Attached files

file filename
EXCEL - IDEA: XBRL DOCUMENT - IDENIX PHARMACEUTICALS INCFinancial_Report.xls
EX-31.1 - EX-31.1 - IDENIX PHARMACEUTICALS INCd700947dex311.htm
EX-31.2 - EX-31.2 - IDENIX PHARMACEUTICALS INCd700947dex312.htm
EX-32.2 - EX-32.2 - IDENIX PHARMACEUTICALS INCd700947dex322.htm
EX-32.1 - EX-32.1 - IDENIX PHARMACEUTICALS INCd700947dex321.htm
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

(Mark One)

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

For the Quarterly Period Ended March 31, 2014

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 000-49839

 

 

Idenix Pharmaceuticals, Inc.

(Exact name of registrant as specified in its charter)

 

 

 

Delaware   45-0478605

(State or Other Jurisdiction of

Incorporation or Organization)

 

(IRS Employer

Identification No.)

 

320 Bent Street

Cambridge, MA

  02141
(Address of Principal Executive Offices)   (Zip Code)

Registrant’s telephone number, including area code: (617) 995-9800

 

 

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

 

Large accelerated filer:   ¨    Accelerated filer:   x
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 by Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

As of April 23, 2014, the number of shares of the registrant’s common stock, par value $0.001 per share, outstanding was 150,843,352 shares.

 

 

 


Table of Contents
     Page  

Part I-Financial Information

  

Item 1. Financial Statements

  

Unaudited Condensed Consolidated Balance Sheets at March 31, 2014 and December 31, 2013

     3  

Unaudited Condensed Consolidated Statements of Operations and Comprehensive Loss for the Three Months Ended March 31, 2014 and 2013

     4  

Unaudited Condensed Consolidated Statements of Cash Flows for the Three Months Ended March  31, 2014 and 2013

     5  

Notes to the Unaudited Condensed Consolidated Financial Statements

     6  

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

     17  

Item 3. Quantitative and Qualitative Disclosures About Market Risk

     22  

Item 4. Controls and Procedures

     22  

Part II-Other Information

  

Item 1. Legal Proceedings

     22  

Item 1A. Risk Factors

     22  

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

     41  

Item 3. Defaults Upon Senior Securities

     42  

Item 4. Mine Safety Disclosures

     42   

Item 5. Other Information

     42  

Item 6. Exhibits

     42  

Signatures

     43  

Exhibit Index

     44  

Exhibit 31.1

  

Exhibit 31.2

  

Exhibit 32.1

  

Exhibit 32.2

  

EX-101 INSTANCE DOCUMENT

  

EX-101 SCHEMA DOCUMENT

  

EX-101 CALCULATION LINKBASE DOCUMENT

  

EX-101 DEFINITION LINKBASE DOCUMENT

  

EX-101 LABELS LINKBASE DOCUMENT

  

EX-101 PRESENTATION LINKBASE DOCUMENT

  

 

2


Table of Contents

IDENIX PHARMACEUTICALS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(IN THOUSANDS, EXCEPT SHARE DATA)

(UNAUDITED)

 

     March 31,
2014
    December 31,
2013
 
ASSETS     

Current assets:

    

Cash and cash equivalents

   $ 205,008      $ 122,006   

Restricted cash

     1,402        1,402   

Receivables from related party

     1,292        1,409   

Other current assets

     4,198        4,935   
  

 

 

   

 

 

 

Total current assets

     211,900        129,752   

Property and equipment, net

     2,538        2,782   

Receivables from related party, net of current portion

     4,842        5,082   

Other assets

     3,852        3,395   
  

 

 

   

 

 

 

Total assets

   $ 223,132      $ 141,011   
  

 

 

   

 

 

 
LIABILITIES AND STOCKHOLDERS’ EQUITY     

Current liabilities:

    

Accounts payable

   $ 8,900      $ 7,781   

Accrued expenses

     12,035        9,303   

Deferred revenue, related party

     714        714   

Other current liabilities

     279        392   
  

 

 

   

 

 

 

Total current liabilities

     21,928        18,190   

Other long-term liabilities

     9,437        9,278   

Deferred revenue

     4,272        4,272   

Deferred revenue, related party, net of current portion

     3,095        3,274   
  

 

 

   

 

 

 

Total liabilities

     38,732        35,014   

Commitments and contingencies (Note 7)

    

Stockholders’ equity:

    

Common stock, $0.001 par value; 200,000,000 shares authorized at March 31, 2014 and December 31, 2013; 150,843,352 and 134,119,350 shares issued and outstanding at March 31, 2014 and December 31, 2013, respectively

     151        134   

Additional paid-in capital

     1,047,857        935,406   

Accumulated other comprehensive income

     908        859   

Accumulated deficit

     (864,516     (830,402
  

 

 

   

 

 

 

Total stockholders’ equity

     184,400        105,997   
  

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 223,132      $ 141,011   
  

 

 

   

 

 

 

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

 

3


Table of Contents

IDENIX PHARMACEUTICALS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

AND COMPREHENSIVE LOSS

(IN THOUSANDS, EXCEPT PER SHARE DATA)

(UNAUDITED)

 

     Three Months Ended March 31,  
     2014     2013  

Revenues:

    

Collaboration revenue - related party

   $ (3,007   $ 852   
  

 

 

   

 

 

 

Total revenues

     (3,007     852   

Operating expenses:

    

Cost of revenues

     —          332   

Research and development

     21,077        24,008   

General and administrative

     10,303        7,535   
  

 

 

   

 

 

 

Total operating expenses

     31,380        31,875   
  

 

 

   

 

 

 

Loss from operations

     (34,387     (31,023

Other income, net

     274        271   
  

 

 

   

 

 

 

Loss before income taxes

     (34,113     (30,752

Income tax expense

     (1     (1
  

 

 

   

 

 

 

Net loss

   $ (34,114   $ (30,753
  

 

 

   

 

 

 

Basic and diluted net loss per common share

   $ (0.24   $ (0.23

Shares used in computing basic and diluted net loss per common share

     145,118        133,958   

Comprehensive loss:

    

Net loss

   $ (34,114   $ (30,753

Changes in other comprehensive income:

    

Foreign currency translation adjustment

     49        (349
  

 

 

   

 

 

 

Comprehensive loss

   $ (34,065   $ (31,102
  

 

 

   

 

 

 

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

 

4


Table of Contents

IDENIX PHARMACEUTICALS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(IN THOUSANDS)

(UNAUDITED)

 

     Three Months Ended March 31,  
     2014     2013  

Cash flows from operating activities:

    

Net loss

   $ (34,114   $ (30,753

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

    

Depreciation

     271        866   

Share-based compensation expense

     1,430        1,248   

Revenue adjustment for contingently issuable shares

     3,199        (673

Other

     6        —     

Changes in operating assets and liabilities:

    

Receivables from related party

     117        137   

Other assets

     564        511   

Accounts payable

     1,119        (71

Accrued expenses and other current liabilities

     2,550        3,671   

Deferred revenue, related party

     (179     (179

Other liabilities

     160        207   
  

 

 

   

 

 

 

Net cash used in operating activities

     (24,877     (25,036
  

 

 

   

 

 

 

Cash flows from investing activities:

    

Purchases of property and equipment

     (11     (249
  

 

 

   

 

 

 

Net cash used in investing activities

     (11     (249
  

 

 

   

 

 

 

Cash flows from financing activities:

    

Proceeds from exercise of common stock options

     1,248        5   

Proceeds from issuance of common stock, net of offering costs

     106,590        —     
  

 

 

   

 

 

 

Net cash provided by financing activities

     107,838        5   

Effect of changes in exchange rates on cash and cash equivalents

     52        (249
  

 

 

   

 

 

 

Net increase (decrease) in cash and cash equivalents

     83,002        (25,529

Cash and cash equivalents at beginning of period

     122,006        230,826   
  

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 205,008      $ 205,297   
  

 

 

   

 

 

 

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

 

5


Table of Contents

IDENIX PHARMACEUTICALS, INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

1. BUSINESS OVERVIEW

Overview

Idenix Pharmaceuticals, Inc., which we refer to together with our wholly owned subsidiaries as Idenix, we, us or our, is a biopharmaceutical company engaged in the discovery and development of drugs for the treatment of human viral diseases with operations in the United States and France. Currently, our primary research and development focus is on the treatment of patients with hepatitis C virus, or HCV, using nucleotide polymerase inhibitors and NS5A inhibitors.

In April 2014, we completed a seven-day proof-of-concept study of IDX21437, our lead uridine nucleotide prodrug candidate. IDX21437 monotherapy was well-tolerated and showed potent antiviral activity of mean maximal viral load reductions of 4.2 to 4.3 log10 IU/mL for patients infected with HCV genotype 1, 2 or 3 receiving 300 mg once-daily of IDX21437 for seven days. We expect to initiate an all-oral pan-genotypic combination phase II clinical trial of IDX21437 and samatasvir, our NS5A inhibitor, in mid-2014.

IDX21459 is our follow-on uridine-based nucleotide prodrug candidate that has shown a favorable preclinical profile including potent, pan-genotypic activity and favorable safety with respect to cardiac, mitochondrial and genotoxicity assessments. In April 2014, we initiated a phase I clinical trial in several countries outside the U.S. for IDX21459 to evaluate healthy volunteers and genotype 1 HCV-infected patients at multiple doses.

As part of our ongoing and extensive nucleotide discovery effort, we continue to explore and develop a diverse spectrum of nucleotides with novel bases, prodrugs and sugar moieties. Our discovery efforts are currently focused on the identification of a novel nucleotide prodrug with a distinct resistance profile from our clinical nucleotide candidates that can be used in a combination strategy to treat HCV.

In March 2014, we and certain co-owners were granted a European Patent, EP 1 523 489, that covers 2’-methyl-2’-fluoro nucleosides for treating HCV. Subsequently, we filed infringement lawsuits against Gilead Sciences, Inc., and/or certain of its subsidiaries, which we refer to as Gilead, in France, Germany and the United Kingdom. In these lawsuits, we are seeking remedies with respect to Gilead’s marketing and sales of drugs containing SovaldiTM, which we believe infringes our European patent. Gilead has counterclaimed for invalidity in certain of these jurisdictions. We also have several other legal matters ongoing with Gilead including infringement lawsuits in the U.S. and Canada, an ongoing interference case declared by the U.S. Patent and Trademark Office, or USPTO, and invalidity matters in other foreign jurisdictions. In March 2014, related to the Norway invalidity proceeding, the Oslo District Court determined that our patent NO 330 755 covering 2’-methyl-2’-fluoro nucleoside compounds useful in the treatment of HCV and other flaviviridae infections is invalid. We filed an appeal to challenge the court’s decision. The details of these ongoing legal matters are described more fully in Note 7.

In January 2014, we issued 16.4 million shares of our common stock to Baupost Group, L.L.C., or Baupost, a related party, through a registered direct offering under a shelf registration and received $106.6 million in net proceeds. We believe our current cash and cash equivalents will be sufficient to sustain operations into at least the second half of 2015.

Our drug development programs and the potential commercialization of our drug candidates will require substantial cash to fund costs that we incur in connection with preclinical studies and clinical trials, regulatory review, manufacturing and sales and marketing efforts. We have incurred losses in each year since our inception and at March 31, 2014, we had an accumulated deficit of $864.5 million. We expect to incur losses over the next several years as we continue to expand our drug discovery and development efforts. As a result of continuing losses, we may seek additional funding through a combination of public or private financing, collaborative relationships or other arrangements and we may seek a partner who will assist in the future development and commercialization of our drug candidates.

We are subject to risks common to companies in the biopharmaceutical industry including, but not limited to, the successful development of products, clinical trial uncertainty, regulatory approval, fluctuations in operating results and financial risks, potential need for additional funding, protection of proprietary technology and patent risks, compliance with government regulations, dependence on key personnel and collaboration partners, competition, technological and medical risks and management of growth.

 

6


Table of Contents

IDENIX PHARMACEUTICALS, INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—CONTINUED

(UNAUDITED)

 

Basis of Presentation

The condensed consolidated financial statements reflect the operations of Idenix Pharmaceuticals, Inc. and our wholly owned subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation.

The accompanying condensed consolidated financial statements are unaudited and have been prepared by us in accordance with generally accepted accounting principles in the United States of America, or GAAP, for interim reporting. Accordingly, these interim financial statements do not include all the information and footnotes required by GAAP for complete financial statements and should be read in conjunction with the audited consolidated financial statements for the year ended December 31, 2013, which are included in our Annual Report on Form 10-K filed with the Securities and Exchange Commission, or SEC, on February 27, 2014. These interim financial statements are unaudited, but in the opinion of management, reflect all adjustments (including normal recurring accruals) necessary for a fair statement of the financial position and results of operations for the interim periods presented. The year ended condensed consolidated balance sheet data presented for comparative purposes was derived from audited financial statements, but does not include all disclosures required by GAAP.

The preparation of condensed consolidated financial statements in accordance with GAAP requires management to make estimates and judgments that may affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities. On an on-going basis, we evaluate our estimates, judgments and methodologies, including those related to revenue recognition, accrued expenses, clinical trial expenses, impairment and amortization of long-lived assets, share-based compensation, income taxes including the valuation allowance for deferred tax assets, contingencies and litigation. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable, the results of which form the basis for making judgments about the carrying values of assets and liabilities. Actual results may differ from these estimates under different assumptions or conditions.

The results of operations for the interim periods are not necessarily indicative of the results of operations to be expected for any future period or the fiscal year ending December 31, 2014.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Revenue Recognition

Revenue is recognized in accordance with SEC Staff Accounting Bulletin No. 101, Revenue Recognition in Financial Statements, as amended by SEC Staff Accounting Bulletin No. 104, Revenue Recognition, and for revenue arrangements entered into after June 30, 2003, in accordance with the revenue recognition guidance of the Financial Accounting Standards Board, or FASB. For multiple-element revenue arrangements entered into or materially modified after January 1, 2011, we recognize revenue under Accounting Standard Codification Topic 605, Revenue Recognition, or Topic 605.

We record revenue provided that there is persuasive evidence that an arrangement exists, delivery has occurred or services have been rendered, the price is fixed or determinable and collectability is reasonably assured.

Collaboration Revenue — Related Party

In July 2012, we executed a termination and revised relationship agreement, which we refer to as the termination agreement, with Novartis Pharma AG, or Novartis, which granted Novartis a non-exclusive license to conduct clinical trials evaluating a combination of any of our and Novartis’ HCV drug candidates after the HCV drug candidates have completed dose-ranging studies, subject to meeting certain criteria. The details of the termination agreement are described more fully in Note 6. We determined that the best estimate of selling price, or BESP, of Novartis’ non-exclusive license at July 31, 2012 was $5.0 million which is recognized as collaboration revenue from related party on a straight-line basis over the term of the non-exclusive license, or seven years. In establishing BESP for the non-exclusive license, we used a discounted cash flow model and considered the likelihood of our and Novartis’ drugs being commercialized, the development and commercialization timeline, discount rate, and probable treatment combination and associated peak sales figures which generate royalty amounts. As of March 31, 2014 and December 31, 2013, the remaining balances of $3.8 million and $4.0 million, respectively, were included in deferred revenue from related party in our condensed consolidated balance sheets.

 

7


Table of Contents

IDENIX PHARMACEUTICALS, INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—CONTINUED

(UNAUDITED)

 

Also under the collaboration, Novartis is entitled to stock subscription rights. If we issue any shares of capital stock, other than in limited situations, Novartis has the right to purchase such number of shares required to maintain its percentage ownership of our voting stock for either the same consideration per share paid by others acquiring our stock or, in specified situations, for a 10% premium to the consideration per share paid by others acquiring our stock. Novartis has the right to purchase shares of our common stock when stock options are exercised under certain plans. Commencing in August 2012, the fair value of our common stock that would be issuable to Novartis is recorded as an adjustment to the revenue recognized from the collaboration with Novartis and additional paid-in capital. The fair value of this stock subscription right is estimated on a quarterly basis using a trinomial lattice valuation model which includes inputs of our per share common stock price, exercise prices of outstanding options, expected term of our options and exercise rates as well as assumptions regarding expected volatility and exercise multiples. Our stock price as of the end of each fiscal quarter has a significant impact on the fair value calculation. Typically, if the stock price increases quarter over quarter, the fair value of Novartis’ stock subscription right increases and this increase in the fair value is recorded as a reduction to revenue in the quarter with a corresponding increase to additional paid-in capital. This may result in contra-revenue or negative revenue being recognized in any given fiscal period. This stock subscription right is described more fully in Note 6.

