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EX-32.1 - SECTION 906 CEO AND CFO CERTIFICATION - ARIAD PHARMACEUTICALS INCd333019dex321.htm
EX-31.2 - SECTION 302 CFO CERTIFICATION - ARIAD PHARMACEUTICALS INCd333019dex312.htm
EX-10.1 - AMENDED AND RESTATED EXECUTIVE EMPLOYMENT AGREEMENT - ARIAD PHARMACEUTICALS INCd333019dex101.htm
EX-10.5 - FORM OF 2012 PERFORMANCE SHARE CERTIFICATE - ARIAD PHARMACEUTICALS INCd333019dex105.htm
EX-10.4 - DIRECTOR COMPENSATION ARRANGEMENTS - ARIAD PHARMACEUTICALS INCd333019dex104.htm
EX-10.2 - FIRST AMENDMENT TO AMENDED AND RESTATED EXECUTIVE EMPLOYMENT AGREEMENT - ARIAD PHARMACEUTICALS INCd333019dex102.htm
EX-31.1 - SECTION 302 CEO CERTIFICATION - ARIAD PHARMACEUTICALS INCd333019dex311.htm
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EX-10.3 - FIRST AMENDMENT TO AMENDED AND RESTATED EXECUTIVE EMPLOYMENT AGREEMENT - ARIAD PHARMACEUTICALS INCd333019dex103.htm
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

FORM 10-Q

 

 

 

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

For the quarterly period ended March 31, 2012

OR

 

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

For the transition period from              to             

Commission File Number: 0-21696

 

 

ARIAD Pharmaceuticals, Inc.

(Exact name of registrant as specified in its charter)

 

 

 

Delaware   22-3106987

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

26 Landsdowne Street, Cambridge, Massachusetts 02139

(Address of principal executive offices) (Zip Code)

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

Former Name, Former Address and Former Fiscal Year,

If Changed Since Last Report: Not Applicable

 

 

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

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

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

 

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

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

The number of shares of the registrant’s common stock outstanding as of April 30, 2012 was 165,728,859.

 

 

 


Table of Contents

ARIAD PHARMACEUTICALS, INC.

TABLE OF CONTENTS

 

          Page  

PART I.

  

FINANCIAL INFORMATION

     1   

ITEM 1.

  

UNAUDITED FINANCIAL STATEMENTS

     1   
  

Condensed Consolidated Balance Sheets – March 31, 2012 and December 31, 2011

     1   
  

Condensed Consolidated Statements of Operations for the Three Months Ended March 31, 2012 and 2011

     2   
  

Condensed Consolidated Statements of Comprehensive Loss for the Three Months Ended March 31, 2012 and 2011

     2   
  

Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2012 and 2011

     3   
  

Notes to Unaudited Condensed Consolidated Financial Statements

     4   

ITEM 2.

  

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

     11   

ITEM 3.

  

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     23   

ITEM 4.

  

CONTROLS AND PROCEDURES

     23   

PART II.

  

OTHER INFORMATION

     24   

ITEM 1A.

  

RISK FACTORS

     24   

ITEM 6.

  

EXHIBITS

     24   
  

SIGNATURES

     25   
  

EXHIBIT INDEX

     26   


Table of Contents
PART I. FINANCIAL INFORMATION

 

ITEM 1. UNAUDITED FINANCIAL STATEMENTS

ARIAD PHARMACEUTICALS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

 

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

ASSETS

    

Current assets:

    

Cash and cash equivalents

   $ 198,222      $ 306,256   

Marketable securities

     89,532        —     

Other current assets

     3,085        1,311   
  

 

 

   

 

 

 

Total current assets

     290,839        307,567   

Restricted cash

     749        749   

Property and equipment, net

     6,699        6,611   

Intangible and other assets, net

     5,627        5,785   
  

 

 

   

 

 

 

Total assets

   $ 303,914      $ 320,712   
  

 

 

   

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

    

Current liabilities:

    

Accounts payable

   $ 6,722      $ 5,728   

Current portion of long-term debt and capital lease obligations

     1,626        1,454   

Accrued compensation and benefits

     3,858        1,209   

Accrued product development expenses

     10,961        11,948   

Other accrued expenses

     4,704        3,634   

Current portion of deferred executive compensation

     963        1,032   

Current portion of deferred revenue

     231        231   

Other current liabilities

     136        136   
  

 

 

   

 

 

 

Total current liabilities

     29,201        25,372   
  

 

 

   

 

 

 

Long-term debt and capital lease obligations

     10,678        11,215   
  

 

 

   

 

 

 

Deferred executive compensation

     3,527        2,723   
  

 

 

   

 

 

 

Deferred revenue

     711        768   
  

 

 

   

 

 

 

Other long-term liabilities

     2,532        1,854   
  

 

 

   

 

 

 

Warrant liability

     —          58,639   
  

 

 

   

 

 

 

Stockholders’ equity:

    

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

    

Common stock, $.001 par value; authorized, 240,000,000 shares in 2012 and 2011; issued and outstanding, 165,474,108 shares in 2012 and 157,608,702 shares in 2011

     165        158   

Additional paid-in capital

     869,972        776,946   

Accumulated other comprehensive loss

     (15     —     

Accumulated deficit

     (612,857     (556,963
  

 

 

   

 

 

 

Total stockholders’ equity

     257,265        220,141   
  

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 303,914      $ 320,712   
  

 

 

   

 

 

 

See notes to unaudited condensed consolidated financial statements.

