%			22.0	%			8	%

Testim

Testim revenues for the three months ended September 30, 2011 increased over the comparable 2010 period despite new competitors entering the market. The increase in Testim net U.S. revenues resulted primarily from growth in Testim demand resulting from increased prescriptions and increases in pricing, partially offset by an increase in revenue allowances. According to National Prescription Audit data from IMS Health, a pharmaceutical market research firm (IMS), Testim total prescriptions for the third quarter of 2011 grew 13% over the comparable period of 2010. We believe that Testim prescription growth in the 2011 period over the 2010 period was driven by physician and patient acceptance that Testim provides better patient outcomes and the continued focus of our sales force on the promotion of Testim to urologists, endocrinologists and select primary care physicians. Testim net U.S. revenues in the third quarter of 2011 benefited from price increases having a cumulative impact of 14% over the comparable 2010 period.

 

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Testim international contract revenues shown in the above table represent the amortization of deferred up-front and milestone payments we previously received under our Testim out-licensing agreements.

XIAFLEX

Total revenues for XIAFLEX in the third quarter of 2011 were $13.1 million compared to $5.7 million in the third quarter of 2010. Net revenues for the three months ended September 30, 2011 include $10.3 million of net U.S. product sales of XIAFLEX compared to the $4.6 million recorded in the third quarter of 2010 following the initial U.S. product sales of XIAFLEX for Dupuytren’s, which was launched late in the first quarter of 2010. XIAFLEX international contract revenues relate to our out-licensing agreements for XIAFLEX and represent cumulative catch-up adjustments for milestone payments received during the period, the ongoing amortization of deferred up-front and milestone payment amounts and royalties received. The increase in XIAFLEX international contract revenue for the third quarter of 2011 over the comparable period in 2010 is principally due to a cumulative catch-up revenue adjustments of $1.0 million related to the $7.5 million regulatory milestone earned in the 2011 period and incremental revenue amortization relating to milestone payments we received from Pfizer during 2011.

Revenue allowances

Revenue allowances as a percentage of gross U.S. revenues for the third quarter of 2011 compared to that of 2010 increased due to higher levels of managed care contract rebates and government health plan charge-backs, partially offset by a lower revenue allowance percentage on XIAFLEX gross U.S. revenues.

Cost of goods sold. Cost of goods sold was $13.5 million and $11.6 million for the three months ended September 30, 2011 and 2010, respectively. Cost of goods sold reflects the cost of product sold, royalty obligations due to the Company’s licensors, and the amortization of the deferred costs associated with the Pfizer Agreement. The increase in cost of goods sold for the three months ended September 30, 2011 over the comparable period in 2010 was principally attributable to the increase in Testim units sold. Gross margin on our net revenues was 79.7% in the third quarter of 2011 compared to 78.4% in the comparable 2010 period. The increase in the gross margin rate is principally due to the contribution of high margin XIAFLEX contract revenues. In addition, gross margin on XIAFLEX U.S. product sales for the three months ended September 30, 2011 reflects the benefit of past claims from our licensor of approximately $0.9 million compared to $0.5 million of such claims in the comparable 2010 period.

Research and development expenses. We currently have only one product in development, XIAFLEX. The majority of research and development spending for the three and nine month periods ending September 30, 2011 relates to costs being incurred for the development of XIAFLEX for Peyronie’s, development of a larger scale XIAFLEX production process and development of multiple injections of XIAFLEX for adult Dupuytren’s patients with multiple palpable cords. A significant portion of the research and development expenses are for the internal personnel and infrastructure costs common to the support of these development efforts. Since we do not allocate these common costs to individual projects for external reporting purposes, we do not report research and development cost by project.

Investments in research and development for the quarter ended September 30, 2011 were $14.2 million, compared to $14.4 million for 2010. The expense decreased slightly compared to the prior year period since increased spending in 2011 related to the phase III XIAFLEX clinical trials for Peyronie’s disease was offset by a smaller investment in the development of a larger scale XIAFLEX production process.

Selling, general and administrative expenses. Selling, general and administrative expenses totaled $43.3 million for the quarter ended September 30, 2011, compared with $40.3 million for the year-ago quarter. The increase was primarily due to promotional and training activity in support of the launch of XIAFLEX for Dupuytren’s in the U.S.