Cash and Cash Equivalents

We consider all highly liquid investments purchased with a maturity date of 90 days or less at the date of purchase to be cash equivalents.

In connection with certain of our operating lease commitments, we issued letters of credit collateralized by cash deposits that were classified as restricted cash on the condensed consolidated balance sheets. Restricted cash amounts have been classified as current assets based on the expected release date of the restrictions.

Concentration of Credit Risk

Financial instruments that potentially subject us to concentrations of credit risk primarily consist of cash and cash equivalents and receivables from related party. We invest our excess cash and cash equivalents in interest bearing accounts at major United States financial institutions. Management mitigates credit risk by limiting the investment type and maturity to securities that preserve capital, maintain liquidity and have a high credit quality.

At March 31, 2014 and December 31, 2013, all of our receivables from related party were due from Novartis related to Novartis’ commitment under the termination agreement to reimburse us for contractual payments due by us to third-parties (Note 7).

Fair Value Measurements

Our financial statements include assets and liabilities that are measured at fair value on a recurring basis as of March 31, 2014 and December 31, 2013. Fair values determined by Level 1 inputs utilize observable data such as quoted prices in active markets. Fair values determined by Level 2 inputs utilize data points other than quoted prices in active markets that are observable either directly or indirectly. Fair values determined by Level 3 inputs utilize unobservable data points in which there is little or no market data, which require the reporting entity to develop its own assumptions.

At March 31, 2014 and December 31, 2013, we had $163.7 million and $88.0 million, respectively, invested in money market funds. Our money market investments have calculated net asset values and are therefore classified as Level 2. There were no Level 3 assets held at fair value at March 31, 2014 or at December 31, 2013. There were no gross unrealized gains or losses for the three months ended March 31, 2014 or 2013.

Accrued Expenses

We accrue expenses we have incurred but have not been invoiced. This process involves estimating the level of service performed by third-parties on our behalf and the associated cost incurred for these services as of each balance sheet date in our financial statements. Examples of estimated accrued expenses in which subjective judgments may be required include services provided by contract organizations for preclinical development, clinical trials and manufacturing of clinical materials. Accruals for amounts due to clinical research organizations are among our most significant estimates. In connection with these service fees, our estimates are most affected by our understanding of the status and timing of services provided relative to the actual level of services incurred by the service providers. The date on which certain services

 

8


Table of Contents

IDENIX PHARMACEUTICALS, INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—CONTINUED

(UNAUDITED)

 

commence, the level of services performed on or before a given date and the cost of services is often subject to our judgment. We make these judgments based upon the facts and circumstances known to us. Advance payments for goods and services that will be used in future research and development activities are expensed when the activity has been performed or when the goods have been received rather than when payment is made.

Share-Based Compensation

We recognize share-based compensation for employees and directors using a grant date fair value based method that results in expense being recognized in our condensed consolidated financial statements.

3. NET LOSS PER COMMON SHARE

Basic net loss per common share is computed by dividing the net loss available to common stockholders by the weighted average number of common shares outstanding during the period. Diluted net loss per common share is computed by dividing the net loss available to common stockholders by the weighted average number of common shares and other potential common shares then outstanding. Potential common shares consist of common shares issuable upon the assumed exercise of outstanding stock options (using the treasury stock method) and the issuance of contingently issuable shares subject to Novartis’ stock subscription rights (Note 6) and restricted stock awards.

The following sets forth the computation of basic and diluted net loss per common share:

 

     Three Months Ended March 31,  
     2014     2013  
     (In Thousands, Except
per Share Data)
 

Basic and diluted net loss per common share:

    

Net loss

   $ (34,114   $ (30,753

Basic and diluted weighted average number of common shares outstanding

     145,118        133,958   

Basic and diluted net loss per common share

   $ (0.24   $ (0.23

The following potential common shares were excluded from the calculation of basic and diluted net loss per common share because their effect was anti-dilutive:

 

     Three Months Ended March 31,  
     2014      2013  
     (In Thousands)  

Options

     8,616         8,994   

Contingently issuable shares to related party

     1,233         512   
  

 

 

    

 

 

 
     9,849         9,506   
  

 

 

    

 

 

 

In addition to the contingently issuable shares to related party listed in the table above, Novartis could be entitled to additional shares under its stock subscription rights which would be anti-dilutive in future periods based on our current stock price.

 

9


Table of Contents

IDENIX PHARMACEUTICALS, INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—CONTINUED

(UNAUDITED)

 

4. ACCRUED EXPENSES

Accrued expenses consisted of the following:

 

     March 31,
2014
     December 31,
2013
 
     (In Thousands)  

Research and development contract costs

   $ 5,541       $ 2,832   

Payroll and benefits

     2,102         2,888   

Professional fees

     2,476         992   

Accrued settlement payment

     1,033         1,052   

Other

     883         1,539   
  

 

 

    

 

 

 
   $ 12,035       $ 9,303   
  

 

 

    

 

 

 

Other long-term liabilities consisted of the following:

 

     March 31,
2014
     December 31,
2013
 
     (In Thousands)  

Accrued settlement payment

   $ 4,857       $ 5,082   

Research and development contract costs

     3,278         3,278   

Other

     1,302         918   
  

 

 

    

 

 

 
   $ 9,437       $ 9,278   
  

 

 

    

 

 

 

5. SHARE-BASED COMPENSATION

The following table shows share-based compensation expense as included in our condensed consolidated statements of operations and comprehensive loss:

 

     Three Months Ended March 31,  
     2014      2013  
     (In Thousands)  

Research and development

   $ 483       $ 469   

General and administrative

     947         779   
  

 

 

    

 

 

 

Total share-based compensation expense

   $ 1,430       $ 1,248   
  

 

 

    

 

 

 

The table below illustrates the fair value per share and Black-Scholes option pricing model with the following assumptions used for grants issued:

 

     Three Months Ended March 31,  
     2014     2013  

Weighted average fair value of options

   $ 4.72      $ 3.02   

Risk-free interest rate

     1.53     0.87

Expected dividend yield

     —          —     

Expected option term (in years)

     5.26        5.27   

Expected volatility

     81.5     80.4

The expected option term and expected volatility were determined by examining the expected option term and expected volatilities of similarly sized biotechnology companies as well as expected term and expected volatility of our own stock.

 

10


Table of Contents

IDENIX PHARMACEUTICALS, INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—CONTINUED

(UNAUDITED)

 

The following table summarizes option activity under the equity incentive plans:

 

     Number of
Shares
    Weighted
Average Exercise
Price per Share
 

Options outstanding at December 31, 2013

     7,430,965      $ 6.67   

Granted

     1,662,150      $ 7.12   

Cancelled

     (173,814   $ 12.24   

Exercised

     (303,761   $ 4.11   
  

 

 

   

Options outstanding at March 31, 2014

     8,615,540      $ 6.74   
  

 

 

   

Options exercisable at March 31, 2014

     5,173,663      $ 6.66   

We had an aggregate of $15.6 million of share-based compensation expense as of March 31, 2014 remaining to be amortized over a weighted average expected term of 2.9 years.

6. COLLABORATION

Janssen Pharmaceuticals, Inc. Collaboration

In January 2013, we entered into a non-exclusive collaboration agreement with Janssen Pharmaceuticals, Inc., or Janssen, for the clinical evaluation of all-oral direct acting antiviral, or DAA, HCV combination therapies. The combination therapies involve samatasvir, our once-daily pan-genotypic NS5A inhibitor, simeprevir, a once-daily protease inhibitor jointly developed by Janssen and Medivir AB, or Medivir, and TMC647055, a once-daily non-nucleoside polymerase inhibitor, with low dose ritonavir, being developed by Janssen.

Under the terms of this collaboration agreement, we are conducting the clinical trials. The collaboration includes two ongoing phase II clinical trials, which we refer to as HELIX-1 and HELIX-2. HELIX-1 is a 12-week phase II clinical trial evaluating samatasvir and simeprevir plus ribavirin in treatment-naïve genotype 1b or 4 HCV-infected patients. Interim data from HELIX-1 showed the regimen was well-tolerated and that in patients receiving 50 mg of samatasvir and 150 mg of simeprevir plus ribavirin, 85% had undetectable virus levels at four weeks after completing therapy, or SVR4. The 50 mg dose has been advanced into the ongoing 3-DAA HELIX-2 clinical trial. In the fourth quarter of 2013, we initiated a 12-week phase II HELIX-2 clinical trial which evaluates the three-DAA combination of samatasvir, simeprevir, and TMC647055 with low-dose ritonavir, with and without ribavirin, in genotype 1 HCV-infected patients who are either treatment-naïve or have relapsed after treatment with interferon and ribavirin. This clinical trial is ongoing and we expect to report SVR4 data in the second half of 2014.

Under this collaboration agreement, the clinical trials are conducted whereby Janssen provides us with clinical supply of simeprevir and TMC647055 at no cost. Neither party will receive any milestone or royalty payments from the other party under this agreement. Both companies retain all rights to their respective compounds under this agreement. The parties have no obligation to conduct additional clinical trials beyond those described here. Neither party has licensed any commercial rights to the other party.

This collaboration agreement may be terminated by either party in certain circumstances. Janssen may terminate the collaboration agreement, in its sole discretion, by providing us with 30 days written notice. If Janssen terminates the collaboration agreement in such instance, it shall reimburse us for certain of our costs associated with the collaboration.

If either us or Janssen materially breaches the collaboration agreement and does not cure such breach within a specified time period, the non-breaching party may terminate the collaboration agreement in its entirety. Either party may also terminate the collaboration agreement, effective immediately, if the other party files for bankruptcy, is dissolved or has a receiver appointed for substantially all of its property. Either party may also terminate the collaboration agreement to protect the safety, health or welfare of subjects in the trials. We may terminate the collaboration agreement prior to the commencement of certain activities if Janssen’s research development and license agreement with Medivir is terminated.

Novartis Collaboration

In May 2003, we entered into the development and commercialization agreement with Novartis related to the worldwide development and commercialization of our drug candidates. In May 2003, we also entered into the stockholders’

 

11


Table of Contents

IDENIX PHARMACEUTICALS, INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—CONTINUED

(UNAUDITED)

 

agreement with Novartis. In July 2012, we and Novartis materially modified our collaboration by executing the termination agreement and the second amended and restated stockholders’ agreement. As of April 23, 2014, Novartis owned approximately 22% of our outstanding common stock.

Termination Agreement

Pursuant to the termination agreement, we granted Novartis a non-exclusive license to conduct clinical trials evaluating a combination of any of our and Novartis’ HCV drug candidates after the HCV drug candidates have completed dose-ranging studies, subject to meeting certain criteria. Novartis’ ability to initiate combination trials expires on the seven year anniversary of the execution of the termination agreement, or July 2019, although any combination study commenced prior to such expiration date may continue after the expiration date. We determined the BESP of the non-exclusive license at July 31, 2012 to be $5.0 million which is recognized as revenue on a straight-line basis over the term of the non-exclusive license, or seven years. During each of the three months ended March 31, 2014 and 2013, we recognized $0.2 million of collaboration revenue related to the non-exclusive license and as of March 31, 2014 and December 31, 2013, we had a balance of $3.8 million and $4.0 million, respectively, of deferred revenue from related party in our condensed consolidated balance sheets. The collaboration revenue was also impacted by Novartis’ stock subscription rights described below.

If Novartis conducts a dose-ranging study with respect to our HCV drug candidates, we have agreed to supply Novartis with our HCV drug candidates for use in such combination trials. We and Novartis have agreed to use commercially reasonable efforts to, in good faith, enter into a supply agreement and other relevant agreements in connection with any such combination trial. Additionally, under the termination agreement, following the receipt of certain data related to a combination trial and upon Novartis’ request, we and Novartis are obligated to use, in good faith, commercially reasonable efforts to negotiate a future agreement for the development, manufacture and commercialization of such combination therapy for the treatment of HCV. Neither party is obligated to negotiate for a period longer than 180 days.

Under the termination agreement, Novartis’ option right to license our current and future development-stage drug candidates in any therapeutic area was terminated. In exchange, we agreed to pay Novartis a royalty based on worldwide product sales of our HCV drug products, unless such drug products are prescribed in combination with Novartis’ HCV drug products. The royalty percentage will vary based on our commercialized HCV drug product, but range from the high single digits to the low double digit percentages. Royalties are payable until the later to occur of: a) expiration of the last-to-expire of specified patent rights in a country; or b) ten years after the first commercial sale of a product in such country, provided that if royalties are payable on a product after the expiration of the patent rights in a country, each of the respective royalty rates for such product in such country would be reduced by one-half.

Under the termination agreement, we no longer receive royalty or milestone payments from Novartis based upon worldwide product sales of telbivudine (Tyzeka®/Sebivo®) for the treatment of hepatitis B virus, or HBV. Novartis is obligated to pay for our contractual payments to Le Centre National de la Recherche Scientifique, or CNRS, and the University of Alabama at Birmingham Research Foundation, or UABRF, in connection with intellectual property related to Tyzeka®/Sebivo®. We are otherwise responsible for any payments to third-parties in connection with intellectual property necessary to sell Tyzeka®/Sebivo®.

Termination or Breach by Either Party

If either we or Novartis materially breaches the termination agreement and does not cure such breach within 30 days, the non-breaching party may terminate this agreement in its entirety. Either party may also terminate this agreement, effective immediately, if the other party files for bankruptcy, is dissolved, or has a receiver appointed for substantially all of its property. Novartis may also terminate this agreement for convenience. If Novartis terminates this agreement either because of a material breach by us that has not been cured or because we have filed for bankruptcy, Novartis may, at its election, retain the licenses granted to it by us under the termination agreement to conduct clinical trials evaluating a combination of any of our HCV drug candidates and any of Novartis’ HCV drug candidates and we would remain obligated to make royalty payments to Novartis based on sales of our HCV drug products. If we terminate this agreement either because of a material breach by Novartis that has not been cured or because Novartis has filed for bankruptcy, or if Novartis terminates this agreement for convenience, the licenses granted to Novartis to conduct combination trials terminate and we would remain obligated to make royalty payments to Novartis based on sales of our HCV drug products.

 

12


Table of Contents

IDENIX PHARMACEUTICALS, INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—CONTINUED

(UNAUDITED)

 

Indemnification

We have agreed to indemnify Novartis and its affiliates against losses suffered as a result of our development, manufacture and commercialization of our HCV products. We have also agreed to indemnify Novartis and its affiliates against losses suffered as a result of any breach of representations and warranties in the termination agreement, the development and commercialization agreement and a stock purchase agreement entered into in 2003. Under these agreements with Novartis, we made numerous representations and warranties to Novartis regarding our drug candidates for the treatment of HBV and HCV, including representations regarding ownership of related inventions and discoveries. In the event of a breach of any such representation or warranty by us, Novartis has the right to seek indemnification from us and, under certain circumstances, our stockholders who sold shares to Novartis in 2003, which includes certain of our current and former directors and officers, for damages suffered by Novartis as a result of such breach. The amounts for which we and our stockholders could be liable to Novartis could be substantial.

Second Amended and Restated Stockholders’ Agreement

In May 2003, we entered into the stockholders’ agreement with Novartis and in July 2012, we amended this agreement by executing the second amended and restated stockholders’ agreement which includes the terms as described below.

Novartis’ Registration Rights and Corporate Governance Rights

Under the second amended and restated stockholders’ agreement, Novartis maintains its rights to cause us to register for resale, under the Securities Act of 1933, as amended, shares held by Novartis and/or its affiliates.