 

1


Table of Contents

ARIAD PHARMACEUTICALS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

 

     Three Months Ended
March 31,
 
In thousands, except per share data    2012     2011  

Revenue:

    

License revenue

   $ 64      $ —     

Service revenue

     17        56   
  

 

 

   

 

 

 

Total revenue

     81        56   
  

 

 

   

 

 

 

Operating expenses:

    

Research and development

     28,774        14,574   

General and administrative

     11,288        4,854   
  

 

 

   

 

 

 

Total operating expenses

     40,062        19,428   
  

 

 

   

 

 

 

Loss from operations

     (39,981     (19,372
  

 

 

   

 

 

 

Other income (expense):

    

Interest income

     68        55   

Interest expense

     (57     (60

Revaluation of warrant liability

     (15,924     (18,572
  

 

 

   

 

 

 

Other income (expense), net

     (15,913     (18,577
  

 

 

   

 

 

 

Net loss

   $ (55,894   $ (37,949
  

 

 

   

 

 

 

Net loss per share – basic and diluted

   $ (0.35   $ (0.29
  

 

 

   

 

 

 

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

     160,970        128,998   
  

 

 

   

 

 

 

ARIAD PHARMACEUTICALS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS

OF COMPREHENSIVE LOSS

(Unaudited)

 

     Three Months Ended
March 31,
 
In thousands    2012     2011  

Net loss

   $ (55,894   $ (37,949
  

 

 

   

 

 

 

Other comprehensive loss:

    

Net unrealized losses on marketable securities

     (15     —     
  

 

 

   

 

 

 

Other comprehensive loss

     (15     —     
  

 

 

   

 

 

 

Comprehensive loss

   $ (55,909   $ (37,949
  

 

 

   

 

 

 

See notes to unaudited condensed consolidated financial statements.

 

2


Table of Contents

ARIAD PHARMACEUTICALS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

     Three Months Ended
March 31,
 
In thousands    2012     2011  

Cash flows from operating activities:

    

Net loss

   $ (55,894   $ (37,949

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

    

Depreciation and amortization

     1,015        946   

Amortization of premium on marketable securities

     7        —     

Stock-based compensation

     4,913        2,404   

Deferred executive compensation expense

     633        380   

Revaluation of warrant liability

     15,924        18,572   

Increase (decrease) from:

    

Other current assets

     (1,773     (594

Other assets

     (22     2   

Accounts payable

     616        (63

Accrued compensation and benefits

     2,649        (319

Accrued product development expenses

     (988     (1,134

Other accrued expenses

     1,601        486   

Other current liabilities

     712        —     

Deferred revenue

     (57     —     

Deferred executive compensation paid

     103        —     
  

 

 

   

 

 

 

Net cash used in operating activities

     (30,561     (17,269
  

 

 

   

 

 

 

Cash flows from investing activities:

    

Acquisitions of marketable securities

     (89,554     —     

Investment in property and equipment

     (916     (423

Investment in intangible assets

     (195     (241
  

 

 

   

 

 

 

Net cash used in investing activities

     (90,665     (664
  

 

 

   

 

 

 

Cash flows from financing activities:

    

Proceeds from long-term borrowings

     —          4,375   

Repayment of long-term borrowings

     (350     (350

Principal payments under capital lease obligation

     (15     (24

Proceeds from issuance of common stock pursuant to warrants

     12,482        7,580   

Payment of tax withholding obligations related to stock compensation

     (2,302     (324

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

     3,377        1,402   
  

 

 

   

 

 

 

Net cash provided by financing activities

     13,192        12,659   
  

 

 

   

 

 

 

Net decrease in cash and cash equivalents

     (108,034     (5,274

Cash and cash equivalents, beginning of period

     306,256        103,630   
  

 

 

   

 

 

 

Cash and cash equivalents, end of period

   $ 198,222      $ 98,356   
  

 

 

   

 

 

 

Supplemental disclosure:

    

Non-cash transaction – investment in property and equipment included in accounts payable or accruals

   $ 758      $ —     
  

 

 

   

 

 

 

See notes to unaudited condensed consolidated financial statements.

 

3


Table of Contents

ARIAD PHARMACEUTICALS, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS

1. Management Statement

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

2. Marketable Securities

The Company has classified its marketable securities as available-for-sale and, accordingly, carries such securities at fair value. At March 31, 2012, all of the Company’s marketable securities consisted of United States government or agency securities.

At March 31, 2012, the aggregate fair value and amortized cost of the Company’s marketable securities were $89,532,000 and 89,547,000, respectively. Gross unrealized gains and losses were $10,000 and $25,000, respectively, at March 31, 2012.

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

3. Property and Equipment, Net

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

 

In thousands    March 31,
2012
    December 31,
2011
 

Leasehold improvements

   $ 22,259      $ 22,252   

Construction in progress

     770        699   

Equipment and furniture

     17,696        17,032   
  

 

 

   

 

 

 
     40,725        39,983   

Less accumulated depreciation and amortization

     (34,026     (33,372
  

 

 

   

 

 

 
   $ 6,699      $ 6,611   
  

 

 

   

 

 

 

Depreciation and amortization expense for the three-month periods ended March 31, 2012 and 2011 amounted to $654,000 and $766,000, respectively.

 

4


Table of Contents

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

 

In thousands    March 31,
2012
    December 31,
2011
 

Equipment and furniture

   $ 392      $ 392   

Less accumulated depreciation and amortization

     (278     (257
  

 

 

   

 

 

 
   $ 114      $ 135   
  

 

 

   

 

 

 

4. Intangible and Other Assets, Net

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

 

In thousands    March 31,
2012
    December 31,
2011
 

Capitalized patent and license costs

   $ 6,139      $ 6,799   

Purchased technology

     5,901        5,901   
  

 

 

   

 

 

 
     12,040        12,700   

Less accumulated amortization

     (6,476     (6,957
  

 

 

   

 

 

 
     5,564        5,743   

Other assets

     63        42   
  

 

 

   

 

 

 
   $ 5,627      $ 5,785   
  

 

 

   

 

 

 

Amortization expense for intangible assets amounted to $169,000 and $214,000 for the three-month periods ended March 31, 2012 and 2011, respectively. The weighted average amortization period for intangible assets was 14.3 years in 2012 and 14.8 years in 2011.