Interest income. Interest income relates primarily to interest earned on cash, cash equivalents and short-term investments.

Interest expense. Interest expense in 2011 relates primarily to the costs associated the Company’s two year $30 million revolving credit line which expired under its terms in August 2011.

Nine Months Ended September 30, 2011 and 2010

Net revenues. Net revenues for the nine months ended September 30, 2011 and 2010 comprise the following:

 

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		Nine months ended September 30,												% Change
		2011				2010				Change
		(in millions)
Testim revenues-
Net U.S. revenues		$	148.2			$	137.8			$	10.4				8	%
International product shipments			1.5				1.3				0.2				15	%
International contract revenues			0.6				0.5				0.1				34	%
			150.3				139.6				10.7				8	%
XIAFLEX revenues-
Net U.S. revenues			28.8				6.7				22.1				758	%
Revenue recognition change			1.8				—				1.8				n/a
International contract revenues			10.1				3.3				6.8				211	%
			40.7				10.0				30.7				307	%
Total net revenues		$	191.0			$	149.6			$	41.4				28	%
Revenue allowance as a percentage of
gross U.S. revenues			26	%			22.0	%			4	%

Testim

The increase in Testim net U.S. revenues resulted primarily from growth in Testim demand resulting from increased prescriptions and increases in pricing, partially offset by an increase revenue allowances. According to National Prescription Audit data from IMS, Testim total prescriptions for the first nine months of 2011 grew 8% over the comparable period of 2010. We believe that Testim prescription growth in the 2011 period over the 2010 period was driven by physician and patient acceptance that Testim provides better patient outcomes and the continued focus of our sales force on the promotion of Testim to urologists, endocrinologists and select primary care physicians. Testim net U.S. revenues the first nine months of 2011 benefited from price increases having a cumulative impact of 9% over the comparable 2010 period. Testim international contract revenues shown in the above table represent the amortization of deferred up-front, milestone and royalty payments we previously received under our Testim out-licensing agreements.

XIAFLEX

Including the change in revenue recognition discussed above, total revenues for XIAFLEX for the nine months ended September 30, 2011 were $40.7 million compared to $10.0 million for the comparable period of 2010. Net revenues for the nine months ended September 30, 2011 include $28.8 million of net U.S. product sales of XIAFLEX compared to the $6.7 million recorded for the first nine months of 2010 following the initial U.S. product sales of XIAFLEX for Dupuytren’s, which was launched late in the first quarter of 2010. XIAFLEX international contract revenues relate to our out-licensing agreements for XIAFLEX and represent cumulative catch-up adjustments for milestone payments received during the period, the ongoing amortization of deferred up-front and milestone payment amounts and royalties received. The increase in XIAFLEX international contract revenue for the first nine months of 2011 over the comparable period of 2010 is principally due to cumulative catch-up revenue adjustments aggregating $4.8 million related to the $45.0 million of regulatory milestones earned during 2011 and incremental revenue amortization relating to milestone payments we received from Pfizer during 2011.

Revenue allowances

Revenue allowances as a percentage of gross U.S. revenues for the first nine months of 2011 compared to that of 2010 increased due to higher levels of managed care contract rebates and government health plan charge-backs, partially offset by a lower revenue allowance percentage on XIAFEX gross U.S. revenues.

Cost of goods sold. Cost of goods sold was $39.2 million and $32.6 million for the nine months ended September 30, 2011 and 2010, respectively. Cost of goods sold reflects the cost of product sold, royalty obligations due to the Company’s licensors, and the amortization of the deferred costs associated with the Pfizer Agreement. The increase in cost of goods sold for the nine months ended September 30,

 

22

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2011 over the comparable period in 2010 was principally attributable to the increase in Testim units sold. Gross margin on our net revenues was 79.5% in the first nine months of 2011 compared to 78.2% in the comparable 2010 period. The increase in the gross margin rate is principally due to the contribution of high margin XIAFLEX contract revenues and product sales, including the contribution from the impact of the change in revenue recognition, and year-over-year price increases of Testim in the U.S., partially offset by increased Testim managed care rebates. In addition, gross margin on XIAFLEX U.S. product sales reflect the benefit of past claims from our licensor of approximately $1.9 million in the first nine months of 2011 compared to $0.7 million of such claims in the comparable 2010 period.