Under the second amended and restated stockholders’ agreement, we have agreed to use our reasonable best efforts to nominate for election one designee of Novartis for so long as Novartis and its affiliates own at least 15% of our voting stock. Novartis has the rights to appoint a non-voting observer to any committee of our board of directors. Novartis has no other corporate governance right under the second amended and restated stockholders’ agreement.

Novartis’ Stock Subscription Rights

Under the second amended and restated stockholders’ agreement, if we issue any shares of capital stock, other than in limited situations, Novartis has the right to purchase such number of shares required to maintain its percentage ownership of our voting stock for either the same consideration per share paid by others acquiring our stock or, in specified situations, for a 10% premium to the consideration per share paid by others acquiring our stock. Related to our common stock offering in January 2014, Novartis had the right to purchase up to approximately 4.1 million shares of our common stock at $6.50 per share or at a 10% premium for specified periods to maintain its ownership percentage. The value of this stock subscription right was estimated to be $2.5 million at March 31, 2014 using a Black-Scholes fair value method which includes inputs of our per share common stock price, exercise prices, expected volatility, expected term and risk-free interest rates. Novartis did not participate in the offering.

Novartis has the right to purchase shares of our common stock when stock options are exercised under certain stock option plans. Commencing in August 2012, the fair value of our common stock that would be issuable to Novartis pursuant to this right is recorded as an adjustment to the revenue recognized from the collaboration with Novartis and additional paid-in capital. The fair value of this stock subscription right is estimated on a quarterly basis using a trinomial lattice valuation model which includes inputs of our per share common stock price, exercise prices of outstanding options, expected term of our options and exercise rates as well as assumptions regarding expected volatility and exercise multiples. The impact of the stock subscription right related to stock options that would be issuable to Novartis was $0.7 million for the three months ended March 31, 2014. Our stock price as of the end of each fiscal quarter has a significant impact on the fair value calculation. Typically, if the stock price increases quarter over quarter, the fair value of Novartis’ stock subscription right increases and this increase in the fair value is recorded as a reduction to revenue in the quarter with a corresponding increase to additional paid-in capital. This may result in contra-revenue, or negative revenue, being recognized in any given fiscal period.

For the three months ended March 31, 2014, the $3.2 million impact of Novartis’ stock subscription rights increased additional paid-in capital and reduced collaboration revenue. For the three months ended March 31, 2013, the $0.7 million impact of Novartis’ stock subscription rights reduced additional paid-in capital and increased collaboration revenue.

 

13


Table of Contents

IDENIX PHARMACEUTICALS, INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—CONTINUED

(UNAUDITED)

 

7. COMMITMENTS AND CONTINGENCIES

Product and Drug Candidates

In connection with the resolution of matters relating to certain of our HCV drug candidates, in May 2004, we entered into a settlement agreement with the University of Alabama at Birmingham, or UAB which provides for a milestone payment of $1.0 million to UAB upon receipt of regulatory approval in the United States to market and sell certain HCV products invented or discovered by our former chief executive officer during the period from November 1, 1999 to November 1, 2000. This settlement agreement also provides that we will pay UAB an amount equal to 0.5% of worldwide net sales of such HCV products with a minimum sales-based payment equal to $12.0 million. Such payments would be due even in the instance where we licensed such technology to a third-party. Currently, there are no such HCV products approved and therefore there was no related liability recorded as of March 31, 2014.

We have potential payment obligations under the license agreement with the Universita degli Studi di Cagliari, or the University of Cagliari, pursuant to which we have the exclusive worldwide right to make, use and sell certain HCV technologies and the right to sublicense any of those rights. If we receive license fees, milestone payments or any other payments with respect to technology licensed to us by the University of Cagliari, we must provide payments to the University of Cagliari. In addition, we will be liable to the University of Cagliari for a fixed royalty payment on worldwide sales of licensed drug products that derive from the specified patents. The license agreement terminates at the expiration of all royalty payment obligations, unless terminated earlier by us, by the mutual agreement of the parties or by a material breach of the terms of the agreement.

Pursuant to the license agreement between us and UAB, we were granted an exclusive license to the rights that the UABRF an affiliate of UAB, Emory University and CNRS have to a 1995 U.S. patent application and progeny thereof and counterpart patent applications in Europe, Canada, Japan and Australia that cover the use of certain synthetic nucleosides for the treatment of HBV. In July 2008, we entered into a settlement agreement with UAB, UABRF and Emory University relating to our telbivudine technology. Pursuant to this settlement agreement, all contractual disputes relating to patents covering the use of certain synthetic nucleosides for the treatment of HBV and all litigation matters relating to patents and patent applications related to the use of ß-L-2’-deoxy-nucleosides for the treatment of HBV assigned to one or more of Idenix, CNRS and L’Universite Montpellier II, or the University of Montpellier, and which cover the use of Tyzeka®/Sebivo® have been resolved. UAB also agreed to abandon certain continuation patent applications it filed in July 2005. Under the terms of the settlement agreement, we paid UABRF (on behalf of UAB and Emory University) a $4.0 million upfront payment and agreed to make additional payments to UABRF equal to 20% of all royalty payments received by us from Novartis from worldwide sales of Tyzeka®/Sebivo®, subject to minimum payment obligations aggregating $11.0 million. Our payment obligations under the settlement agreement expire in August 2019. The settlement agreement was effective on June 1, 2008 and included mutual releases of all claims and covenants not to sue among the parties. It also included a release from a third-party scientist who had claimed to have inventorship rights in certain Idenix/CNRS/University of Montpellier patents. Included in the condensed consolidated balance sheets as of March 31, 2014 and December 31, 2013 was a liability of $5.9 million and $6.1 million, respectively, related to this settlement agreement. Under the termination agreement executed in July 2012, we no longer receive royalty or milestone payments from Novartis based upon worldwide product sales of Tyzeka®/Sebivo®. Novartis is required to reimburse us for our contractual payments to UABRF in connection with our intellectual property related to Tyzeka®/Sebivo®. Included in receivables from related party at March 31, 2014 and December 2013 was $6.1 million for the reimbursement from Novartis for these contractual payments to UABRF.

In May 2003, we and Novartis entered into an amended and restated agreement with CNRS and the University of Montpellier. The agreement includes provisions relating to ownership and commercialization of the technology which is discovered or obtained as part of the collaboration as well as rights regarding ownership and use of such technology, including telbivudine, which remain in effect following termination or expiration of the agreement. Under the cooperative agreement, we are obligated to make royalty payments for products derived from such patents, including products for HCV. Such payments would be due even in the instance where we licensed such patents to a third-party.

Legal Contingency

The USPTO has declared two interferences between Idenix and Gilead. An interference proceeding is divided into two stages. The first phase determines the application filing dates each party will have benefit of for the interfering subject matter. The party with the benefit of the earliest application filing date is deemed the ‘senior party’ and the party with the

 

14


Table of Contents

IDENIX PHARMACEUTICALS, INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—CONTINUED

(UNAUDITED)

 

later date is deemed the ‘junior party’. The second phase of the interference determines which party was first to invent. The party who is deemed first to invent prevails in the interference proceeding. Certain or all of the claims in a patent may be declared invalid if the party does not prevail in the interference.

In February 2012, the first interference was declared by the USPTO concerning our co-owned U.S. Patent Application 12/131,868 and Gilead’s U.S. Patent No. 7,429,572. Both the application and patent claim certain nucleoside compounds useful in treating HCV. In January 2014, the USPTO awarded Gilead priority of invention. We have challenged this decision outside the USPTO in the U.S. District Court for the District of Delaware.

In December 2013, the second interference was declared by the USPTO concerning our co-owned U.S. Patent No. 7,608,600 and Gilead’s U.S. Patent Application 11/854,218. Both the patent and application claim certain nucleoside compounds useful in treating HCV. In this case, the USPTO has initially determined that we are the ‘senior party’ and that Gilead is the ‘junior party’, although that determination may change after the first phase of the interference. We cannot predict if the decision in the first interference will influence the timing and/or outcome of the second interference.

In June 2012, Gilead filed suit against us in the Canadian Federal Court seeking to invalidate one of our issued co-owned Canadian patents. This patent covers similar subject matter to our U.S. Patent Application 12/131,868 and U.S. Patent No. 7,608,600. In April 2014, we counterclaimed for infringement against Gilead in Canada. Through this counterclaim we are seeking remedies with respect to Gilead’s marketing and sales of drugs containing Sovaldi™, which we believe infringes our Canadian patent. The Canadian patent involved covers similar subject matter to our U.S. Patent No. 7,608,600.

In September 2012, Gilead filed suit against us in Norway in the Oslo District Court seeking to invalidate one of our issued co-owned Norwegian patents. Our patent, NO 330 755, covers certain 2’-methyl-2’-fluoro nucleoside compounds useful in the treatment of HCV and other flaviviridae infections, which is similar subject matter to our U.S. Patent Application 12/131,868 and U.S. Patent No. 7,608,600. In March 2014, the Oslo District Court determined that our Norwegian patent, NO 330 755, is invalid. We filed an appeal to challenge the court’s decision. In the event we do not prevail in the appeals process, we may be liable for reimbursement of legal fees incurred by Gilead of an amount, if any, as determined by the Norway court. Accordingly, no estimate regarding the range of possible loss can be made for the reimbursement of legal fees.

In January 2013, Gilead commenced proceedings in the Federal Court of Australia seeking a declaration of certain claims of one of our issued co-owned Australian patents. This patent covers similar subject matter to our U.S. Patent Application 12/131,868 and U.S. Patent No. 7,608,600.

In August 2013, we filed a request with the Chinese Patent Office’s Patent Re-examination Board, or PRB, to invalidate Gilead’s Chinese Patent No. ZL.200480019148.4. Gilead’s patent relates to 2’-fluoro-2’-methyl-nucleoside compounds that are useful for treating HCV. The request alleges that Gilead’s patent is invalid for lack of novelty over a prior filed Idenix co-owned Chinese patent application. We cannot predict whether our request will be granted by the PRB.

In December 2013, we filed infringement lawsuits against Gilead in the U.S District Court for the District of Massachusetts and in U.S. District Court for the District of Delaware. In the Massachusetts action, we allege that Gilead’s method of treating HCV using its Sovaldi™ product infringes our two asserted co-owned patents, U.S. Patent Nos. 6,914,054 and 7,608,597. In the Delaware action, we allege that Gilead’s method of treating HCV using its Sovaldi™ product infringes our asserted co-owned patent U.S. Patent No. 7,608,600. In these lawsuits, we are seeking remedies with respect to Gilead’s marketing and sales of drugs containing Sovaldi™, which we believe infringes our U.S. patents. In the Delaware action, we also filed an interference claim between our co-owned U.S. Patent No. 7,608,600 and Gilead’s U.S. Patent No. 8,415,322. As part of that claim, we are asking that our U.S. Patent No. 7,608,600 be deemed to have priority of invention over Gilead’s U.S. Patent No. 8,415,322.

In March 2014, we and certain co-owners were granted a European Patent, EP 1 523 489, that covers 2’-methyl-2’-fluoro nucleosides for treating HCV. Subsequently, we filed infringement lawsuits against Gilead in France, Germany and the United Kingdom. In these lawsuits, we are seeking remedies with respect to Gilead’s marketing and sales of drugs containing Sovaldi™, which we believe infringes our European patent. The European patent involved covers similar subject matter to our U.S. Patent No. 7,608,600.

While we cannot predict whether we will prevail, we intend to vigorously defend all of these actions described above and any others like it brought by a third-party. These legal proceedings are likely to be expensive and time consuming. We

 

15


Table of Contents

IDENIX PHARMACEUTICALS, INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—CONTINUED

(UNAUDITED)

 

do not believe the patents at issue in these cases are relevant to any compounds we currently have under clinical development. In the event we do not prevail in certain jurisdictions, we may be liable for reimbursement of legal fees incurred by the other party. As of March 31, 2014, we have not recorded a liability associated with any of these legal matters as we do not consider a loss to be probable.

Indemnification

We have agreed to indemnify Novartis and its affiliates against losses suffered as a result of the development, manufacture and commercialization of our HCV products. We have also agreed to indemnify Novartis and its affiliates against losses suffered as a result of any breach of representations and warranties in the termination agreement, development and commercialization agreement and the stock purchase agreement. Under these agreements with Novartis, we made numerous representations and warranties to Novartis regarding our HBV and HCV drug candidates, including representations regarding our ownership of the inventions and discoveries. In the event of a breach of any such representation or warranty by us, Novartis has the right to seek indemnification from us and, under certain circumstances, from our stockholders who sold shares to Novartis in 2003, which includes some of our current and former directors and officers, for damages suffered by Novartis as a result of such breach. The amounts for which we and our stockholders could be liable to Novartis could be substantial. While it is possible that we may be required to make payments pursuant to the indemnification obligations we have under these agreements, we cannot reasonably estimate the amount of such payments or the likelihood that such payments would be required.

Under the Janssen collaboration agreement, we agreed to indemnify Janssen against losses suffered as a result of a breach of representations and warranties in the agreement and/or any injury to a subject in a clinical trial under the collaboration agreement caused by the use or manufacture of samatasvir. We made numerous representations and warranties to Janssen. If one or more of these representations or warranties were not true at the time they were made, we would be in breach of the agreement. In the event of a breach by us or in the event of injury to a subject in a clinical trial under the collaboration agreement caused by the use or manufacture of samatasvir, Janssen has the right to seek indemnification from us for damages suffered as a result of such breach or subject injury. The amounts for which we could be liable to Janssen under these circumstances may be substantial. In the instance where a subject in a clinical trial suffers injury or death and it is not determinable which compound caused the injury or death, each party shall be responsible for defending any third-party claims alleged against the party after the application of our clinical trial insurance, to the extent applicable.

 

16


Table of Contents

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

This report contains “forward-looking statements” within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended. For this purpose, any statements contained herein regarding our strategy, future operations, financial position, future revenues, projected costs and expenses, prospects, plans and objectives of management, other than statements of historical facts, are forward-looking statements. The words “anticipate”, “believe”, “estimate”, “intend”, “may”, “plan”, “will”, “would” and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words. Such statements reflect our current views with respect to future events. Because these forward-looking statements involve known and unknown risks and uncertainties, actual results, performance or achievements could differ materially from those expressed or implied by these forward-looking statements for a number of important reasons, including those discussed under “Critical Accounting Policies and Estimates”, “Risk Factors”, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and elsewhere in this Quarterly Report on Form 10-Q. We cannot guarantee any future results, levels of activity, performance or achievements. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those described in this Quarterly Report on Form 10-Q as anticipated, believed, estimated or expected. The forward-looking statements contained in this Quarterly Report on Form 10-Q represent our estimates as of the date of this Quarterly Report on Form 10-Q (unless another date is indicated) and should not be relied upon as representing our expectations as of any other date. While we may elect to update these forward-looking statements, we specifically disclaim any obligation to do so.

Overview

Idenix Pharmaceuticals, Inc., which we refer to together with our wholly owned subsidiaries as Idenix, we, us or our, is a biopharmaceutical company engaged in the discovery and development of drugs for the treatment of human viral diseases with operations in the United States and France. Currently, our primary research and development focus is on the treatment of patients with hepatitis C virus, or HCV. Our HCV discovery program is focused on nucleotide polymerase inhibitors and NS5A inhibitors. Our strategic goal is to develop safe, potent and convenient all-oral combinations of direct-acting antiviral, or DAA, drug candidates that are pan-genotypic without the use of pegylated interferon and ribavirin, or Peg-IFN/RBV. Our objective is to develop once-daily agents that have low potential for drug-drug interaction, high tolerability and are designed for use in multiple combination regimens. We are seeking to build a combination development strategy, both internally and with partners, to advance the future of HCV treatments. We believe that nucleotides will have a significant role in a combination DAA strategy for the treatment of HCV and therefore we are currently concentrating a substantial amount of our discovery efforts on this class of drugs. We believe we have strong nucleotide scientific expertise within our organization and should be able to leverage our intellectual patent portfolio to develop additional novel nucleotide drug candidates.