5. Long-term Debt and Capital Lease Obligations

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

 

In thousands    March 31,
2012
    December 31,
2011
 

Bank term loan

   $ 12,250      $ 12,600   

Capital lease obligations

     54        69   
  

 

 

   

 

 

 
     12,304        12,669   

Less current portion

     (1,626     (1,454
  

 

 

   

 

 

 
   $ 10,678      $ 11,215   
  

 

 

   

 

 

 

The term loan provides for quarterly payments of principal and interest with final scheduled maturity on December 31, 2015. The loan bears interest at LIBOR plus 1.25 to 2.25 percent, depending on the percentage of the Company’s liquid assets on deposit with or invested through the bank, or at the prime rate. The effective interest rate on the loan was 1.76 percent at March 31, 2012. The loan is secured by a lien on all assets of the Company excluding intellectual property, which the Company has agreed not to pledge to any other party. The loan requires the Company to maintain a minimum of $15.0 million in unrestricted cash, cash equivalents and investments. The loan also contains certain covenants that restrict additional indebtedness, additional liens and sales of assets, and dividends, distributions or repurchases of common stock.

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

 

5


Table of Contents

The future scheduled principal payments due under these financing obligations were as follows at March 31, 2012:

 

In thousands    Bank Term
Loan
    Capital
Lease
Obligations
 

Year ended December 31:

    

2012

   $ 1,050      $ 39   

2013

     2,100        15   

2014

     4,200        —     

2015

     4,900        —     
  

 

 

   

 

 

 
     12,250        54   

Less current portion

     (1,575     (51
  

 

 

   

 

 

 

Long-term portion

   $ 10,675      $ 3   
  

 

 

   

 

 

 

6. Executive Compensation Plan

Under the Company’s deferred executive compensation plan, the Company accrues a liability for the value of the awards ratably over the vesting period. The grant-date value of awards made in March 2012 was $1.1 million. No awards were made in the first quarter of 2011. The net expense for this plan was $839,000 and $380,000 for the three-month periods ended March 31, 2012 and 2011, respectively.

7. Stockholders’ Equity and Warrants

Authorized Common Stock

At March 31, 2012, the Company had 240,000,000 shares of common stock authorized.

Financings

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

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

 

6


Table of Contents

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

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

Changes in Stockholders’ Equity

The changes in stockholders’ equity for the three-month period ended March 31, 2012 were as follows:

 

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

Balance, January 1, 2012

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

Issuance of common stock pursuant to warrant exercises

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

Issuance of common stock pursuant to ARIAD stock plans

     2,059,563         2         3,375            3,377   

Stock-based compensation

           4,913            4,913   

Payment of tax withholding obligations related to stock-based compensation

           (2,302         (2,302

Net unrealized losses on marketable securities

             (15       (15

Net loss

               (55,894     (55,894
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Balance, March 31, 2012

     165,474,108       $ 165       $ 869,972      $ (15   $ (612,857   $ 257,265   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

8. Fair Value of Financial Instruments

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

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

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

 

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

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

 

     March 31, 2012  
In thousands    Total      Level 1      Level 2      Level 3  

Marketable securities

   $ 89,532       $ —         $ 89,532       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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

Warrant liability

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

 

 

    

 

 

    

 

 

    

 

 

 

The Company’s marketable securities are carried at fair value. Marketable securities are classified as Level 2 in the fair value hierarchy as they are traded in a dealer market where the price at which the dealer is willing to pay or to sell is more readily available than closing prices. Therefore, their fair value is based on observable inputs other than quoted prices included within Level 1.

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

 

In thousands    Three Months Ended
March 31,
 
     2012     2011  

Balance at beginning of period

   $ 58,639      $ 28,815   

Exercise of warrants

     (74,563     (14,863

Revaluation of warrant liability

     15,924        18,572   
  

 

 

   

 

 

 

Balance at end of period

   $ —        $ 32,524   
  

 

 

   

 

 

 

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

 

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9. Stock-Based Compensation

The Company awards stock options and other equity-based instruments to its employees, directors and consultants and provides employees the right to purchase common stock (collectively “share-based payments”), pursuant to stockholder approved plans. The Company’s statement of operations included total compensation cost from share-based payments for the three-month periods ended March 31, 2012 and 2011, as follows:

 

     Three Months Ended
March  31,
 
In thousands    2012      2011  

Compensation cost from:

     

Stock options

   $ 2,889       $ 889   

Stock and stock units

     1,975         1,461   

Purchases of common stock at a discount

     49         54   
  

 

 

    

 

 

 
   $ 4,913       $ 2,404   
  

 

 

    

 

 

 

Compensation cost included in:

     

Research and development expenses

   $ 2,516       $ 1,158   

General and administrative expenses

     2,397         1,246   
  

 

 

    

 

 

 
   $ 4,913       $ 2,404   
  

 

 

    

 

 

 

Stock Options

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

Stock option activity under the Company’s stock plans for the year ended March 31, 2012 was as follows:

 

     Number of
Shares
    Weighted
Average

Exercise  Price
Per Share
 

Options outstanding, January 1, 2012

     7,381,329      $ 5.22   

Granted

     1,531,750      $ 14.90   

Forfeited

     (12,063   $ 2.89   

Exercised

     (775,107   $ 4.23   
  

 

 

   

Options outstanding, March 31, 2012

     8,125,909      $ 7.14   
  

 

 

   

Stock and Stock Unit Grants

Stock and stock unit grants are provided to non-employee directors as compensation and generally carry no restrictions as to resale or are fully vested upon grant. Stock and stock unit grants to officers carry restrictions as to resale for periods of time or vesting provisions over time as specified in the grant. Stock and stock unit grants are valued at the closing market price of the Company’s common stock on the date of grant and compensation expense is recognized over the requisite service period, vesting period or period during which restrictions remain on the common stock or stock units granted.