Research and development expenses. Research and development spending for the nine months ended September 30, 2011 was $43.2 million, compared to $34.1 million for 2010. The increase in expense results principally from the commencement of start-up activities related to the phase III XIAFLEX clinical trials for Peyronie’s disease and costs incurred to address inspection comments received from European regulators concerning our manufacturing plant.

Selling, general and administrative expenses. Selling, general and administrative expenses totaled $129.8 million for the nine months ended September 30, 2011, compared with $117.7 million for the year-ago comparable period. The increase was primarily due to the addition of the sales and reimbursement field force and infrastructure, and promotional and training activity in support of the launch of XIAFLEX for Dupuytren’s in the U.S.

Interest income. Interest income relates primarily to interest earned on cash, cash equivalents and short-term investments.

Interest expense. Interest expense relates primarily to the costs associated the Company’s two year $30 million revolving credit line which expired under its terms in August 2011.

Liquidity and Capital Resources

We had $149.6 million and $128.2 million in cash, cash equivalents and short-term investments as of September 30, 2011 and December 31, 2010, respectively. We believe that our current financial resources and sources of liquidity will be adequate for the Company to fund our anticipated operations beyond reaching profitability based on our current plans and expectations. We may, however, elect to raise additional funds prior to this time in order to enhance our sales and marketing efforts for additional products we may acquire, commercialize any product candidates that receive regulatory approval, acquire or in-license approved products or product candidates or technologies for development and to maintain adequate cash reserves to minimize financial market fundraising risks. Insufficient funds may cause us to delay, reduce the scope of, or eliminate one or more of our development, commercialization or expansion activities. Our future capital needs and the adequacy of our available funds will depend on many factors, including:

 

•

our ability to successfully increase sales in the U.S. of XIAFLEX for Dupuytren’s;

 

•

third-party payor coverage and reimbursement for our products;

 

•

the cost of manufacturing, distributing, marketing and selling our products;

 

•

the scope, rate of progress and cost of our product development activities;

 

•

the costs of supplying and commercializing our products and product candidates;

 

•

the effect of competing technological and market developments;

 

•

the cost of filing, prosecuting, defending and enforcing any patent claims and other intellectual property rights, including costs associated with the matter of Auxilium Pharmaceuticals, Inc. and CPEX Pharmaceuticals, Inc. vs. Upsher-Smith Laboratories, Inc. filed on December 4, 2008 in the United States District Court for the District of Delaware and the outcome thereof;

 

23

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•

the extent to which we acquire or invest in businesses or technologies, although we currently have no commitments or agreements relating to any of these types of transactions; and

 

•

entry into the marketplace of competitive products.

If additional funds are required, we may raise such funds from time to time through public or private sales of equity or debt securities or from bank or other loans. Financing may not be available on acceptable terms, or at all, and our failure to raise capital when needed could materially adversely impact our growth plans and our financial condition or results of operations. Additional equity financing, if available, may be dilutive to the holders of our common stock and may involve significant cash payment obligations and covenants that restrict our ability to operate our business.

Sources and Uses of Cash

Cash provided by operations was $26.1 million for the nine months ended September 30, 2011, compared to cash used in operations of $35.6 million for the comparable 2010 period. Cash provided by operations for the nine months ended September 30, 2011 resulted primarily from the $15.0 million up-front payment received from Asahi and the $33.6 million of net milestone payments received from Pfizer, offset by BioSpecific’s share of these up-front and milestone payments and operating losses (net of stock compensation expenses and other non-cash charges). Cash used in operations for 2010 resulted primarily from operating losses (net of stock compensation expenses) and other non-cash charges, offset in part by approximately $13.7 million of net milestone receipts in the first nine months of 2010.

Cash used in investing activities was $105.6 million for the nine months ended September 30, 2011, compared to cash used of $8.2 million for the nine months ended September 30, 2010. The cash impact of investing activities in 2011 relates primarily to net purchases of short-term investments in marketable debt securities, investments in property and equipment and the investment of $1.9 million to secure the Horsham facility letter of credit. In 2010, the cash impact of investing activities relates primarily to our investments in property and equipment, net of the redemptions of long-term investments. Our investments in property and equipment relate primarily to improvements made to our Horsham biological manufacturing facility and our information technology infrastructure for the production of XIAFLEX.