The following table summarizes key information regarding our pipeline of HCV drug candidates/programs:

 

Drug Candidates/Programs

  

Description

IDX21437 – Lead Uridine-Based Nucleotide Prodrug    In the fourth quarter of 2013, we initiated a phase I/II clinical trial outside the U.S. for IDX21437. In April 2014, we completed a seven-day proof-of-concept study of IDX21437. IDX21437 monotherapy was well-tolerated and showed potent antiviral activity of mean maximal viral load reductions of 4.2 to 4.3 log10 IU/mL for patients infected with HCV genotype 1, 2 or 3 receiving 300 mg once-daily of IDX21437 for seven days. We expect to initiate an all-oral pan-genotypic combination phase II clinical trial of IDX21437 and samatasvir, our NS5A inhibitor, in mid-2014.
IDX21459 – Uridine-Based Nucleotide Prodrug    IDX21459 is our follow-on uridine-based nucleotide prodrug candidate that has shown a favorable preclinical profile including potent, pan-genotypic activity and favorable safety with respect to cardiac, mitochondrial and genotoxicity assessments. In April 2014, we initiated a phase I clinical trial in several countries outside the U.S. for IDX21459 to evaluate healthy volunteers and genotype 1 HCV-infected patients at multiple doses.
Nucleotide Polymerase Inhibitor Discovery Program    As part of our ongoing extensive nucleotide discovery effort, we continue to explore and develop a diverse spectrum of nucleotides with novel bases, prodrugs and sugar moieties. Our discovery efforts are currently focused on the identification of a novel nucleotide prodrug with a distinct resistance profile from our clinical nucleotide candidates that can be used in a combination

 

17


Table of Contents
   strategy to treat HCV. In April 2014, we elected not to continue our clinical development program for IDX20963, our nucleotide prodrug previously placed on clinical hold by the U.S. Food and Drug Administration, or FDA.
Samatasvir (IDX719) - NS5A Inhibitor   

We expect to initiate an all-oral pan-genotypic combination phase II clinical trial of samatasvir and IDX21437 in mid-2014.

 

In January 2013, we entered into a non-exclusive collaboration agreement with Janssen Pharmaceuticals, Inc., or Janssen, for the clinical evaluation of all-oral DAA combinations including samatasvir, simeprevir, a once-daily protease inhibitor jointly developed by Janssen and Medivir AB, or Medivir, and TMC647055, a once-daily non-nucleoside polymerase inhibitor, with low-dose ritonavir, being developed by Janssen.

 

Interim data from the phase II HELIX-1 clinical trial showed the regimen of samatasvir and simeprevir plus ribavirin was well-tolerated and that in patients receiving 50 mg of samatasvir and 150 mg of simeprevir plus ribavirin, 85% had undetectable virus levels at four weeks after completing therapy, or SVR4. The 50 mg dose was advanced into the ongoing 3-DAA HELIX-2 clinical trial.

 

In the fourth quarter of 2013, we initiated a 12-week phase II HELIX-2 clinical trial which evaluates the three-DAA combination of samatasvir, simeprevir, and TMC647055 with low-dose ritonavir, with and without ribavirin, in genotype 1 HCV-infected patients who are either treatment-naïve or have relapsed after treatment with interferon and ribavirin. This trial is ongoing and we expect to report SVR4 data in the second half of 2014.

In March 2014, we and certain co-owners were granted a European Patent, EP 1 523 489, that covers 2’-methyl-2’-fluoro nucleosides for treating HCV. Subsequently, we filed infringement lawsuits against Gilead Sciences, Inc., and/or certain of its subsidiaries, which we refer to as Gilead, in France, Germany and the United Kingdom. In these lawsuits, we are seeking remedies with respect to Gilead’s marketing and sales of drugs containing SovaldiTM, which we believe infringes our European patent. Gilead has counterclaimed for invalidity in certain of these jurisdictions. We also have several other legal matters ongoing with Gilead including infringement lawsuits in the U.S. and Canada, an ongoing interference case declared by the U.S. Patent and Trademark Office, or USPTO, and invalidity matters in other foreign jurisdictions. In March 2014, related to the Norway invalidity proceeding, the Oslo District Court determined that our patent NO 330 755 covering 2’-methyl-2’-fluoro nucleoside compounds useful in the treatment of HCV and other flaviviridae infections is invalid. We filed an appeal to challenge the court’s decision.

All of our drug candidates are currently in preclinical or early to mid-stage clinical development. Our drug development programs and the potential commercialization of our drug candidates will require substantial cash to fund costs that we incur in connection with preclinical studies and clinical trials, regulatory review, manufacturing and sales and marketing efforts. We have incurred losses in each year since our inception and at March 31, 2014, we had an accumulated deficit of $864.5 million. We expect to incur losses over the next several years as we continue to expand our drug discovery and development efforts. As a result of continuing losses, we may seek additional funding through a combination of public or private financing, collaborative relationships or other arrangements and we may seek a partner who will assist in the future development and commercialization of our drug candidates.

We are subject to risks common to companies in the biopharmaceutical industry including, but not limited to, the successful development of products, clinical trial uncertainty, regulatory approval, fluctuations in operating results and financial risks, potential need for additional funding, protection of proprietary technology and patent risks, compliance with government regulations, dependence on key personnel and collaboration partners, competition, technological and medical risks and management of growth.

Results of Operations

Comparison of Three Months Ended March 31, 2014 and 2013

Revenues

Collaboration revenue from related party consisted of revenues associated with our collaboration with Novartis Pharma AG, or Novartis. Under the termination and revised relationship agreement entered into with Novartis in July 2012, or the

 

18


Table of Contents

termination agreement, we granted Novartis a non-exclusive license for combination trials, which is recognized over the term of the non-exclusive license, or seven years. These amounts are impacted by the net changes for Novartis’ stock subscription rights.

Collaboration revenue from related party was $(3.0) million in the three months ended March 31, 2014 as compared to $0.9 million in the same period in 2013. The $3.9 million decrease was primarily due to charges against revenue of $2.5 million due to the impact of Novartis’ stock subscription rights related to our registered direct offering in January 2014 and $0.7 million due to the impact of Novartis’ stock subscription rights related to stock options that would be issuable to Novartis. The stock subscription right is described in the footnotes to the condensed consolidated financial statements to this Quarterly Report on Form 10-Q.

Cost of Revenues

We did not record cost of revenues in the three months ended March 31, 2014 as compared to $0.3 million in the same period in 2013.

Research and Development Expenses

Research and development expenses were $21.1 million in the three months ended March 31, 2014 as compared to $24.0 million in the same period in 2013. The decrease of $2.9 million was primarily due to $3.9 million of expenses related to the IDX184 and IDX19368 programs which were discontinued in early 2013, $3.8 million related to the IDX20963 program which was discontinued in 2014 and $1.6 million related to samatasvir. These costs were partially offset by increases in clinical trial expenses of $6.4 million related to IDX21437.

We expect our research and development expenses for 2014 to be higher than the amount incurred in 2013 mainly due to the planned advancement of IDX21437 and samatasvir into phase II clinical trials.

We will continue to devote substantial resources to our research and development activities, expand our research pipeline and engage in future development activities as we continue to advance our drug candidates and explore collaborations with other entities that we believe will create shareholder value.

General and Administrative Expenses

General and administrative expenses were $10.3 million in the three months ended March 31, 2014 as compared to $7.5 million in the same period in 2013. The increase of $2.8 million was mainly due to additional patent interference and patent litigation costs.

We expect our general and administrative expenses for 2014 to be higher than the amount incurred in 2013 mainly due to additional patent litigation costs.

Other Income, Net

Other income, net was $0.3 million in the three months ended March 31, 2014 and was primarily comprised of research and development credits. This amount was substantially unchanged as compared to the same period in 2013.

Income Tax Expense

Income tax expense was less than $0.1 million in the three months ended March 31, 2014 which was substantially unchanged as compared to the same period in 2013.

Liquidity and Capital Resources

Since our inception in 1998, we have financed our operations with proceeds obtained in connection with license and development arrangements and equity financings. The proceeds include:

 

    license, milestone, royalty and other payments from Novartis through July 31, 2012;

 

    license, milestone and stock purchase payments from ViiV and GlaxoSmithKline, or GSK through March 15, 2012;

 

    reimbursements from Novartis for costs we have incurred subsequent to May 8, 2003 in connection with the development of Tyzeka®/Sebivo® and compounds Novartis previously licensed from us;

 

19


Table of Contents
    sales of Tyzeka® in the United States through September 30, 2007;

 

    net proceeds from Sumitomo Pharmaceuticals Co., Ltd., or Sumitomo, for reimbursement of development costs;

 

    net proceeds from private placements of our convertible preferred stock in 1998, 1999 and 2001;

 

    net proceeds from offerings in July 2004, October 2005, August 2009, April 2010, April 2011, November 2011, August 2012 and January 2014;

 

    net proceeds from private placements of our common stock concurrent with our public offerings in 2004, 2005 and April 2011; and

 

    proceeds from the exercise of stock options granted pursuant to our equity compensation plans.

We had total cash and cash equivalents of $205.0 million and $122.0 million as of March 31, 2014 and December 31, 2013, respectively. We believe that our current cash and cash equivalents will be sufficient to sustain operations into at least the second half of 2015. Our investment policy seeks to manage these assets to achieve our goals of preserving principal and maintaining adequate liquidity. As of March 31, 2014, all of our investments were in money market funds.

We have incurred losses in each year since our inception and at March 31, 2014, we had an accumulated deficit of $864.5 million. We expect to incur losses over the next several years as we continue to expand our drug discovery and development efforts. As a result, we may seek additional funding through a combination of public or private financing, collaborative relationships or other arrangements and we may seek a partner who will assist in the future development and commercialization of our drug candidates. In January 2014, we issued 16.4 million shares of our common stock to Baupost Group, L.L.C., or Baupost, through a registered direct offering under a shelf registration and received $106.6 million in net proceeds. Additional funding may not be available to us or, if available, may not be on terms favorable to us. Further, any additional equity financing may be dilutive to stockholders, other than Novartis, which has the right to maintain its current ownership level. If we are unable to obtain adequate financing on a timely basis, we could be required to delay, reduce or eliminate one or more of our drug development programs, enter into new collaborative, strategic alliances or licensing arrangements that may not be favorable to us and reduce the number of our employees.

Net cash used in operating activities was $24.9 million and $25.0 million in the three months ended March 31, 2014 and 2013, respectively.

Net cash used in investing activities was less than $0.1 million and $0.2 million in the three months ended March 31, 2014 and 2013, respectively.

Net cash provided by financing activities was $107.8 million and less than $0.1 million in the three months ended March 31, 2014 and 2013, respectively. The increase of $107.8 million was primarily due to the receipt of net proceeds of $106.6 million related to the registered direct offering in January 2014.

Contractual Obligations and Commitments

Set forth below is a description of our contractual obligations as of March 31, 2014:

 

     Payments Due by Period  

Contractual Obligations

   Total      Less Than
1 Year
     1-3 Years      4-5 Years      After 5
Years
 
     (In Thousands)  

Operating leases

   $ 19,669       $ 3,470       $ 7,074       $ 5,994       $ 3,131   

Settlement payments and other agreements

     1,559         1,448         111         —           —     

Long-term obligations

     5,346         —           —           4,857         489   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total contractual obligations

   $ 26,574       $ 4,918       $ 7,185       $ 10,851       $ 3,620   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Included in the table above is $5.9 million related to a settlement agreement we entered into in July 2008 with the University of Alabama at Birmingham, or UAB, the University of Alabama at Birmingham Research Foundation, or UABRF, an affiliate of UAB, and Emory University relating to our telbivudine technology. Pursuant to this settlement

 

20


Table of Contents

agreement, all contractual disputes relating to patents covering the use of certain synthetic nucleosides for the treatment of HBV and all litigation matters relating to patents and patent applications related to the use of ß-L-2’-deoxy-nucleosides for the treatment of HBV assigned to one or more of Idenix, Le Centre National de la Recherche Scientifique, or CNRS, and L’Universite Montpellier II, or the University of Montpellier, and which cover the use of Tyzeka®/Sebivo® have been resolved. Under the terms of the settlement agreement, we paid UABRF (on behalf of UAB and Emory University) a $4.0 million upfront payment and will make additional payments to UABRF equal to 20% of all royalty payments received by us from Novartis based on worldwide sales of Tyzeka®/Sebivo®, subject to minimum payment obligations aggregating $11.0 million. Our payment obligations under the settlement agreement expire in August 2019. The settlement agreement was effective on June 1, 2008 and included mutual releases of all claims and covenants not to sue among the parties. It also included a release from a third-party scientist who had claimed to have inventorship rights in certain Idenix/CNRS/University of Montpellier patents. Novartis is required to reimburse us for our contractual payments to UABRF in connection with our intellectual property related to Tyzeka®/Sebivo®. Included in receivables from related party at March 31, 2014 was $6.1 million for the reimbursement from Novartis for these contractual payments to UABRF.

Certain potential payment obligations relating to our HBV and HCV product and drug candidates that are described below are excluded from the contractual obligations table above as we cannot make a reliable estimate of the period in which the cash payments may be made.

In May 2004, we entered into a settlement agreement with UAB which provides for a milestone payment of $1.0 million to UAB upon receipt of regulatory approval in the United States to market and sell certain HCV products invented or discovered by our former chief executive officer during the period from November 1, 1999 to November 1, 2000. This settlement agreement also provides that if such HCV products were approved and commercialized, we will pay UAB an amount equal to 0.5% of worldwide net sales of such HCV products with a minimum sales-based payment equal to $12.0 million. Such payments would be due even in the instance where we licensed such technology to a third-party. Currently, there are no such HCV products approved and therefore there was no related liability recorded as of March 31, 2014.

We have potential payment obligations under the license agreement with the Universita degli Studi di Cagliari, or the University of Cagliari, pursuant to which we have the exclusive worldwide right to make, use and sell certain HCV technologies and the right to sublicense any of those rights. If we receive license fees, milestone payments or any other payments with respect to technology licensed to us by the University of Cagliari, we must provide payments to the University of Cagliari. In addition, we will be liable to the University of Cagliari for a fixed royalty payment on worldwide sales of licensed drug products that derive from the specified patents. The license agreement terminates at the expiration of all royalty payment obligations, unless terminated earlier by us, by the mutual agreement of the parties or by a material breach of the terms of the agreement.

In May 2003, we and Novartis entered into an amended and restated agreement with CNRS and the University of Montpellier. The agreement includes provisions relating to ownership and commercialization of the technology which is discovered or obtained as part of the collaboration as well as rights regarding ownership and use of such technology, including telbivudine, which remain in effect following termination or expiration of the agreement. Under this cooperative agreement, we are obligated to make royalty payments for products derived from such patents, including products for HCV. Such payments would be due even in the instance where we licensed such patents to a third-party.

In March 2003, we entered into a final settlement agreement with Sumitomo, under which the rights to develop and commercialize telbivudine in Japan, China, South Korea and Taiwan previously granted to Sumitomo were returned to us. This agreement with Sumitomo became effective upon consummation of our collaboration with Novartis in May 2003. The settlement agreement we entered into with Sumitomo provides for a $5.0 million milestone payment to Sumitomo if and when the first commercial sale of telbivudine occurs in Japan. As part of the termination agreement, Novartis remains obligated to reimburse us for any such payment made to Sumitomo.

Off-Balance Sheet Arrangements

We currently have no off-balance sheet arrangements.

Critical Accounting Policies and Estimates

Our discussion and analysis of our financial condition and results of operations are based on our condensed consolidated financial statements, which have been prepared in accordance with generally accepted accounting principles in the United States of America. The preparation of the condensed consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. On an ongoing basis, we evaluate our estimates and judgments, including those related to revenue recognition, accrued expenses and share-based

 

21


Table of Contents

compensation. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

Our significant accounting policies are more fully described in Note 2 to our consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2013.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Interest Rate Risk

Changes in interest rates may impact our financial position, operating results or cash flows. The primary objective of our investment activities is to preserve capital while maintaining liquidity until it is required to fund operations. To minimize risk, we maintain our operating cash in commercial bank accounts. We invest our cash in high quality financial instruments, primarily money market funds. Due to the nature of these instruments, we do not believe that we have a material exposure to interest rate risk.