 

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Stock and stock unit activity under the Company’s stock plans for the year ended March 31, 2012 was as follows:

 

     Number of
Shares
    Weighted
Average

Grant  Date
Fair Value
 

Outstanding, January 1, 2012

     2,785,026      $ 4.51   

Granted

     901,677      $ 15.00   

Forfeited

     (6,800   $ 4.13   

Vested or restrictions lapsed

     (1,420,406   $ 3.73   
  

 

 

   

Outstanding, March 31, 2012

     2,259,497      $ 9.19   
  

 

 

   

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

10. Net Loss Per Share

Net loss per share amounts have been computed based on the weighted-average number of common shares outstanding during each period. Because of the net loss reported in each period, diluted and basic net loss per share amounts are the same. For the three-month periods ended March 31, 2012 and 2011, the following potentially dilutive securities were not included in the computation of net loss per share because the effect would be anti-dilutive:

 

     Three Months Ended
March  31,
 
In thousands    2012      2011  

Outstanding stock options

     8,126         6,884   

Outstanding restricted stock and restricted stock units

     2,259         2,394   

Warrants to purchase common stock

     —           6,038   
  

 

 

    

 

 

 
     10,385         15,316   
  

 

 

    

 

 

 

11. Recently Adopted or Issued Accounting Pronouncements

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

 

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

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

Overview

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

Financial Condition and Results of Operations

At March 31, 2012, we had cash, cash equivalents and marketable securities of $287.8 million, working capital of $261.6 million, and total stockholders’ equity of $257.3 million compared to cash and cash equivalents of $306.3 million, working capital of $282.2 million, and total stockholders’ equity of $220.1 million at December 31, 2011. For the three-month period ended March 31, 2012, we reported a net loss of $55.9 million and cash used in operating activities of $30.6 million. Based on our current operating plan, we believe that our cash and cash equivalents at March 31, 2012 will be sufficient to fund our operations to the end of 2013. This estimate assumes that we receive milestone and royalty payments from Merck & Co., Inc., or Merck, during this period, related to regulatory approvals and commercialization of ridaforolimus for patients with bone and soft-tissue sarcomas, for which Merck has filed for regulatory approval in the United States, Europe and other jurisdictions. However, there can be no assurance that such regulatory approvals will be obtained.

Product Development and Discovery

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

Ponatinib, previously known as AP24534, is an investigational pan BCR-ABL inhibitor that we believe has potential applications in various hematological cancers and solid tumors. In the third quarter of 2011, we completed patient enrollment in a pivotal Phase 2 clinical trial of ponatinib in patients with resistant or intolerant chronic myeloid leukemia, or CML, or Philadelphia positive acute lymphoblastic leukemia, or Ph+ ALL. Subject to further patient follow-up and data analysis in this trial, we expect to file for marketing approval of ponatinib in the United States and Europe in the third quarter of 2012 with potential regulatory approval in the United States as soon as the first quarter of 2013. Subject to obtaining marketing approval, we intend to commercialize ponatinib in the United States and Europe and other select markets worldwide. We also plan to initiate additional clinical trials of ponatinib, including a Phase 3 clinical trial in newly diagnosed CML patients, and commence clinical trials of ponatinib in Japan, in the second half of 2012.

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

 

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Ridaforolimus is an investigational mTOR inhibitor that we discovered internally and later licensed in 2010 to Merck. Under the license agreement, Merck is responsible for all activities and has agreed to fund 100 percent of the costs related to the development, manufacturing and commercialization of ridaforolimus in oncology. We intend to co-promote ridaforolimus in the United States, if approved by the FDA. In the third quarter of 2011, Merck filed in both Europe and the United States for regulatory approval of ridaforolimus as a maintenance therapy for patients with metastatic soft-tissue and bone sarcomas who had a favorable response to chemotherapy. In March 2012, the FDA’s Oncologic Drugs Advisory Committee, or ODAC, voted 13 to 1 that a favorable risk-benefit profile for ridaforolimus had not been demonstrated in this setting. The ODAC panel’s conclusion will be considered by the FDA when making its decision regarding the New Drug Application, or NDA, for ridaforolimus. The FDA action date for this NDA is scheduled to be on or before June 5, 2012. Merck continues to develop ridaforolimus in other oncology indications. Under the license agreement, Merck has agreed to pay us milestone payments based on successful development of ridaforolimus and achievement of specified sales thresholds, as well as tiered, double-digit royalties on global net sales.

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

Critical Accounting Policies and Estimates

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

Revenue Recognition

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

For the three months ended March 31, 2012, we reported total revenue of $81,000. Revenue is recognized when there is persuasive evidence that an arrangement exists, delivery has occurred, the price is fixed and determinable and collection is reasonably assured. Revenue arrangements with multiple elements are divided into separate units of accounting if certain criteria are met, including whether the delivered element has stand-alone value to the customer. When deliverables are separable, consideration received is allocated to the separate units of accounting based on the relative selling price of the elements and the appropriate revenue recognition principles are applied to each unit.

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

Intangible Assets

At March 31, 2012, we reported $5.6 million of intangible assets, consisting of capitalized costs related primarily to purchased and issued patents, patent applications and licenses and the recorded value of the technology associated with our acquisition in September 2008 of the 20-percent minority interest of

 

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ARIAD Gene Therapeutics, Inc. that we did not previously own, net of accumulated amortization. The carrying value of these intangible assets is evaluated for possible impairment, and losses are recorded when the evaluation indicates that the carrying value is not recoverable. This evaluation involves estimates of future net cash flows expected to be generated by the asset. Such estimates require judgment regarding future events and expected cash flows. Changes in these estimates, including decisions to discontinue using the technologies, could result in material changes to our balance sheet and charges to our statements of operations. If we were to abandon the ongoing development of the underlying product candidates or technologies or terminate our efforts to pursue collaborations or license agreements, or if our estimates of future net cash flows expected to be generated by the asset change, we may be required to write down or write off a portion of the carrying value of our intangible assets.