Cash provided by financing activities was $2.4 million and $4.2 million for the nine months ended September 30, 2011 and 2010, respectively. Cash provided by financing activities in both periods resulted primarily from cash receipts from stock option exercises and employee stock purchases, net of treasury shares acquired in satisfaction of tax withholding requirements on stock awards to certain officers and employees.

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements as defined in Item 303(a) (4) of Regulation S-K.

New Accounting Pronouncements

See Note 1(e) – New Accounting Pronouncements to the Company’s Consolidated Financial Statements.

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

We are subject to market risks in the normal course of our business, including changes in interest rates and exchange rates. There have been no significant changes in our exposure to market risks since

 

24

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December 31, 2010. Refer to “Item 7 A. Quantitative and Qualitative Disclosures About Market Risk” of our Annual Report on Form 10-K for the year ended December 31, 2010 for additional information.

Item 4. Controls and Procedures.

Evaluation of Disclosure Controls and Procedures.

Our Chief Executive Officer and Chief Financial Officer have concluded, based on their respective evaluations as of the end of the period covered by this Report, that our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this Report are effective to provide reasonable assurance that the information required to be disclosed in the reports we file under the Exchange Act is (i) recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and (ii) is accumulated and communicated to management as appropriate to allow timely decisions regarding required disclosures. A controls system cannot provide absolute assurances, however, that the objectives of the controls system are met, and no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within a company have been detected.

Changes in Internal Control over Financial Reporting.

No change in our internal control over financial reporting occurred during our most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings.

As previously reported in Part I, Item 3 in our Annual Report on Form 10-K for the year ended December 31, 2010, on February 15, 2011, we filed a complaint in the Court of Common Pleas, Chester County, Pennsylvania against BioSpecifics alleging that BioSpecifics had breached the Amended and Restated BioSpecifics Agreement, dated December 11, 2008, by and between BioSpecifics and the Company by its commencement of clinical trials for the use of injectable collagenase to treat canine lipomas without the prior knowledge and approval of the parties’ Joint Development Committee. Also, as previously reported in Part II, Item 1 in our Quarterly Report on Form 10-Q for the quarter ended June 30, 2010, on May 2, 2011, BioSpecifics filed a complaint in the Supreme Court of the State of New York, Nassau County, Commercial Division, against Recipharm AB, RecipharmCobra Holdings Limited (the Recipharm entities, collectively Cobra) and us claiming that we had breached an oral contract with BioSpecifics and interfered with a contract BioSpecifics has with Cobra. As previously reported in our Current Report on Form 8-K filed September 1, 2011, on August 31, 2011, we and BioSpecifics entered into a settlement agreement (the Settlement Agreement), pursuant to which the parties settled all pending litigation and resolved other outstanding disputes between them. Pursuant to the Settlement Agreement, we reserve certain rights and the parties have agreed to certain clarifications as to intellectual property matters and amounts owed between the parties. As a result of this settlement, we and BioSpecifics will be co-owners of U.S. Patent No. 7,811,560. The effectiveness of the Settlement Agreement was conditioned, in part, upon the execution by the parties of the Second Amended and Restated BioSpecifics Agreement.

We are also party to various other actions and claims arising in the normal course of business. We believe that amounts accrued for awards or assessments in connection with all such matters are adequate and that the ultimate resolution of these matters will not have a material adverse effect on the our financial position or the manner in which we conduct our business. However, there exists a reasonable

 

25

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possibility of loss in excess of the amounts accrued, the amount of which cannot currently be estimated. While we do not believe that the amount of such excess loss could be material to our financial position, any such loss could have a material adverse effect on our results of operations or the manner in which we conduct our business in the period(s) during which the underlying matters are resolved.

Item 1A. Risk Factors.