Foreign Currency Exchange Rate Risk

Our foreign currency transactions include a subsidiary in France that is denominated in euros. As a result of these foreign currency transactions, our financial position, results of operations and cash flows can be affected by market fluctuations in foreign currency exchange rates. We have not entered into any derivative financial instruments to reduce the risk of fluctuations in currency exchange rates.

Item 4. Controls and Procedures

Disclosure Controls and Procedures

We have conducted an evaluation under the supervision and with the participation of our management, including our chief executive officer and chief financial officer (our principal executive officer and principal financial officer, respectively), regarding the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, or the Exchange Act) as of the end of the period covered by this report. Based on such evaluation, our chief executive officer and chief financial officer concluded that, as of March 31, 2014, our disclosure controls and procedures were effective at the reasonable assurance level.

Changes in Internal Control over Financial Reporting

There was no change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the quarter ended March 31, 2014 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

See Part I, Item 3 of our Annual Report on Form 10-K for the year ended December 31, 2013 and Note 7 of this quarterly report for discussions of our legal proceedings.

Item 1A. Risk Factors

Our business faces many risks. The risks described below may not be the only risks we face. Additional risks we do not yet know of or which we currently believe are immaterial may also impair our business operations. If any of the events or circumstances described in the following risks actually occurs, our business, financial condition or results of operations could suffer and the trading price of our common stock could decline. The following risks should be considered, together with all of the other information in our Annual Report on Form 10-K for the year ended December 31, 2013 before deciding to invest in our securities.

 

22


Table of Contents

Factors Related to Our Business

Our failure to successfully acquire or develop and market drug candidates or have drug candidates approved by regulatory agencies would impair our ability to grow.

We intend to develop all-oral combination therapies for the treatment of HCV and are developing multiple drug candidates to support this goal. The success of this strategy depends upon the development and commercialization of drug candidates that we successfully discover, license or otherwise acquire.

Proposing, negotiating and implementing the acquisition or in-license of drug candidates may be a lengthy and complex process. Other companies, including those with substantially greater financial, marketing and sales resources, may compete with us for the acquisition of drug candidates. We may not be able to acquire the rights to additional drug candidates on terms that we find acceptable.

Drug candidates we discover, license or acquire will require additional and likely substantial development, including formulation optimization, extensive clinical testing and approval by the FDA and applicable foreign regulatory authorities.

All drug candidates are prone to the risks of failure which are inherent in pharmaceutical drug development, including the possibility that the drug candidate will not be shown to be sufficiently safe and effective for approval by regulatory authorities. We have experienced many regulatory delays and setbacks in the clinical development of several of our drug candidates. For example, in August 2012, the FDA placed IDX184, a guanosine-based nucleotide prodrug, on partial clinical hold, and IDX19368, a guanosine-based nucleotide prodrug, on clinical hold. Both of these holds were due to serious cardiac-related adverse events observed with a competitor’s nucleotide polymerase inhibitor, BMS-986094. In previous clinical trials as well as our phase II clinical trial of IDX184 in combination with Peg-IFN/RBV we have observed no evidence of serious cardiac-related adverse events to date. In February 2013, the FDA communicated to us that both of these programs would remain on clinical hold due to unresolved concerns regarding the potential for cardiac toxicity. As a result, we elected not to continue the development of these two programs. In June 2013, the FDA requested additional preclinical safety information for IDX20963. In April 2014, we elected not to continue preclinical studies related to IDX20963 and therefore will not move this drug candidate into clinical testing.

Regulatory agencies have expressed safety concerns following cardiac-related adverse events observed in nucleotide compounds previously in development for the treatment of patients with HCV. Our business may be adversely affected if such regulatory concerns lead to more burdensome preclinical or clinical studies that cause significant delays in developing our future nucleotide drug candidates.

Our primary research and development focus is the treatment of patients with HCV. In August 2012, the FDA placed IDX184 and IDX19368 on clinical hold. Both of these holds were due to serious cardiac-related adverse events observed with a competitor’s nucleotide polymerase inhibitor, BMS-986094. These three compounds are guanosine-based nucleotide polymerase inhibitors. In February 2013, the FDA communicated to us that IDX184 and IDX19368 would remain on clinical hold due to unresolved concerns regarding the potential for cardiac toxicity. As a result, we elected not to continue the development of these two programs. If the FDA or other regulatory agencies continue to express safety concerns regarding the possibility of cardiac-related adverse events with respect to nucleotide drug candidates, future preclinical and clinical studies involving such compounds may be more burdensome or include additional preclinical or clinical endpoints that are difficult to meet. In such instance, our progress in the development of these drug candidates may be significantly slowed. If our development timelines are significantly slowed, our business may be adversely affected.

Our product candidates may exhibit undesirable side effects when used alone or in combination with other approved pharmaceutical products or investigational agents, which may delay or preclude their further development or regulatory approval, or limit their use if approved.

Throughout the drug development process, we must continually demonstrate the safety and tolerability of our drug candidates in order to obtain regulatory approval to advance their clinical development or to market them. Even if our drug candidates demonstrate biologic activity and clinical efficacy, any unacceptable adverse side effects or toxicities, when administered alone or in the presence of other pharmaceutical products or investigational agents, which can arise at any stage of development, may outweigh their potential benefit. For instance, in September 2010, two of our drug candidates for the treatment of HCV, IDX184 and IDX320, were placed on clinical hold by the FDA following a 14-day drug-drug interaction study of a combination of IDX184 and IDX320 in healthy volunteers. We discontinued the clinical development of IDX320. In February 2011, the IDX184 program was placed on partial clinical hold, which allowed us to initiate a phase II 12-week clinical trial of IDX184 in HCV-infected patients in July 2011. In February 2012, the FDA removed the partial clinical hold on IDX184. In August 2012, the FDA placed IDX184 on partial clinical hold and IDX19368 on clinical hold due to serious cardiac-related adverse events observed with a competitor’s nucleotide polymerase inhibitor, BMS-986094. In February 2013, the FDA communicated to us that both of these programs would remain on clinical hold. As a result, we elected not to continue the development of these two programs. In future preclinical studies and clinical trials our product

 

23


Table of Contents

candidates may demonstrate unacceptable safety profiles or unacceptable drug-drug interactions, which could result in the delay or termination of their development, prevent regulatory approval or limit their market acceptance if they are ultimately approved.

We have incurred a cumulative loss since inception. If we do not generate significant revenues, we will not be profitable.

We have incurred significant losses each year since our inception in May 1998. We expect to report a net loss for the next several years as we continue to expand our drug discovery and development efforts. We will not be able to generate revenues from product sales until we successfully complete clinical development and receive regulatory approval for one of our drug candidates, and we or a collaboration partner successfully introduce such product commercially. We expect to incur annual operating losses and expect that the net loss we will incur will fluctuate from quarter to quarter and such fluctuations may be substantial. To generate product revenue, regulatory approval for products we successfully develop must be obtained and we and/or one of our existing or future collaboration partners must effectively manufacture, market and sell such products. Even if we successfully commercialize drug candidates that receive regulatory approval, we may not be able to realize revenues at a level that would allow us to achieve or sustain profitability. Accordingly, we may never generate significant revenue and, even if we do generate significant revenue, we may never achieve profitability.

We will need additional capital to fund our operations, including the development, manufacture and potential commercialization of our drug candidates. If we do not have or cannot raise additional capital when needed, we will be unable to develop and ultimately commercialize our drug candidates successfully.

We believe our cash and cash equivalents balance at March 31, 2014 will be sufficient to sustain operations into at least the second half of 2015. Our drug development programs and the potential commercialization of our drug candidates will require substantial cash to fund expenses that we will incur in connection with preclinical studies and clinical trials, regulatory review and future manufacturing and sales and marketing efforts.

Our need for additional funding will depend in part on whether we enter into development and commercialization agreements with third-parties and receive related license fees, milestone payments and development expense reimbursement payments thereunder with respect to our drug candidates.

Our future capital needs will also depend generally on many other factors, including:

 

    the scope and results of our preclinical studies and clinical trials;

 

    the progress of our current preclinical and clinical development programs for HCV;

 

    the cost of obtaining, maintaining and defending patents on our drug candidates and our processes;

 

    the cost, timing and outcome of regulatory reviews;

 

    any costs associated with changes in rules and regulations promulgated by the FDA related to the drug development process and/or clinical trials, including but not limited to increased costs associated with the evolving standard of care treatment regimens;

 

    the commercial potential of our drug candidates;

 

    the rate of technological advances in our markets;

 

    the cost of acquiring or in-licensing new discovery compounds, technologies, drug candidates or other business assets;

 

    the magnitude of our general and administrative expenses;

 

    any costs related to litigation in which we may be involved or related to any claims made against us;

 

    any costs we may incur under current and future licensing arrangements;

 

    the costs of commercializing and launching other products, if any, which are successfully developed and approved for commercial sale by regulatory authorities; and

 

    the amount of revenue that we may be able to realize from commercialization and sale of drug candidates, if any, which are approved by regulatory authorities.

 

24


Table of Contents

We expect that we will incur significant costs to complete the clinical trials and other studies required to enable us to submit regulatory applications with the FDA and/or the EMA for our drug candidates as we continue development of each of our drug candidates. The time and cost to complete clinical development of our drug candidates may vary as a result of a number of factors.

We may seek additional capital through a combination of public and private equity offerings, debt financings and collaborative, strategic alliance and licensing arrangements. Such additional financing may not be available when we need it or may not be available on terms that are favorable to us.

If we raise additional capital through the sale of our common stock, existing stockholders, other than Novartis, which has the right to maintain a certain level of ownership, will experience dilution of their current level of ownership of our common stock and the terms of the financing may adversely affect the holdings or rights of our stockholders. If we are unable to obtain adequate financing on a timely basis, we could be required to delay, reduce or eliminate one or more of our drug development programs or to enter into new collaborative, strategic alliances or licensing arrangements that may not be favorable to us. More generally, if we are unable to obtain adequate funding, we may be required to scale back, suspend or terminate our business operations.

Our research and development efforts may not result in additional drug candidates being discovered on anticipated timelines, which could limit our ability to generate revenues.

Some of our research and development programs are at preclinical stages. Additional drug candidates that we may develop or acquire will require significant research, development, preclinical studies and clinical trials, regulatory approval and commitment of resources before any commercialization may occur. We cannot predict whether our research will lead to the discovery of any additional drug candidates that could generate revenues for us.

Our investments are subject to general credit, liquidity, market and interest rate risks.

As of March 31, 2014, all of our investments were in money market funds. Our investment policy seeks to manage these assets to achieve our goals of preserving principal and maintaining adequate liquidity. Should our investments cease paying or reduce the amount of interest paid to us, our interest income would suffer. In addition, general credit, liquidity, market and interest risks associated with our investment portfolio may have an adverse effect on our financial condition.

The commercial markets which we intend to enter are subject to intense competition. If we are unable to compete effectively, our drug candidates may be rendered noncompetitive or obsolete.

We are engaged in segments of the pharmaceutical industry that are highly competitive and rapidly changing. Many large pharmaceutical and biotechnology companies, academic institutions, governmental agencies and other public and private research organizations are commercializing or pursuing the development of products that target viral diseases, including the same diseases we are targeting.

Several new drugs have been approved by the FDA for commercial sale for the treatment of HCV and we believe that a significant number of drug candidates that are currently under development may become available in the future for the treatment of HCV. We anticipate that we will face intense competition from existing products and we expect to face increasing competition as new products enter the market and advanced technologies become available. Our competitors’ products may be more effective, have fewer side effects, have lower costs or be better marketed and sold than any of our products. Additionally, products that our competitors successfully develop for the treatment of HCV may be marketed prior to any HCV product we or our collaboration partners successfully develop. Many of our competitors have:

 

    significantly greater financial, technical and human resources than we have and may be better equipped to discover, develop, manufacture and commercialize products;

 

    more extensive experience in conducting preclinical studies and clinical trials, obtaining regulatory approvals and manufacturing and marketing pharmaceutical products;

 

    products that have been approved or drug candidates that are in late-stage development; and

 

    collaborative arrangements in our target markets with leading companies and research institutions.

 

25


Table of Contents

Under the termination agreement, Novartis has a non-exclusive license for a period of seven years from July 2012 to conduct clinical trials evaluating a combination of any of our HCV drug candidates and any of Novartis’ HCV drug candidates after each drug candidate has completed a dose-ranging study. If Novartis obtains regulatory approval to co-label a Novartis HCV drug with one or more of our HCV drugs, Novartis could market and sell a combination that may compete with our drug candidates and/or combination products that we market and sell in the future. In addition, Novartis may market, sell, promote or license other competitive products. Novartis has significantly greater financial, technical and human resources than we have, is better equipped to discover, develop, manufacture and commercialize products, and has more extensive experience in preclinical studies and clinical trials, obtaining regulatory approvals and manufacturing and marketing pharmaceutical products. In the event that Novartis competes with us, our business could be materially and adversely affected.

Competitive products may render our products obsolete or non-competitive before we can recover the expenses of developing and commercializing our drug candidates. Furthermore, the development of new treatment methods and/or the widespread adoption or increased utilization of vaccines for the diseases we are targeting could render our drug candidates non-competitive, obsolete or uneconomical.

With respect to drug candidates, if any, that we may successfully develop and obtain approval to commercialize, we will face competition based on the safety and effectiveness of our products, the timing and scope of regulatory approvals, the availability and cost of supply, marketing and sales capabilities, reimbursement coverage, price, patent position and other factors. Our competitors may develop or commercialize more effective or more affordable products or obtain more effective patent protection than we do. Accordingly, our competitors may commercialize products more rapidly or effectively than we do, which could adversely affect our competitive position and business.

Biotechnology and related pharmaceutical technologies have undergone and continue to be subject to rapid and significant change. Our future will depend in large part on our ability to maintain a competitive position with respect to these technologies.

If biopharmaceutical companies involved in HCV drug development continue to consolidate, competition may increase and our business may be harmed.

In late 2011 and early 2012, several acquisitions of smaller biopharmaceutical companies by larger biopharmaceutical companies took place at substantial premiums over the market capitalizations of the target companies, including the acquisitions of Anadys Pharmaceuticals and Pharmasset, Inc. by F. Hoffman-LaRoche & Co. and Gilead, respectively. If such consolidation continues to take place, we may face competitive pressures to a far greater degree than had those consolidations not occurred, resulting from the greater resources the larger pharmaceutical companies can invest in their HCV development pipelines.

If we are not able to attract and retain key management and scientific personnel and advisors, we may not successfully develop our drug candidates or achieve our other business objectives.

The growth of our business and our success depends in large part on our ability to attract and retain key management and research and development personnel. Our key personnel include our senior officers, many of whom have very specialized scientific, medical or operational knowledge. The loss of the service of any of the key members of our senior management team may significantly delay or prevent our discovery of additional drug candidates, the development of our drug candidates and achievement of our other business objectives. Our ability to attract and retain qualified personnel, consultants and advisors is critical to our success.

We face intense competition for qualified individuals from numerous pharmaceutical and biotechnology companies, academic institutions, governmental entities and other research institutions. We may be unable to attract and retain these individuals and our failure to do so would have an adverse effect on our business.

Our business has a substantial risk of product liability claims. If we are unable to obtain or maintain appropriate levels of insurance, a product liability claim against us could adversely affect our business.

Our business exposes us to significant potential product liability risks that are inherent in the development, manufacturing and marketing of human therapeutic products. Product liability claims could result in a recall of products or a change in the therapeutic indications for which such products may be used. In addition, product liability claims may distract our management and key personnel from our core business, require us to spend significant time and money in litigation or require us to pay significant damages, which could prevent or interfere with commercialization efforts and could adversely affect our business. Claims of this nature would also adversely affect our reputation, which could damage our position in the marketplace.