Accrued Product Development Expenses

We accrue expenses for our product development activities based on our estimates of services performed or progress achieved pursuant to contracts and agreements with multiple vendors including research laboratories, contract manufacturers, contract research organizations and clinical sites. These estimates are recorded in research and development expenses in our statement of operations and are reflected in accrued product development expenses on our balance sheet. At March 31, 2012, we reported accrued product development expenses of $11.0 million on our balance sheet.

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

Fair Value of Warrants

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

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

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

Results of Operations

For the three months ended March 31, 2012 and 2011

Revenue

We recorded total revenue of $81,000 in the three-month period ended March 31, 2012, compared to $56,000 in the corresponding period in 2011. Total revenue in 2012 consisted primarily of license revenue

 

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pursuant to a license agreement related to our ARGENT technology in accordance with our revenue recognition policy. Total revenue in 2011 consisted entirely of service revenue of $56,000, reflecting services provided to Merck pursuant to our license agreement for ridaforolimus. We expect that our quarterly service revenue will decrease over the remainder of 2012 as we continue to decrease the level of services performed at the request of Merck.

We expect that our revenue in 2012 will be primarily dependent on the status of any regulatory approvals for ridaforolimus, which could result in milestone payments from Merck. Pursuant to our license agreement, Merck has agreed to pay us up to $40 million associated with regulatory approvals of ridaforolimus for the sarcoma indication, consisting of $25 million for marketing approval in the United States, $10 million for approval to sell ridaforolimus in the European Union, including first pricing and reimbursement approval granted by a regulatory authority in any major European country or by the EMA, and $5 million for marketing approval of ridaforolimus in Japan. Merck submitted applications for approval of ridaforolimus in the United States and in Europe in 2011, which are currently under review. In addition, if ridaforolimus receives regulatory approval and Merck commences sales, we would also be entitled to receive tiered double-digit royalties on global net sales under the license agreement, although in 2012 we do not expect such royalty revenue will be material to our results of operations. As noted above, there can be no assurance that ridaforolimus will receive regulatory approval, or if it does, that it will be commercially successful.

Operating Expenses

Research and Development Expenses

Research and development expenses increased by $14.2 million, or 97 percent, to $28.8 million in the three-month period ended March 31, 2012, compared to $14.6 million in the corresponding period in 2011, for the reasons set forth below. The research and development process necessary to develop a pharmaceutical product for commercialization is subject to extensive regulation by numerous governmental authorities in the United States and other countries. This process typically takes years to complete and requires the expenditure of substantial resources. Current requirements include:

 

 

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

 

 

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

 

 

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

 

 

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

 

 

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

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

We group our research and development, or R&D, expenses into two major categories: direct external expenses and all other R&D expenses. Direct external expenses consist of costs of outside parties to

 

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

Our R&D expenses for the three-month period ended March 31, 2012, as compared to the corresponding period in 2011, were as follows:

 

     Three months ended March 31,      Increase/
(decrease)
 
In thousands    2012      2011     

Direct external expenses:

        

Clinical programs

   $ 10,886       $ 3,994       $ 6,892   

Preclinical programs

     —           1,113         (1,113

All other R&D expenses

     17,888         9,467         8,421   
  

 

 

    

 

 

    

 

 

 
   $ 28,774       $ 14,574       $ 14,200   
  

 

 

    

 

 

    

 

 

 

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

Direct external expenses for ponatinib were $10.1 million in the three-month period ended March 31, 2012, an increase of $6.1 million as compared to the corresponding period in 2011. The increase is due to increases in clinical trial costs of $2.4 million, contract manufacturing costs of $2.5 million, and supporting non-clinical costs of $1.3 million. Clinical trials costs increased primarily due to increased enrollment and treatment of patients in our pivotal Phase 2 clinical trial, offset in part by a decrease in costs of our on-going Phase 1 clinical trial as treatment of patients and other activities in this trial have decreased over this time period. Contract manufacturing costs increased due primarily to the conduct of product and process development and qualification initiatives to support regulatory filings for this product candidate, as well as the production of ponatinib for use in our clinical trials. Supporting non-clinical costs increased due primarily to increased quality and stability studies and initiatives to develop and commercialize a companion diagnostic test to identify patients with the T315I mutation of the BCR-ABL gene. We expect that our direct external expenses for ponatinib will continue to increase in 2012 as we continue to treat patients in our ongoing Phase 1 and Phase 2 clinical trials, initiate additional clinical trials of this product candidate, conduct additional studies to support continued development of ponatinib, and prepare and potentially file applications for regulatory approval of this product candidate.

Direct external expenses for AP26113 were $766,000 in the three-month period ended March 31, 2012, which were entirely included in clinical programs in 2012 in the table above reflecting the transfer of this program to a clinical development status in the third quarter of 2011. Direct external expenses for AP26113 were $1.1 million for the three-month period ended March 31, 2011, which were entirely included in preclinical programs. The decrease in expenses for AP26113 was due primarily to the completion of toxicology studies and product development initiatives required for filing of the IND, offset in part by costs of the Phase 1/2 clinical trial initiated in the third quarter of 2011. We expect that our direct external expenses for AP26113 will continue to increase in 2012 as we continue to enroll patients in our on-going clinical trial of this product candidate and conduct additional studies to support continued development of AP26113.