In addition to the other information contained in this Report, you should carefully consider the factors discussed in Part I, Item 1A “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2010 in evaluating our business, financial position, future results and prospects. Although there have been no material changes to the risk factors described in such Annual Report on Form 10-K, the risks described therein are not the only risks facing our company. Additional risks that we do not presently know or that we currently believe are immaterial could also materially and adversely affect our business, financial position, future results and prospects.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

Issuer Purchases of Equity Securities

The following table summarizes the Company’s purchases of its common stock for the three months ended September 30, 2011:

 

Period

Total Number of Shares (or Units) Purchased

Average Price Paid Per Share (or Unit)

Total Number of Shares (or Units) Purchased as Part of Publicly Announced Plans or Programs

Maximum Number (or Approximate Dollar Value) of Shares (or Units) that May Yet Be Purchased Under the Plans or Programs

July 1, 2011 to July 31, 2011

None

Not applicable

Not applicable

Not applicable

Aug. 1, 2011 to Aug. 31, 2011

178

$

15.49

Not applicable

Not applicable

Sept. 1, 2011 to Sept. 30, 2011

None

Not applicable

Not applicable

Not applicable

Total

178

(1)

$

15.49

Not applicable

Not applicable

 

(1)	Represents shares purchased from an employee, pursuant to the Company’s 2004 Equity Compensation Plan to satisfy such individual’s tax liability with respect to the vesting of resticted stock issued in accordance with Rule 16 b- 3 of the Securities Exchange Act of 1934.

Unregistered Sale of Equity Securities

None.

Use of Proceeds

None.

Item 6. Exhibits.

 

Exhibit No.		Description
3.1		Fifth Restated Certificate of Incorporation of the Registrant (filed as Exhibit 3.1 to the Registrant’s Quarterly Report on Form 10-Q filed on August 16, 2004, File No. 000-50855, and incorporated by reference herein).
3.2		Amended and Restated Bylaws of the Registrant (filed as Exhibit 3.2 to the Registrant’s Quarterly Report on Form 10-Q filed on August 16, 2004, File No. 000-50855, and incorporated by reference herein).
10.1#		Employment Agreement, dated August 8, 2011, by and between the Registrant and James P. Tursi, M.D.
10.2#		Employment Agreement, dated November 1, 2011, by and between the Registrant and Jennifer L. Armstrong
10.3#		Employment Agreement, dated November 1, 2011, by and between the Registrant and Richard M. Dudek
10.4#		Employment Agreement, dated November 1, 2011, by and between the Registrant and Edward F. Kessig
10.5*		Second Amended and Restated Development and License Agreement, dated as of August 31, 2011, by and between Auxilium Pharmaceuticals, Inc. and BioSpecifics Technologies Corp. (filed as Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed on September 1, 2011, File No. 000-50855, and incorporated by reference herein).
10.6*		Settlement Agreement, dated as of August 31, 2011, by and between Auxilium Pharmaceuticals, Inc. and BioSpecifics Technologies Corp. (filed as Exhibit 10.2 to the Registrant’s Current Report on Form 8-K filed on September 1, 2011, File No. 000-50855, and incorporated by reference herein).
31.1		Certification of Armando Anido, the Registrant’s Principal Executive Officer, required by Rule 13a-14(a) or Rule 15d-14(a).
31.2		Certification of James E. Fickenscher, the Registrant’s Principal Financial Officer, required by Rule 13a-14(a) or Rule 15d-14(a).
32		Certification of Armando Anido, the Registrant’s Principal Executive Officer, and James E. Fickenscher, the Registrant’s Principal Financial Officer, required by Rule 13a-14(b) or Rule 15d-14(b) and Section 1350 of Chapter 63 of Title 18 of the United States Code (18 U.S.C. 1350).
101.INS†		XBRL Instance Document

 

26

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101.SCH†		XBRL Taxonomy Extension Schema Document
101.CAL†		XBRL Taxonomy Extension Calculation Linkbase Document
101.LAB†		XBRL Taxonomy Extension Label Linkbase Document
101.PRE†		XBRL Taxonomy Extension Presentation Linkbase Document
101.DEF†		XBRL Taxonomy Extension Definition Linkbase Document

 

#

Indicates management contract or compensatory plan or arrangement.

 

*

Confidential treatment requested under 17 C.F.R. §§ 200.80(b)(4) and 240.24b-2. The confidential portions of this exhibit have been submitted and are marked accordingly. The confidential portions have been filed separately with the Securities and Exchange Commission.