 

26


Table of Contents

For Tyzeka®/Sebivo®, product liability claims could be made against us based on the use of our product prior to October 1, 2007, at which time we transferred to Novartis our worldwide development, commercialization and manufacturing rights and obligations related to Tyzeka®/Sebivo®. For Tyzeka®/Sebivo®, product liability claims could be made against us based on the use of our drug candidates in clinical trials we conducted prior to 2007. We have obtained product liability insurance for Tyzeka®/Sebivo® and maintain clinical trial insurance for our drug candidates in development. Such insurance may not provide adequate coverage against potential liabilities. In addition, clinical trial and product liability insurance is becoming increasingly expensive. As a result, we may be unable to maintain or increase current amounts of product liability and clinical trial insurance coverage, obtain product liability insurance for other products, if any, that we seek to commercialize, obtain additional clinical trial insurance or obtain sufficient insurance at a reasonable cost. If we are unable to obtain or maintain sufficient insurance coverage on reasonable terms or to otherwise protect against potential product liability claims, we may be unable to commercialize our products or conduct the clinical trials necessary to develop our drug candidates. A successful product liability claim brought against us in excess of our insurance coverage may require us to pay substantial amounts in damages. This could adversely affect our cash position and results of operations.

Our insurance policies are expensive and protect us only from some business risks, which will leave us exposed to significant, uninsured liabilities.

We do not carry insurance for all categories of risk that our business may encounter. We currently maintain general liability, property, workers’ compensation, products liability, directors’ and officers’ and employment practices insurance policies. We do not know, however, if we will be able to maintain existing insurance with adequate levels of coverage. Any significant uninsured liability may require us to pay substantial amounts, which would adversely affect our cash position and results of operations.

If the estimates we make, and the assumptions on which we rely, in preparing our financial statements prove inaccurate, our actual results may vary from those reflected in our projections and accruals.

Our financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of our assets, liabilities, revenues and expenses, the amounts of charges accrued by us and related disclosures of contingent assets and liabilities. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. There can be no assurance, however, that our estimates, or the assumptions underlying them, will not change. Different assumptions could yield materially different financial results.

If we fail to design and maintain an effective system of internal controls, we may not be able to accurately report our financial results or prevent fraud. As a result, current and potential stockholders could lose confidence in our financial reporting, which could harm our business and the trading price of our common stock.

As directed by Section 404 of the Sarbanes-Oxley Act of 2002, the SEC adopted rules requiring public companies to include a report in Annual Reports on Form 10-K that contains an assessment by management of the effectiveness of the company’s internal controls over financial reporting. In addition, the company’s independent registered public accounting firm must attest to the effectiveness of our internal controls over financial reporting.

We have completed an assessment and will continue to review in the future our internal controls over financial reporting in an effort to ensure compliance with the Section 404 requirements. The manner by which companies implement, maintain and enhance these requirements including internal control reforms, if any, to comply with Section 404, and how registered independent public accounting firms apply these requirements and test companies’ internal controls, is subject to change and will evolve over time. As a result, notwithstanding our efforts, it is possible that either our management or our independent registered public accounting firm may in the future determine that our internal controls over financial reporting are not effective.

A determination that our internal controls over financial reporting are ineffective could result in an adverse reaction in the financial marketplace due to a loss of investor confidence in the reliability of our financial statements, which ultimately could negatively impact the market price of our stock, increase the volatility of our stock price and adversely affect our ability to raise additional funding.

Our business is subject to international economic, political and other risks that could negatively affect our results of operations or financial position.

 

27


Table of Contents

Our business is subject to risks associated with doing business internationally, including:

 

    changes in a specific country’s or region’s political or economic conditions, including Western Europe, in particular;

 

    potential negative consequences from changes in tax laws affecting our ability to repatriate profits;

 

    difficulty in staffing and managing operations overseas;

 

    unfavorable labor regulations applicable to our operations in France;

 

    changes in foreign currency exchange rates; and

 

    the need to ensure compliance with the numerous regulatory and legal requirements applicable to our business in each of these jurisdictions and to maintain an effective compliance program to ensure compliance.

Our operating results may be impacted by the health of the North American and European economies. Our business and financial performance may be adversely affected by current and future economic conditions that cause a decline in business and consumer spending, including a reduction in the availability of credit, rising interest rates, financial market volatility and recession.

Factors Related to Development, Clinical Testing and Regulatory Approval of Our Drug Candidates

All of our drug candidates are in development. Our drug candidates remain subject to clinical testing and regulatory approval. If we are unable to develop our drug candidates, we will not be successful.

To date, we have limited experience marketing, distributing and selling any products. The success of our business depends primarily upon our ability, or that of any future collaboration partner, to successfully commercialize other products we may successfully develop.

Our drug candidates are in various stages of development. All of our drug candidates require regulatory review and approval prior to commercialization. Approval by regulatory authorities requires, among other things, that our drug candidates satisfy rigorous standards of safety, including efficacy and assessments of the toxicity and carcinogenicity of the drug candidates we are developing. To satisfy these standards, we must engage in expensive and lengthy testing. Notwithstanding the efforts to satisfy these regulatory standards, our drug candidates may not:

 

    offer therapeutic or other improvements over existing drugs;

 

    be proven safe and effective in clinical trials;

 

    meet applicable regulatory standards;

 

    be capable of being produced in commercial quantities at acceptable costs; or

 

    be successfully commercialized.

In June 2013, the FDA requested additional preclinical safety information for IDX20963. In April 2014, we elected not to continue preclinical studies related to IDX20963 and therefore will not move this drug candidate into clinical testing.

Commercial availability of our drug candidates is dependent upon successful clinical development and receipt of requisite regulatory approvals. Clinical data often are susceptible to varying interpretations. Many companies that have believed that their drug candidates performed satisfactorily in clinical trials in terms of both safety and efficacy have nonetheless failed to obtain regulatory approval for commercial sale. Furthermore, the FDA and other regulatory authorities may request additional information including data from additional clinical trials, which may significantly delay any approval and these regulatory agencies ultimately may not grant marketing approval for any of our drug candidates. For example, in August 2012, the FDA placed IDX184 and IDX19368 on clinical hold. Both of these holds were due to serious cardiac-related adverse events observed with a competitor’s nucleotide polymerase inhibitor, BMS-986094. In February 2013, the FDA communicated to us that both of these programs would remain on clinical hold. As a result, we elected not to continue the development of these two programs.

 

28


Table of Contents

If our preclinical or clinical trials are not successful, we will not obtain regulatory approval for the commercial sale of our drug candidates.

To obtain regulatory approval for the commercial sale of our drug candidates, we will be required to demonstrate through preclinical studies and clinical trials that our drug candidates are safe and effective. Preclinical studies and clinical trials are lengthy and expensive and the historical rate of failure for drug candidates is high, including those drug candidates that are classified as nucleoside/nucleotide polymerase inhibitors. The results from preclinical studies of a drug candidate may not predict the results that will be obtained in human clinical trials.

We, the FDA or other applicable regulatory authorities may prohibit the initiation or suspend clinical trials of a drug candidate at any time if we or they believe the persons participating in such clinical trials are being exposed to unacceptable health risks or for other reasons. The observation of adverse side effects in a clinical trial may result in the FDA or foreign regulatory authorities refusing to approve a particular drug candidate for any or all indications of use. In August 2012, the FDA placed IDX184 on partial clinical hold and IDX19368 on clinical hold. Both of these holds were due to serious cardiac-related adverse events observed with a competitor’s nucleotide polymerase inhibitor, BMS-986094. In February 2013, the FDA communicated to us that both of these programs would remain on clinical hold. As a result, we elected not to continue the development of these two programs. Additionally, adverse or inconclusive preclinical or clinical trial results concerning any of our drug candidates could require us to conduct additional preclinical or clinical trials, result in increased costs, significantly delay the submission of applications seeking marketing approval for such drug candidates, result in a narrower indication than was originally sought or result in a decision to discontinue development of such drug candidates. For example, in June 2013, the FDA requested additional preclinical safety information for IDX20963. In April 2014, we elected not to continue preclinical studies related to IDX20963 and therefore will not move this drug candidate into clinical testing.

Clinical trials require sufficient patient enrollment, which is a function of many factors, including the size of the patient population, the nature of the protocol, the proximity of patients to clinical sites, the availability of effective treatments for the relevant disease, the eligibility criteria for the clinical trial and other clinical trials evaluating other investigational agents for the same or similar uses, which may compete with us for patient enrollment. Delays in patient enrollment can result in increased costs and longer development times.

We cannot predict whether we will encounter additional problems with any of our completed, ongoing or planned clinical trials that will cause us or regulatory authorities to delay or suspend our clinical trials, delay or suspend patient enrollment into our clinical trials or delay the analysis of data from our completed or ongoing clinical trials. Delays in the development of our drug candidates would delay our ability to seek and potentially obtain regulatory approvals, increase expenses associated with clinical development and likely increase the volatility of the price of our common stock. Any of the following could suspend, terminate or delay the completion of our ongoing, or the initiation of our planned, clinical trials:

 

    discussions with the FDA or comparable foreign authorities regarding the scope or design of our clinical trials;

 

    delays in obtaining, or the inability to obtain, required approvals from, or suspensions or terminations by, institutional review boards or other governing entities at clinical sites selected for participation in our clinical trials;

 

    delays in enrolling participants into clinical trials;

 

    lower than anticipated retention of participants in clinical trials;

 

    insufficient supply or deficient quality of drug candidate materials or other materials necessary to conduct our clinical trials;

 

    serious or unexpected drug-related side effects experienced by participants in our clinical trials; or

 

    negative results of clinical trials.

If the results of our own or any future partner’s ongoing or planned clinical trials for our drug candidates are not available when we expect or if we encounter any delay in the analysis of data from our preclinical studies and clinical trials we may be unable to commence human clinical trials of any drug candidates or we may not have the financial resources to continue the research and development of our drug candidates.

If our drug candidates fail to obtain United States and/or foreign regulatory approval, we and any future partners will be unable to commercialize our drug candidates.

 

29


Table of Contents

Each of our drug candidates is subject to extensive governmental regulations relating to development, clinical trials, manufacturing and commercialization. Rigorous preclinical studies and clinical trials and an extensive regulatory approval process are required in the United States and in many foreign jurisdictions prior to the commercial sale of any drug candidates. Before any drug candidate can be approved for sale, we, or any collaboration partners must demonstrate that it can be manufactured in accordance with the FDA’s cGMP requirements. In addition, facilities where the principal commercial supply of a product is to be manufactured must pass FDA inspection prior to approval. Satisfaction of these and other regulatory requirements is costly, time consuming, uncertain and subject to unanticipated delays. It is possible that none of the drug candidates we are currently developing will obtain the appropriate regulatory approvals necessary to permit commercial distribution.

The time required for FDA review and other approvals is uncertain and typically takes a number of years, depending upon the complexity of the drug candidate. Analysis of data obtained from preclinical studies and clinical trials is subject to confirmation and interpretation by regulatory authorities, which could delay, limit or prevent regulatory approval. We or one of our future partners may also encounter unanticipated delays or increased costs due to government regulation from future legislation or administrative action, changes in FDA policy during the period of product development, clinical trials and FDA regulatory review.

Any delay in obtaining or failure to obtain required approvals could materially adversely affect our ability or that of any partner to generate revenues from a particular drug candidate. In June 2013, the FDA requested additional preclinical safety information for IDX20963 and initiation of clinical trials for IDX20963 was on hold. In April 2014, we elected not to continue preclinical studies related to IDX20963 and therefore will not move this drug candidate into clinical testing. In August 2012, the FDA placed IDX184 on partial clinical hold and IDX19368 on clinical hold. In February 2013, the FDA communicated to us that both of these programs would remain on clinical hold. As a result, we elected not to continue the development of these two programs. In February 2011, ViiV informed us that the FDA placed ‘761, our product candidate for the treatment of HIV which we licensed to ViiV in 2009, on clinical hold and subsequently, the ViiV license agreement was terminated in March 2012. Furthermore, any regulatory approval to market a product may be subject to limitations on the indicated uses for which we or any partner may market the product. These restrictions may limit the size of the market for the product. Additionally, drug candidates we or any future partners successfully develop could be subject to post market surveillance and testing.

We are also subject to numerous foreign regulatory requirements governing the conduct of clinical trials, and we, with any partners, are subject to numerous foreign regulatory requirements relating to manufacturing and marketing authorization, pricing and third-party reimbursement. The foreign regulatory approval processes include all of the risks associated with FDA approval described above as well as risks attributable to the satisfaction of local regulations in foreign jurisdictions. Approval by any one regulatory authority does not assure approval by regulatory authorities in other jurisdictions. Many foreign regulatory authorities, including those in the European Union and in China, have different approval procedures than those required by the FDA and may impose additional testing requirements for our drug candidates. Any failure or delay in obtaining such marketing authorizations for our drug candidates would have a material adverse effect on our business.

Our products will be subject to ongoing regulatory review even after approval to market such products is obtained. If we or any future partners fail to comply with applicable United States and foreign regulations, we or such partners could lose approvals that we or our partners have been granted and our business would be seriously harmed.

Even after approval, any drug product that we or any collaboration partners successfully develop will remain subject to continuing regulatory review, including the review of clinical results, which are reported after our product becomes commercially available. The marketing claims we or any collaboration partners are permitted to make in labeling or advertising regarding our marketed drugs in the United States will be limited to those specified in any FDA approval, and in other markets such as the European Union, to the corresponding regulatory approvals. Any manufacturer we or any collaboration partners use to make approved products will be subject to periodic review and inspection by the FDA or other similar regulatory authorities in the European Union and other jurisdictions. We and any collaboration partners are required to report any serious and unexpected adverse experiences and certain quality problems with our products and make other periodic reports to the FDA or other similar regulatory authorities in the European Union and other jurisdictions. The subsequent discovery of previously unknown problems with the drug, manufacturer or facility may result in restrictions on the drug manufacturer or facility, including withdrawal of the drug from the market. We do not have, and currently do not intend to develop, the ability to manufacture material at commercial scale or for our clinical trials. Our reliance on third-party manufacturers entails risks to which we would not be subject if we manufactured products ourselves, including reliance on such manufacturers for regulatory compliance. Certain changes to an approved product, including the way it is manufactured or promoted, often require prior approval from regulatory authorities before the modified product may be marketed.

 

30


Table of Contents

If we or any collaboration partners fail to comply with applicable continuing regulatory requirements, we or such collaboration partners may be subject to civil penalties, suspension or withdrawal of any regulatory approval obtained, product recalls and seizures, injunctions, operating restrictions and criminal prosecutions and penalties.

If we or any future partners fail to comply with ongoing regulatory requirements after receipt of approval to commercialize a product, we or such partners may be subject to significant sanctions imposed by the FDA, EMA or other United States and foreign regulatory authorities.

The research, testing, manufacturing and marketing of drug candidates and products are subject to extensive regulation by numerous regulatory authorities in the United States and other countries. Failure to comply with these requirements may subject a company to administrative or judicially imposed sanctions. These enforcement actions may include, without limitation:

 

    warning letters and other regulatory authority communications objecting to matters such as promotional materials and requiring corrective action such as revised communications to healthcare practitioners;

 

    civil penalties;

 

    criminal penalties;

 

    injunctions;

 

    product seizure or detention;

 

    product recalls;

 

    total or partial suspension of manufacturing; and

 

    FDA refusal to review or approve pending new drug applications or supplements to new drug applications for previously approved products and/or similar rejections of marketing applications or supplements by foreign regulatory authorities.

The imposition of one or more of these sanctions on us or one of our future partners could have a material adverse effect on our business.

If we do not comply with laws regulating the protection of the environment and health and human safety, our business could be adversely affected.