 

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All other R&D expenses increased by $8.4 million in the three-month period ended March 31, 2012, as compared to the corresponding period in 2011. This increase is primarily due to an increase in personnel costs of $5.5 million due primarily to an increase in number of employees to support expanding R&D activities, salary increases, a newly instituted cash bonus program, and an increase in recruiting costs; an increase in professional services of $0.5 million due primarily to initiatives to upgrade systems and technology used in our business; an increase in stock-based compensation expense of $1.4 million as a result of the impact of a significant increase in the market value of our common stock on the value of stock-based compensation awards in 2011 and 2012; and an increase in rent expense of $0.7 million as a result of an amendment to our building lease. We expect that all other R&D expenses will continue to increase in 2012 to support the expanding development of ponatinib and AP26113, the preparation and potential filing of regulatory filings for approval of ponatinib in the United States and Europe, and our ongoing discovery research efforts.

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

General and Administrative Expenses

General and administrative expenses increased by $6.4 million, or 131 percent, to $11.3 million in the three-month period ended March 31, 2012, compared to $4.9 million in the corresponding period in 2011. This increase was due primarily to an increase in personnel costs of $3.3 million due primarily to an increase in number of employees to support expanding R&D activities and to prepare for potential commercial launch of one or more product candidates, salary increases, a newly instituted cash bonus program and an increase in recruiting costs; an increase in professional services of $1.5 million as a result of an increase in corporate and commercial development initiatives to plan and prepare for the potential commercial launch of ponatinib; an increase in stock-based compensation expense of $1.1 million due to the impact of a significant increase in the market value of our common stock on the value of stock-based compensation awards in 2011 and 2012; as well as an increase in travel costs, insurance costs and other miscellaneous costs. We expect that general and administrative expenses will continue to increase in 2012 as we prepare for potential commercial launch of ponatinib in the United States and in Europe, including the hiring of sales, marketing and commercial operations personnel and the establishment of our European headquarters and operations, and support our expanding research and development activities.

We expect that our operating expenses in total will continue to increase substantially in 2012 for the reasons described above. Operating expenses may fluctuate from quarter to quarter. The actual amount of any increase in operating expenses will depend on, among other things, the status of regulatory

 

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reviews and timing of potential regulatory approvals of our product candidates, the costs to prepare for potential commercial launch of ponatinib in the United States and in Europe, the progress of our product development programs, including on-going and planned clinical trials, results of continuing non-clinical studies and the costs of product and process development activities and product manufacturing.

Other Income (Expense)

Interest Income/Expense

Interest income increased to $68,000 in the three-month period ended March 31, 2012 from $55,000 in the corresponding period in 2011, as a result of a higher average balance of funds invested in 2012.

Interest expense decreased to $57,000 in the three-month period ended March 31, 2012 from $60,000 in the corresponding period in 2011 as a result of lower average borrowings in 2012.

Revaluation of Warrant Liability

In the first quarter of 2012, all 5,805,843 warrants that were outstanding at December 31, 2011 were exercised for proceeds to us of approximately $12.5 million. During the first quarter of 2012, the value of the warrant liability on our balance sheet was adjusted, resulting in a non-cash charge of $15.9 million for the three-month period ended March 31, 2012, due primarily to the increase in the market price of our common stock from December 31, 2011 to the date the warrants were exercised. The revaluation of our warrant liability in the corresponding period in 2011 resulted in a non-cash charge of $18.6 million. Upon exercise of those remaining warrants, the balance of the warrant liability and the associated exercise proceeds were credited to stockholders’ equity and the liability was eliminated.

Operating Results

We reported a loss from operations of $40.0 million in the three-month period ended March 31, 2012 compared to a loss from operations of $19.4 million in the corresponding period in 2011, an increase of $20.6 million, or 106 percent. We also reported a net loss of $55.9 million in the three-month period ended March 31, 2012, compared to a net loss of $38.0 million in the corresponding period in 2011, an increase in net loss of $17.9 million or 47 percent, and a net loss per share of $0.35 and $0.29, respectively. The increase in net loss is largely due to the increase in our operating expenses described above. Our results of operations for the remaining quarters of 2012 will vary from those of the quarter ended March 31, 2012 and actual results will depend on a number of factors, including the receipt of any milestone payments from Merck under our license agreement, the progress of our product development programs, increases in number of employees and related personnel costs, preparations for anticipated commercial launch of our product candidates, the progress of our discovery research programs, the impact of any commercial and business development activities and other factors. The extent of changes in our results of operations will also depend on the sufficiency of funds on hand or available from time to time, which will influence the amount we will spend on operations and capital expenditures and the development timelines for our product candidates.

Liquidity and Capital Resources

We have financed our operations and investments to date primarily through sales of our common stock in public and private offerings, through the receipt of up-front and milestone payments from collaborations and licenses with pharmaceutical and biotechnology companies and, to a lesser extent, through issuances of our common stock pursuant to our stock option and employee stock purchase plans, supplemented by the borrowing of long-term debt from commercial lenders. We sell securities and incur debt when the terms of such transactions are deemed favorable to us and as necessary to fund our current and projected cash needs. We seek to balance the level of cash, cash equivalents and marketable securities on hand with our projected needs and to allow us to withstand periods of uncertainty relative to the availability of funding on favorable terms.

 

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

 

In thousands    March 31,
2012
     December 31,
2011
 

Cash and cash equivalents

   $ 198,222       $ 306,256   

Marketable securities

     89,532         —     
  

 

 

    

 

 

 
   $ 287,754       $ 306,256   
  

 

 

    

 

 

 

We manage our marketable securities portfolio to maintain liquidity for payment of our obligations and to maximize yields. We purchase marketable securities to enhance our yield on invested funds and when such amounts are not needed for near-term payment of obligations. We generally hold our marketable securities to maturity. Upon maturity of such marketable securities, a portion may be retained as cash to provide for payment of current obligations while the remainder will be reinvested in accordance with our investment policy. For the three-month period ended March 31, 2012, we made purchases of marketable securities in the amount of $89.6 million. For the three-month period ended March 31, 2011, there were no purchases or sales of marketable securities.