 

†

XBRL (Extensible Business Reporting Language) information is furnished and not filed for purposes of Sections 11 and 12 of the Securities Act of 1933 and Section 18 of the Securities Exchange Act of 1934, and is not subject to liability under those sections, is not part of any registration statement or prospectus to which it relates and is not incorporated or deemed to be incorporated by reference into any registration statement, prospectus or other document.

 

27

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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.

 

				AUXILIUM PHARMACEUTICALS, INC.
Date: November 9, 2011				/s/ Armando Anido
				Armando Anido Chief Executive Officer and President (Principal Executive Officer)
				AUXILIUM PHARMACEUTICALS, INC.
Date: November 9, 2011				/s/ James E. Fickenscher
				James E. Fickenscher Chief Financial Officer (Principal Financial and Accounting Officer)

 

28

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EXHIBIT INDEX

 

Exhibit No.		Description
3.1		Fifth Restated Certificate of Incorporation of the Registrant (filed as Exhibit 3.1 to the Registrant’s Quarterly Report on Form 10-Q filed on August 16, 2004, File No. 000-50855, and incorporated by reference herein).
3.2		Amended and Restated Bylaws of the Registrant (filed as Exhibit 3.2 to the Registrant’s Quarterly Report on Form 10-Q filed on August 16, 2004, File No. 000-50855, and incorporated by reference herein).
10.1#		Employment Agreement, dated August 8, 2011, by and between the Registrant and James P. Tursi, M.D.
10.2#		Employment Agreement, dated November 1, 2011, by and between the Registrant and Jennifer L. Armstrong
10.3#		Employment Agreement, dated November 1, 2011, by and between the Registrant and Richard M. Dudek
10.4#		Employment Agreement, dated November 1, 2011, by and between the Registrant and Edward F. Kessig
10.5*		Second Amended and Restated Development and License Agreement, dated as of August 31, 2011, by and between Auxilium Pharmaceuticals, Inc. and BioSpecifics Technologies Corp. (filed as Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed on September 1, 2011, File No. 000-50855, and incorporated by reference herein).
10.6*		Settlement Agreement, dated as of August 31, 2011, by and between Auxilium Pharmaceuticals, Inc. and BioSpecifics Technologies Corp. (filed as Exhibit 10.2 to the Registrant’s Current Report on Form 8-K filed on September 1, 2011, File No. 000-50855, and incorporated by reference herein).
31.1		Certification of Armando Anido, the Registrant’s Principal Executive Officer, required by Rule 13a-14(a) or Rule 15d-14(a).
31.2		Certification of James E. Fickenscher, the Registrant’s Principal Financial Officer, required by Rule 13a-14(a) or Rule 15d-14(a).
32		Certification of Armando Anido, the Registrant’s Principal Executive Officer, and James E. Fickenscher, the Registrant’s Principal Financial Officer, required by Rule 13a-14(b) or Rule 15d-14(b) and Section 1350 of Chapter 63 of Title 18 of the United States Code (18 U.S.C. 1350).
101.INS†		XBRL Instance Document
101.SCH†		XBRL Taxonomy Extension Schema Document
101.CAL†		XBRL Taxonomy Extension Calculation Linkbase Document
101.LAB†		XBRL Taxonomy Extension Label Linkbase Document
101.PRE†		XBRL Taxonomy Extension Presentation Linkbase Document
101.DEF†		XBRL Taxonomy Extension Definition Linkbase Document

 

29

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#

Indicates management contract or compensatory plan or arrangement.

 

*

Confidential treatment requested under 17 C.F.R. §§ 200.80(b)(4) and 240.24b-2. The confidential portions of this exhibit have been submitted and are marked accordingly. The confidential portions have been filed separately with the Securities and Exchange Commission.

 

†

XBRL (Extensible Business Reporting Language) information is furnished and not filed for purposes of Sections 11 and 12 of the Securities Act of 1933 and Section 18 of the Securities Exchange Act of 1934, and is not subject to liability under those sections, is not part of any registration statement or prospectus to which it relates and is not incorporated or deemed to be incorporated by reference into any registration statement, prospectus or other document.

 

30