Our research and development activities involve the controlled use of hazardous materials, chemicals and various radioactive compounds. Although we believe that our safety procedures for handling and disposing of these materials comply with the standards prescribed by state and federal laws and regulations, the risk of accidental contamination or injury from these materials cannot be eliminated. If an accident occurs, we could be held liable for resulting damages, which could be substantial. We are also subject to numerous environmental, health and workplace safety laws and regulations, including those governing laboratory procedures, exposure to bloodborne pathogens and the handling of biohazardous materials. Although we maintain workers’ compensation insurance to cover us for costs we may incur due to injuries to our employees resulting from the use of these materials and environmental liability insurance to cover us for costs associated with environmental or toxic tort claims that may be asserted against us, this insurance may not provide adequate coverage against all potential liabilities. Additional federal, state, foreign and local laws and regulations affecting our operations may be adopted in the future. We may incur substantial costs to comply with these laws or regulations. Additionally, we may incur substantial fines or penalties if we violate any of these laws or regulations.

Growing availability of specialty pharmaceuticals may lead to increased focus of cost containment.

Specialty pharmaceuticals refer to medicines that treat rare or life-threatening conditions that have smaller patient populations, such as certain types of cancer, multiple sclerosis, HBV, HCV and HIV. The growing availability and use of innovative specialty pharmaceuticals, combined with their relative higher cost as compared to other types of pharmaceutical products, is beginning to generate significant payer interest in developing cost containment strategies targeted to this sector. While the impact on our payers’ efforts to control access and pricing of specialty pharmaceuticals has been limited to date, our portfolio of specialty products, combined with the increasing use of health technology assessment in markets around the world and the deteriorating finances of governments, may lead to a more significant adverse business impact in the future.

 

31


Table of Contents

Factors Related to Our Relationship with Novartis

If we breach any of the numerous representations and warranties we made to Novartis under the development and commercialization agreement, the termination agreement or the stock purchase agreement, Novartis has the right to seek indemnification from us for damages it suffers as a result of such breach. These amounts could be substantial.

We have agreed to indemnify Novartis and its affiliates against losses suffered as a result of our breach of representations and warranties in the development and commercialization agreement, the termination agreement and the stock purchase agreement. Under these agreements, we made numerous representations and warranties to Novartis regarding our HCV and HBV drug candidates, including representations regarding our ownership of and licensed rights to the inventions and discoveries relating to such drug candidates. If one or more of our representations or warranties were subsequently determined not to be true at the time we made them to Novartis, we would be in breach of these agreements. In the event of a breach by us, Novartis has the right to seek indemnification from us and, under certain circumstances, our stockholders who sold shares to Novartis, which include some of our directors and officers, for damages suffered by Novartis as a result of such breach. The amounts for which we could become liable to Novartis could be substantial.

In May 2004, we entered into a settlement agreement with UAB, relating to our ownership of our former chief executive officer’s inventorship interest in certain of our patents and patent applications, including patent applications covering our HCV drug candidates. Under the terms of the settlement agreement, we agreed to make payments to UAB, including an initial payment made in 2004 in the amount of $2.0 million, as well as regulatory milestone payments and payments relating to net sales of products associated with certain technology. Such payments would be due even in the instance where we licensed such technology to a third-party. Novartis may seek to recover from us and, under certain circumstances, our stockholders who sold shares to Novartis, which include many of our officers and directors, the losses it suffers as a result of any breach of the representations and warranties we made relating to our HCV drug candidates and may assert that such losses include the settlement payments.

In July 2008, we, our former chief executive officer, in his individual capacity, the University of Montpellier and CNRS entered into a settlement agreement with UAB, UABRF, and Emory University. Pursuant to this settlement agreement, all contractual disputes relating to patents covering the use of certain synthetic nucleosides for the treatment of HBV and all litigation matters relating to patents and patent applications related to the use of ß-L-2’-deoxy-nucleosides for the treatment of HBV assigned to one or more of Idenix, CNRS, and the University of Montpellier and which cover the use of Tyzeka®/Sebivo® have been resolved. Under the terms of the settlement, we paid UABRF (on behalf of UAB and Emory University) a $4.0 million upfront payment and agreed to make additional payments to UABRF equal to 20% of all royalty payments received by us from Novartis based on worldwide sales of Tyzeka®/Sebivo®, subject to minimum payment obligations aggregating $11.0 million. Novartis may seek to recover from us and, under certain circumstances, those of our officers, directors and other stockholders who sold shares to Novartis, losses it suffers as a result of any breach of the representations and warranties we made to Novartis relating to our HBV drug candidates and may assert that such losses include the settlement payments. Under the termination agreement we entered into with Novartis in July 2012, Novartis is required to reimburse us for our contractual payments we make to UABRF under the settlement agreement.

If we issue capital stock, in certain situations, Novartis will be able to purchase a pro rata portion of shares that we may issue to maintain its percentage ownership in Idenix.

Novartis has the right, subject to limited exceptions noted below, to purchase a pro rata portion of shares of capital stock that we issue. The price that Novartis pays for these securities would be either the price that we offer such securities to third-parties, including the price paid by persons who acquire shares of our capital stock pursuant to awards granted under stock compensation or equity incentive plans or, in specified situations, for a 10% premium to the consideration per share paid by others acquiring our stock. Novartis’ right to purchase a pro rata portion does not include:

 

    securities issuable in connection with any stock split, reverse stock split, stock dividend or recapitalization that we undertake that affects all holders of our common stock proportionately;

 

    shares of common stock issuable upon exercise of stock options and other awards pursuant to our 1998 equity incentive plan; and

 

    securities issuable in connection with our acquisition of all the capital stock or all or substantially all of the assets of another entity.

Except as noted above, Novartis’ right to purchase shares includes a right to purchase securities that are convertible into, or exchangeable for, our common stock, provided that Novartis’ right to purchase stock in connection with options or

 

32


Table of Contents

other convertible securities issued to any of our directors, officers, employees or consultants pursuant to any stock compensation or equity incentive plan will not be triggered until the underlying equity security has been issued to the director, officer, employee or consultant. Novartis waived its right to purchase additional shares of our common stock as a result of the shares of common stock we issued to GSK in 2009. Additionally, Novartis did not purchase shares of our common stock pursuant to our offerings in August 2009, April 2010, November 2011, August 2012 or January 2014. We issued 1.8 million shares of our common stock to Novartis pursuant to a private placement agreement in conjunction with our underwritten offering in April 2011. Novartis’ ownership has been diluted from approximately 53% prior to the August 2009 offering to approximately 22% as of April 23, 2014.

The safety or efficacy profile of any of our HCV clinical candidates may differ in combination with other existing or future drugs used to treat HCV, including those being developed by Novartis, and therefore may preclude the further development or approval of our HCV clinical candidates, which could materially harm our business.

Phase II and phase III clinical trials of other DAAs similar to those being developed by us are now being conducted in combination with the current standard of care and increasingly, with other DAAs in clinical development. Therefore, the clinical development and commercialization pathway for our product candidates we may develop in the future for the treatment of HCV will require that it be evaluated during clinical trials in combination with other existing or future DAAs. When combined with other HCV therapies, our product candidates may demonstrate unexpected side effects even if our product candidates demonstrate meaningful therapeutic benefits equal to or better than our competitors’ compounds, an acceptable safety profile, and a dose amenable to combination therapy in phase I and other early-stage clinical trials. Under limited circumstances, Novartis has rights to combine its HCV clinical candidates, including alisporivir, with our HCV clinical candidates, including samatasvir. Although we elected to discontinue the development of IDX184 in February 2013, Novartis may elect to perform certain combination trials with IDX184 and its clinical candidates, subject to regulatory approval. We believe the optimized treatment of HCV will involve the combination of three or more antiviral compounds. We cannot assure that any of our HCV clinical candidates will be amenable for use in combination with some, or any, existing therapies or those in clinical development, including HCV clinical candidates developed by Novartis now or in the future.

If we enter into a future commercialization agreement with Novartis and Novartis terminates or fails to perform its obligations under such agreement, we may not be able to successfully commercialize our drug candidates licensed to Novartis under such agreement and the development and commercialization of our other drug candidates could be delayed, curtailed or terminated.

Following the receipt of certain data related to a combination trial and upon Novartis’ request, we and Novartis are obligated to use, in good faith, commercially reasonable efforts to negotiate a future agreement for the development, manufacture and commercialization of such combination therapy for the treatment of HCV. Neither party is obligated to negotiate for a period longer than 180 days. We may not be able to obtain terms that are favorable to us, including obtaining co-promotion and co-marketing rights or a reasonable royalty for future sales of combination therapies including our HCV drug candidates. If we do enter into such an agreement, we will likely depend upon the success of the efforts of Novartis to manufacture, market and sell such combination therapies, if any, that are successfully developed. We will have limited control over the resources that Novartis may devote to such manufacturing and commercialization efforts and, if Novartis does not devote sufficient time and resources to such efforts, we may not realize the commercial or financial benefits we anticipate, and our results of operations may be adversely affected.

If Novartis were to breach or terminate a future commercialization agreement with us, the development or commercialization of the affected drug candidate or product could be delayed, curtailed or terminated because we may not have sufficient resources or capabilities, financial or otherwise, to continue development and commercialization of the drug candidate, and we may not be successful in entering into a collaboration with another third-party.

Factors Related to Our Dependence on Third-Parties Other Than Novartis

If we seek to enter into collaboration agreements for any drug candidates and we are not successful in establishing such collaborations, we may not be able to continue development of those drug candidates.

Our drug development programs and product commercialization efforts will require substantial additional cash to fund expenses to be incurred in connection with these activities. We may seek to enter into collaboration agreements with other pharmaceutical companies to fund all or part of the costs of drug development and commercialization of drug candidates. We may seek a partner who will assist in the future development and commercialization of our drug candidates for the treatment of HCV, as we have with Janssen. The terms and conditions of our termination agreement with Novartis may discourage other third-parties from entering into future collaboration agreements and relationships with us. We may not be able to enter into collaboration agreements and the terms of any such collaboration agreements may not be favorable to us.

 

33


Table of Contents

If we do not have sufficient funds to develop our drug candidates, we will not be able to bring these drug candidates to market and generate revenue. As a result, our business will be adversely affected. In addition, the inability to enter into collaboration agreements could delay or preclude the development, manufacture and/or commercialization of a drug candidate and could have a material adverse effect on our financial condition and results of operations because:

 

    we may be required to expend our own funds to advance the drug candidate to commercialization;

 

    revenue from product sales could be delayed; or

 

    we may elect not to develop or commercialize the drug candidate.

Our collaboration agreement with Janssen is important to our business. The development of samatasvir, our NS5A inhibitor, in combination with other DAAs could be significantly delayed if Janssen terminates or fails to perform its obligations under its agreement with us.

In January 2013, we entered into a non-exclusive collaboration agreement with Janssen for the clinical evaluation of all-oral DAA HCV combination therapies. The combination therapies involve samatasvir, our once-daily pan-genotypic NS5A inhibitor, simeprevir, a once-daily protease inhibitor jointly developed by Janssen and Medivir, and TMC647055, a once-daily non-nucleoside polymerase inhibitor, with low-dose ritonavir, being developed by Janssen.

If Janssen was to breach or terminate its agreement with us or fail to perform its obligations to us in a timely manner, the development of samatasvir in combination with other DAAs could be significantly delayed. Any delay or termination of this type could have a material adverse effect on our business.

Our collaborations with outside scientists may be subject to restriction and change.

We work with chemists and biologists at academic and other institutions that assist us in our research and development efforts. Many of our drug candidates were discovered with the research and development assistance of these chemists and biologists. Many of the scientists who have contributed to the discovery and development of our drug candidates are not our employees and may have other commitments that would limit their future availability to us. Although our scientific advisors and collaborators generally agree not to do competing work, if a conflict of interest between their work for us and their work for another entity arises, we may lose their services.

We have depended on third-party manufacturers to manufacture products for us. If in the future we manufacture any of our products, we will be required to incur significant costs and devote significant efforts to establish these capabilities.

We have relied upon third-parties to produce material for preclinical and clinical studies and may continue to do so in the future. Although we believe that we will not have any material supply issues, we cannot be certain that we will be able to obtain long-term supply arrangements of those materials on acceptable terms. We also expect to rely on third-parties to produce materials required for clinical trials and for the commercial production of certain of our products if we succeed in obtaining necessary regulatory approvals. If we are unable to arrange for third-party manufacturing, or to do so on commercially reasonable terms, we may not be able to complete development of our products or market them.

Reliance on third-party manufacturers entails risks to which we would not be subject if we manufactured products ourselves, including reliance on the third-party for regulatory compliance and quality assurance, the possibility of breach by the third-party of agreements related to supply because of factors beyond our control and the possibility of termination or nonrenewal of the agreement by the third-party, based on its own business priorities, at a time that is costly or damaging to us.

In addition, the FDA and other regulatory authorities require that our products be manufactured according to cGMP regulations. Any failure by us or our third-party manufacturers to comply with cGMPs and/or our failure to scale up our manufacturing processes could lead to a delay in, or failure to obtain, regulatory approval. In addition, such failure could be the basis for action by the FDA to withdraw approvals for drug candidates previously granted to us and for other regulatory action.

Factors Related to Patents and Licenses

If we are unable to adequately protect our patents and licenses related to our drug candidates, or if we infringe the rights of others, it may not be possible to successfully commercialize products that we develop.

 

34


Table of Contents

Our success will depend in part on our ability to obtain and maintain patent protection both in the United States and in other countries for any products we successfully develop. The patents and patent applications in our patent portfolio are either owned by us, exclusively licensed to us, or co-owned by us and others and exclusively licensed to us. Our ability to protect any products we successfully develop from unauthorized or infringing use by third-parties depends substantially on our ability to obtain and maintain valid and enforceable patents. Due to evolving legal standards relating to the patentability, validity and enforceability of patents covering pharmaceutical inventions and the scope of claims made under these patents, our ability to obtain and enforce patents is uncertain and involves complex legal and factual questions. Accordingly, rights under any issued patents may not provide us with sufficient protection for any products we successfully develop or provide sufficient protection to afford us a commercial advantage against our competitors or their competitive products or processes. In addition, we cannot guarantee that any patents will be issued from any pending or future patent applications owned by or licensed to us. Even if patents have been issued or will be issued, we cannot guarantee that the claims of these patents are, or will be, valid or enforceable, or provide us with any significant protection against competitive products or otherwise be commercially valuable to us. The U.S. Congress passed the Leahy-Smith America Invents Act, or the America Invents Act, which was signed into law in September 2011. The America Invents Act reforms U.S. patent law in part by changing the standard for patent approval from a “first to invent” standard to a “first inventor to file” standard and developing a post-grant review system. This new legislation affects U.S. patent law in a manner that may impact our ability to obtain or maintain patent protection for current or future inventions in the U.S. or otherwise cause uncertainty as to our patent protection.

We may not have identified all patents, published applications or published literature that may affect our business, either by blocking our ability to commercialize our drug candidates, by preventing the patentability of our drug candidates by us, our licensors or co-owners, or by covering the same or similar technologies that may invalidate our patents, limiting the scope of our future patent claims or adversely affecting our ability to market our drug candidates. For example, patent applications are maintained in confidence for at least 18 months after their filing. In some cases, patent applications remain confidential in the USPTO for the entire time prior to issuance of a U.S. patent. Patent applications filed in countries outside the United States are not typically published until at least 18 months from their first filing date. Similarly, publication of discoveries in the scientific or patent literature often lags behind actual discoveries. Therefore, we cannot be certain that we or our licensors or co-owners were the first to invent, or the first inventors to file, patent applications on our product or drug candidates or for their uses. In the event that another party has filed a U.S. patent application covering the same invention as one of our patent applications or patents, we may have to participate in an adversarial proceeding, known as an interference, declared by the USPTO to determine priority of invention in the United States. An interference proceeding is divided into two stages. The first phase determines the application filing dates each party will have benefit of for the interfering subject matter. The party with the benefit of the earliest application filing date is deemed the ‘senior party’ and the party with the later date is deemed the ‘junior party’. The second phase of the interference determines which party was first to invent. The party who is deemed first to invent prevails in the interference proceeding.