Sources of Funds

For the three months ended March 31, 2012 and 2011, our sources of funds were as follows:

 

     Three Months Ended
March 31,
 
In thousands    2012      2011  

Sales/issuances of common stock:

     

Pursuant to warrant exercises

   $ 12,482       $ 7,580   

Pursuant to stock option and purchase plans

     3,377         1,402   

Proceeds from long-term borrowings

     —           4,375   
  

 

 

    

 

 

 
   $ 15,859       $ 13,357   
  

 

 

    

 

 

 

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

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

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

 

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

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

Uses of Funds

The primary uses of our cash are to fund our operations and working capital requirements and, to a lesser degree, to repay our long-term debt, to invest in intellectual property and to invest in our property and equipment as needed for our business. For the three-month periods ended March 31, 2012 and 2011, our uses of cash were as follows:

 

     Three Months Ended
March 31,
 
In thousands    2012      2011  

Net cash used in operating activities

   $ 30,561       $ 17,269   

Repayment of long-term borrowings and capital leases

     365         374   

Investment in intangible assets

     195         241   

Investment in property and equipment

     916         423   

Payment of tax withholding obligations related to stock compensation

     2,302         324   
  

 

 

    

 

 

 
   $ 34,339       $ 18,631   
  

 

 

    

 

 

 

The net cash used in operating activities is comprised of our net losses, adjusted for non-cash expenses, changes in deferred revenue, and working capital requirements. As noted above, our net loss for the three-month period ended March 31, 2012 increased by $17.9 million, as compared to the corresponding period in 2011, due primarily to the overall increases in operating expenses of $20.6 million. Our net cash used in operating activities increased by $13.3 million in the three-month period ended March 31, 2012 as compared to the corresponding period in 2011, reflecting overall increases in operating expenses and changes in working capital. As noted above, we expect that we will continue to incur a net loss in 2012 due to ongoing development of our product candidates and preparation for potential commercialization of our product candidates in the United States and Europe; that our investment in intangible assets, consisting of our intellectual property, will increase in 2012 in support of our product development and commercialization activities; and that our investment in property and equipment will increase in 2012 to support growth of our R&D and general and administrative functions.

 

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Off-Balance Sheet Arrangements

As part of our ongoing business, we do not participate in transactions that generate relationships with unconsolidated entities for financial partnerships, such as entities often referred to as structured finance or special purpose entities which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. As of March 31, 2012, we maintained outstanding letters of credit of $749,000 in accordance with the terms of our long-term lease for our office and laboratory facility and for other purposes.

Contractual Obligations

We have substantial fixed contractual obligations under our long-term debt agreement, operating and capital lease agreements, employment agreements and benefit plans. These non-cancellable contractual obligations were comprised of the following as of March 31, 2012:

 

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

Long-term debt

   $ 12,250       $ 1,050       $ 11,200       $ —         $ —     

Operating leases

     38,690         2,872         15,796         11,023         8,999   

Employment agreements

     6,736         5,198         1,538         —           —     

Other long-term obligations

     6,990         860         6,130         —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total fixed contractual obligations

   $ 64,666       $ 9,980       $ 34,664       $ 11,023       $ 8,999   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Long-term debt consists of scheduled principal payments on such debt. Interest on our long-term debt is based on variable interest rates. Assuming a constant interest rate of 1.76 percent, our average interest rate on our debt at March 31, 2012, over the remaining term of the debt, our interest expense would total approximately $155,000 for the remainder of 2012, and $365,000 in the period 2013 through 2015.

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

Liquidity

At March 31, 2012, we had cash, cash equivalents and marketable securities totaling $287.8 million and working capital of $261.6 million, compared to cash and cash equivalents totaling $306.3 million and working capital of $282.2 million at December 31, 2011. For the three-month period ended March 31, 2012, we reported a net loss of $55.9 million and cash used in operating activities of $30.6 million. Based on our current operating plan, we believe that our cash and cash equivalents at March 31, 2012, together with anticipated milestones and royalty payments from Merck, assuming regulatory approval of ridaforolimus, will be sufficient to fund our operations to the end of 2013. This estimate assumes that we receive milestones and royalty payments from Merck during this period related to regulatory approvals and commercialization of ridaforolimus for patients with soft-tissue and bone sarcomas, for which Merck has filed for regulatory approval in the United States, Europe and other jurisdictions. However, there can be no assurance that such regulatory approvals will be obtained. The FDA action date for the ridaforolimus NDA is scheduled to be on or before June 5, 2012.

 

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We do not have significant recurring revenue streams and have historically incurred operating losses and net losses related to our research and development activities. We expect to continue to incur significant operating expenses and that our operating expenses will increase substantially in 2012 and beyond. We plan to expand our development of our product candidates, ponatinib and AP26113, and to conduct additional clinical trials, including a Phase 3 clinical trial of ponatinib that we plan to initiate in 2012, and continue manufacturing-related and other activities in support of these efforts. Subject to our filing for and receipt of marketing approval, we plan to commercialize ponatinib and future product candidates on our own in the United States, Europe and other select markets worldwide, which will require increased spending to establish sales, marketing and distribution capabilities in these markets. We also plan to continue to invest in discovery research and add to our pipeline of product candidates through these activities. There are many factors that will affect our level of spending on these activities, including the number, size and complexity of, and rate of enrollment of patients in, our clinical trials for ponatinib and AP26113, the extent of other development activities for ponatinib and AP26113, including product and process development, the progress of our preclinical and discovery research programs, the status of regulatory reviews and timing of potential regulatory approvals, in the United States, Europe and other markets of ponatinib, ridaforolimus and other product candidates, the size of the workforce and required systems and infrastructure necessary to support commercialization of our product candidates in multiple markets and other factors.

We currently have no drug products approved for sale. Until such time, if ever, that we receive regulatory approval for our product candidates and generate significant revenues from sales of our product candidates, we plan to continue to fund our operations through the potential receipt of milestone payments under our existing licenses, by issuing common stock, debt or other securities in public or private offerings, or by incurring additional debt from commercial lenders. Under our license agreement with Merck, we will be eligible to receive up to $40 million in additional milestone payments related to the sarcoma indication (consisting of $25 million for marketing approval in the United States, $10 million for approval to sell ridaforolimus in the European Union, including first pricing and reimbursement approval granted by a regulatory authority in any major European country or by the EMA, and $5 million for marketing approval in Japan). In addition to milestone payments, if ridaforolimus receives regulatory approval, Merck has agreed to pay us tiered double-digit royalties on global net sales of ridaforolimus. We have also exercised our option to co-promote ridaforolimus with Merck in the United States, subject to the terms of a co-promotion agreement to be signed by the parties, pursuant to which Merck will reimburse us for our sales efforts. As previously noted, there can be no assurance that such regulatory approvals will be obtained or that we will receive any additional milestone or other payments under our license agreement with Merck.

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

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

 

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

Securities Litigation Reform Act

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

 

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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

We invest cash balances in excess of operating requirements first in short-term, highly liquid securities, with maturities of 90 days or less, and money market accounts. Depending on our level of available funds and our expected cash requirements, we may invest a portion of our funds in marketable securities, consisting generally of corporate debt and U.S. government and agency securities. Maturities of our marketable securities are generally limited to periods necessary to fund our liquidity needs and may not in any case exceed three years. These securities are classified as available-for-sale. Available-for-sale securities are recorded on the balance sheet at fair value with unrealized gains or losses reported as a separate component of stockholders’ equity (accumulated other comprehensive income or loss).

Our investments are sensitive to interest rate risk. We believe, however, that the effect, if any, of reasonable possible near-term changes in interest rates on our financial position, results of operations and cash flows generally would not be material due to the short-term nature of these investments. In particular, at March 31, 2012, because our available funds are invested solely in securities with remaining maturities of twenty-one months or less, we believe that our risk of loss due to changes in interest rates is not material.

At March 31, 2012, we had $12.3 million outstanding under a bank term note which bears interest at prime or, alternatively, LIBOR + 1.25 percent to 2.25 percent. This note is sensitive to interest rate risk. In the event of a hypothetical 10% increase in the interest rate on which the loan is based (18 basis points at March 31, 2012), we would incur approximately $20,000 of additional interest expense per year based on expected balances over the next twelve months.

 

ITEM 4. CONTROLS AND PROCEDURES

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

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

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

 

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PART II. OTHER INFORMATION

 

ITEM 1A. RISK FACTORS

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

 

ITEM 6. EXHIBITS

 

  10.1+    Amended and Restated Executive Employment Agreement, dated May 1, 2010 between ARIAD Pharmaceuticals, Inc. and Maria Cantor.
  10.2    First Amendment to Amended and Restated Executive Employment Agreement, dated January 25, 2012, between ARIAD Pharmaceuticals, Inc. and Maria Cantor.
  10.3    First Amendment to Amended and Restated Executive Employment Agreement, dated January 25, 2012, between ARIAD Pharmaceuticals, Inc. and Frank G. Haluska, M.D., Ph.D.
  10.4+    Director Compensation Arrangements.
  10.5+    Form of 2012 Performance Share Certificate under the ARIAD Pharmaceuticals, Inc. 2006 Long-Term Incentive Plan.
  31.1    Certification of the Chief Executive Officer.
  31.2    Certification of the Chief Financial Officer.
  32.1    Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101@    The following materials from ARIAD Pharmaceutical, Inc.’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2012, formatted in XBRL (eXtensible Business Reporting Language): (i) Unaudited Condensed Consolidated Balance Sheets, (ii) Unaudited Condensed Consolidated Statements of Operations, (iii) Unaudited Condensed Consolidated statements of Comprehensive Loss, (iv) Unaudited Condensed Consolidated Statements of Cash Flows, and (v) Notes to Unaudited Condensed Consolidated Financial Statements.

 

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

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

 

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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.

 

  ARIAD Pharmaceuticals, Inc.
  By:  

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

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

/s/ Edward M. Fitzgerald

    Edward M. Fitzgerald
    Executive Vice President,
    Chief Financial Officer
    (Principal financial officer

Date: May 9, 2012

    and chief accounting officer)

 

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EXHIBIT INDEX

 

Exhibit
No.
   Title
  10.1+    Amended and Restated Executive Employment Agreement, dated May 1, 2010 between ARIAD Pharmaceuticals, Inc. and Maria Cantor.
  10.2    First Amendment to Amended and Restated Executive Employment Agreement, dated January 25, 2012, between ARIAD Pharmaceuticals, Inc. and Maria Cantor.
  10.3    First Amendment to Amended and Restated Executive Employment Agreement, dated January 25, 2012, between ARIAD Pharmaceuticals, Inc. and Frank G. Haluska, M.D., Ph.D.
  10.4+    Director Compensation Arrangements.
  10.5+    Form of 2012 Performance Share Certificate under the ARIAD Pharmaceuticals, Inc. 2006 Long-Term Incentive Plan.
  31.1    Certification of the Chief Executive Officer.
  31.2    Certification of the Chief Financial Officer.
  32.1    Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101@    The following materials from ARIAD Pharmaceutical, Inc.’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2012, formatted in XBRL (eXtensible Business Reporting Language): (i) Unaudited Condensed Consolidated Balance Sheets, (ii) Unaudited Condensed Consolidated Statements of Operations, (iii) Unaudited Condensed Consolidated Statements of Comprehensive Loss, (iv) Unaudited Condensed Consolidated Statements of Cash Flows, and (v) Notes to Unaudited Condensed Consolidated Financial Statements.

 

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

 

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