The USPTO has declared two interferences between Idenix and Gilead. In February 2012, an interference was declared by the USPTO concerning our co-owned U.S. Patent Application 12/131,868 and Gilead’s U.S. Patient No. 7,429,572. Both the application and patent claim certain nucleoside compounds useful in treating HCV. In March 2013, the USPTO issued a decision where we were determined to have a later application filing date than Gilead and therefore we were determined to be the ‘junior party’ and Gilead the ‘senior party’. The second phase of the interference commenced in the second quarter of 2013 and in January 2014, the USPTO determined that we are not entitled to priority of invention and judgment was entered in favor of Gilead. We have challenged this decision in the U.S. District Court for the District of Delaware. In December 2013, a second interference was declared by the USPTO concerning our co-owned U.S. Patent No. 7,608,600 and Gilead’s U.S. Patent Application 11/854,218. Both the patent and the application claim methods of treating HCV infection using certain nucleoside compounds. For the second interference, the USPTO has initially determined that we are the ‘senior party’ and that Gilead is the ‘junior party’, although that determination may change after the first phase of the interference. We cannot predict if the decision in the first interference will influence the timing and/or outcome in the second interference. We intend to vigorously defend these actions and any others like it brought by any third-party. We do not believe our co-owned patent and patent application at issue in the interferences are relevant to any compounds we currently have under clinical development. An interference is based upon complex specialized U.S. patent law and the interference proceedings are likely to be expensive and time consuming.

It is possible that our efforts could be unsuccessful, potentially resulting in the loss of our U.S. patent application and patent at issue in the interferences, which as noted above are not relevant to any compounds we currently have under clinical development. The laws of some foreign jurisdictions do not protect intellectual property rights to the same extent as in the United States and many companies have encountered significant difficulties in protecting and defending such rights in foreign jurisdictions. If we encounter such difficulties in protecting, or are otherwise precluded from effectively protecting, our intellectual property rights in foreign jurisdictions, our business prospects could be substantially harmed.

 

35


Table of Contents

Since our HBV product, telbivudine, was a known compound before the filing of our patent applications covering the use of this drug candidate to treat HBV, we cannot obtain patent protection on telbivudine itself. As a result, we have obtained and maintained patents granted on the method of using telbivudine as a medical therapy for the treatment of HBV. In the termination agreement entered into in July 2012, we have agreed to transfer all our rights to patents and patent applications associated with telbivudine to Novartis.

In July 2008, we entered into a settlement agreement with UAB, UABRF and Emory University relating to our telbivudine technology. Pursuant to this settlement agreement, all contractual disputes relating to patents covering the use of certain synthetic nucleosides for the treatment of HBV and all litigation matters relating to patents and patent applications related to the use of ß-L-2’-deoxy-nucleosides for the treatment of HBV assigned to one or more of Idenix, CNRS and the University of Montpellier and which cover the use of Tyzeka®/Sebivo® have been resolved. UAB also agreed to abandon certain continuation patent applications it filed in July 2005. Under the terms of the settlement, we paid UABRF (on behalf of UAB and Emory University) a $4.0 million upfront payment and agreed to make additional payments to UABRF equal to 20% of all royalty payments received by us from Novartis based on worldwide sales of Tyzeka®/Sebivo®, subject to minimum payment obligations in the aggregate of $11.0 million. Under the termination agreement, we no longer receive royalty or milestone payments from Novartis based upon worldwide product sales of Tyzeka®/Sebivo®. Novartis is required to reimburse us for our contractual payments we make to UABRF under the settlement agreement.

In accordance with our patent strategy, we are attempting to obtain patent protection for our HCV drug candidates, including samatasvir. We have filed U.S. and foreign patent applications for our drug candidates, and in some jurisdictions have obtained patent protection, related to specific compounds, as well as to methods of treating HCV with such compounds. Further, we are prosecuting U.S. and foreign patent applications, and have been granted U.S. and foreign patents, claiming methods of treating HCV with nucleoside/nucleotide polymerase inhibitors.

We are aware that a number of other companies have filed patent applications attempting to cover broad classes of compounds and their use to treat HCV or infection by any member of the Flaviviridae virus family to which HCV belongs. These classes of compounds might relate to nucleoside polymerase inhibitors and/or our NS5A inhibitor, samatasvir. The companies include Merck & Co., Inc., Isis Pharmaceuticals, Inc., Ribapharm, Inc. (a wholly-owned subsidiary of Valeant Pharmaceuticals International), Genelabs Technologies, Inc., Gilead, Bristol-Myers Squibb Company, Enanta Pharmaceuticals, Inc., Presidio Pharmaceuticals, Inc. and Biota, Inc. (a subsidiary of Biota Holdings Ltd.). A foreign country may grant patent rights covering one or more of our drug candidates to one or more other companies. If that occurs, we may need to challenge the third-party patent rights, and if we do not challenge or are not successful with the challenge, we will need to obtain a license that might not be available to us on commercially reasonable terms or at all. The USPTO may grant patent rights covering one or more of our drug candidates to one or more other companies. If that occurs, we may need to challenge the third-party patent rights, and if we do not challenge or are not successful with the challenge, we will need to obtain a license that might not be available at all or on commercially reasonable terms. Given the breadth of our patent portfolio to HCV nucleosides/nucleotides, we expect many competitors to challenge our patents in, for example, Europe, Canada, Australia or the United States at the appropriate time. We cannot predict whether these challenges will occur, or, if they do, exactly when they will occur. We also cannot predict the outcome of any of these challenges, and they may be expensive and time consuming.

In June 2012, Gilead filed suit against us in Canadian Federal Court seeking to invalidate one of our issued co-owned Canadian patents. Our patent, which is the subject of the Canadian litigation, covers similar subject matter to our U.S. Patent Application 12/131,868 and U.S. Patent No. 7,608,600. In April 2014, we counterclaimed for infringement against Gilead in Canada. Through this counterclaim we are seeking remedies with respect to Gilead’s marketing and sales of drugs containing Sovaldi™, which we believe infringes our Canadian patent. The Canadian patent involved covers similar subject matter to our U.S. Patent No. 7,608,600.

In September 2012, Gilead filed suit against us in Norway in the Oslo District Court seeking to invalidate one of our issued co-owned Norwegian patents. In March 2014, the Oslo District Court determined that our Norwegian patent, NO 330 755, is invalid. We filed an appeal to challenge the court’s decision. Our patent, NO 330 755, covers certain 2’-methyl-2’-fluoro nucleoside compounds useful in the treatment of HCV and other flaviviridae infections which is similar subject matter to our U.S. Patent Application 12/131,868 and U.S. Patent No. 7,608,600.

In January 2013, Gilead commenced proceedings in the Federal Court of Australia seeking a declaration that certain claims of one of our issued co-owned Australian patents, covering similar subject matter to our U.S. Patent Application 12/131,868 and U.S. Patent No. 7,608,600.

In August 2013, we filed a request with the Chinese Patent Office’s Patent Re-examination Board, or PRB, to invalidate Gilead’s Chinese Patent No. ZL.200480019148.4. Gilead’s patent relates to 2’-fluoro-2’-methyl-nucleoside compounds that are useful for treating HCV. The request alleges that Gilead’s patent is invalid for lack of novelty over a prior filed Idenix co-owned Chinese patent application. We cannot predict whether our request will be granted by the PRB.

 

36


Table of Contents

We do not believe the respective patents at issue in these foreign cases are relevant to any compounds we currently have under clinical development. Gilead may make similar claims or bring additional legal proceedings in other jurisdictions where we have granted patents.

In August 2013, we filed a request with the PRB to invalidate Gilead’s Chinese Patent No. ZL.200480019148.4. Gilead’s patent relates to 2’-fluoro-2’-methyl-nucleoside compounds that are useful for treating HCV infections. The request alleges that Gilead’s patent is invalid for lack of novelty over a prior filed Idenix co-owned Chinese patent application. We cannot predict whether our request will be granted by the PRB.

In December 2013, we filed infringement lawsuits against Gilead in the U.S District Court for the District of Massachusetts and in U.S. District Court for the District of Delaware. In the Massachusetts action, we allege that Gilead’s method of treating HCV using its Sovaldi™ product infringes our two asserted co-owned patents, U.S. Patent Nos. 6,914,054 and 7,608,597. In the Delaware action, we allege that Gilead’s method of treating HCV using its Sovaldi™ product infringes our asserted co-owned patent U.S. Patent No. 7,608,600. In these lawsuits, we are seeking remedies with respect to Gilead’s marketing and sales of drugs containing Sovaldi™, which we believe infringes our U.S. patents. In the Delaware action, we also filed an interference claim between our co-owned U.S. Patent No. 7,608,600 and Gilead’s U.S. Patent No. 8,415,322. As part of that claim, we are asking that our U.S. Patent No. 7,608,600 be deemed to have priority of invention over Gilead’s U.S. Patent No. 8,415,322.

In March 2014, we and certain co-owners were granted a European Patent, EP 1 523 489, that covers 2’-methyl-2’-fluoro nucleosides for treating HCV. Subsequently, we filed infringement lawsuits against Gilead in France, Germany and the United Kingdom. In these lawsuits, we are seeking remedies with respect to Gilead’s marketing and sales of drugs containing Sovaldi™, which we believe infringes our European patent. The European patent involved covers similar subject matter to our U.S. Patent No. 7,608,600.

While we cannot predict whether we will prevail, we intend to vigorously defend these actions and any others like it brought by any third-party. These litigation proceedings are likely to be expensive and time consuming. In the event we do not prevail in certain jurisdictions, we may be liable for reimbursement of legal fees incurred by the other party.

A number of companies have filed patent applications and have obtained patents covering certain compositions and methods for the treatment, diagnosis and/or screening of HCV that could materially affect the ability to develop and commercialize current drug candidates and other drug candidates we may develop in the future. For example, we are aware that Apath, LLC has obtained broad patents covering HCV proteins, nucleic acids, diagnostics and drug screens. If we need to use these patented materials or methods to develop any of our HCV drug candidates and the materials or methods fall outside certain safe harbors in the laws governing patent infringement, we will need to buy these products from a licensee of the company authorized to sell such products or we will require a license from one or more companies, which may not be available to us on commercially reasonable terms or at all. This could materially affect or preclude our ability to develop and sell our HCV drug candidates.

If we find that any drug candidates we are developing should be used in combination with a product covered by a patent held by another company or institution, and that a labeling instruction is required in product packaging recommending that combination, we could be accused of, or held liable for, infringement or inducement of infringement of certain third-party patents claims covering the product recommended for co-administration with our product. In that case, we may be required to obtain a license from the other company or institution to provide the required or desired package labeling, which may not be available on commercially reasonable terms or at all.

Litigation and disputes related to intellectual property matters occur frequently in the biopharmaceutical industry. Litigation regarding patents, patent applications and other proprietary rights may be expensive and time consuming. If we are unsuccessful in litigation concerning patents or patent applications owned or co-owned by us or licensed to us, we may not be able to protect our products from competition or we may be precluded from selling our products. If we are involved in such litigation, it could cause delays in bringing drug candidates to market and harm our ability to operate. Such litigation could take place in the United States in a federal court or in the USPTO. The litigation could also take place in a foreign country, in either the courts or the patent office of that country.

Our success will depend in part on our ability to uphold and enforce patents or patent applications owned or co-owned by us or licensed to us, which cover products we successfully develop. Proceedings involving our patents or patent applications could result in adverse decisions regarding:

 

    ownership of patents and patent applications;

 

37


Table of Contents
    rights concerning our licenses;

 

    the patentability of our inventions relating to our products and drug candidates; and/or

 

    the enforceability, validity or scope of protection offered by our patents relating to our products and drug candidates.

Even if we are successful in these proceedings, we may incur substantial costs and divert management’s time and attention in pursuing these proceedings, which could have a material adverse effect on us.

In May 2004, we and our former chief executive officer entered into a settlement agreement with UAB resolving a dispute regarding ownership of inventions and discoveries made by our former chief executive officer during the period from November 1999 to November 2002, at which time our former chief executive officer was on sabbatical and then unpaid leave from his position at UAB. The patent applications we filed with respect to such inventions and discoveries include the patent applications covering IDX184 and patents generally related to nucleoside/nucleotide inhibitors.

Under the terms of the settlement agreement with UAB, we agreed to make a $2.0 million initial payment to UAB, as well as other contingent payments based upon the commercial launch of other HCV products discovered or invented by our former chief executive officer during his sabbatical and unpaid leave. In addition, UAB and UABRF have each agreed that neither of them has any right, title or ownership interest in these inventions and discoveries. Under the development and commercialization agreement, termination agreement and stock purchase agreement, we made numerous representations and warranties to Novartis regarding our HCV program, including representations regarding our ownership of the inventions and discoveries. If one or more of our representations or warranties were subsequently determined not to be true at the time we made them to Novartis, we would be in breach of these agreements. In the event of a breach by us, Novartis has the right to seek indemnification from us and, under certain circumstances, our stockholders who sold shares to Novartis, which include many of our directors and officers, for damages suffered by Novartis as a result of such breach. The amounts for which we could be liable to Novartis could be substantial.

Our success will also depend in part on our ability to avoid infringement of the patent rights of others. If it is determined that we do infringe a patent right of another, we may be required to seek a license (which may not be available on commercially reasonable terms or at all), defend an infringement action or challenge the validity of the patents in court. Patent litigation is costly and time consuming. We may not have sufficient resources to bring these actions to a successful conclusion. In addition, if we are not successful in infringement litigation and we do not license or develop non-infringing technology, we may:

 

    incur substantial monetary damages;

 

    encounter significant delays in bringing our drug candidates to market; and/or

 

    be precluded from participating in the manufacture, use or sale of our drug candidates or methods of treatment requiring licenses.

Confidentiality agreements with employees and others may not adequately prevent disclosure of trade secrets and other proprietary information.

To protect our proprietary technology and processes, we also rely in part on confidentiality agreements with our corporate collaborators, employees, consultants, outside scientific collaborators and sponsored researchers and other advisors. These agreements may not effectively prevent disclosure of confidential information and may not provide an adequate remedy in the event of unauthorized disclosure of confidential information. In addition, others may independently discover our trade secrets and confidential information and in such cases we could not assert any trade secret rights against such parties. Costly and time consuming litigation could be necessary to enforce and determine the scope of our proprietary rights and failure to obtain or maintain trade secret protection could adversely affect our competitive business position.

If any of our agreements that grant us the exclusive right to make, use and sell our drug candidates are terminated, we and/or future collaboration partners may be unable to develop or commercialize our drug candidates.

We, together with Novartis, entered into an amended and restated agreement with CNRS and the University of Montpellier, co-owners of the patents and patent applications covering Tyzeka®/Sebivo® and compounds Novartis

 

38


Table of Contents

previously licensed from us. This agreement covers both the cooperative research program and the terms of our exclusive right to exploit the results of the cooperative research, including Tyzeka®/Sebivo® and compounds Novartis previously licensed from us. The cooperative research program with CNRS and the University of Montpellier ended in December 2006 although many of the terms remain in effect for the duration of the patent life of the affected products. We and Novartis have also entered into two agreements with the University of Cagliari, the co-owner of the patents and patent applications covering some of our HCV drug candidates and certain other drug candidates. One agreement with the University of Cagliari covers our cooperative research program and the other agreement is an exclusive license to develop and sell jointly created drug candidates. Our relationship with Cagliari ended in December 2010 although many of the terms remain in effect for the duration of the patent life of the affected products. Under the amended and restated agreement with CNRS and the University of Montpellier and the license agreement, as amended, with the University of Cagliari, we obtained from our co-owners the exclusive right to exploit these drug candidates. Subject to certain rights afforded to Novartis as they relate to the license agreement with the University of Cagliari and CNRS, respectively, these agreements can be terminated by either party in circumstances such as the occurrence of an uncured breach by the non-terminating party. The termination of our rights, including patent rights, under the agreement with CNRS and the University of Montpellier or the license agreement, as amended, with the University of Cagliari would have a material adverse effect on our business and could prevent us from developing a drug candidate or selling a product. In addition, these agreements provide that we pay certain costs of patent prosecution, maintenance and enforcement. These costs could be substantial. Our inability or failure to pay these costs could result in the termination of the agreements or certain rights under them.

Under our amended and restated agreement with CNRS and the University of Montpellier and our license agreement, as amended, with the University of Cagliari, we and Novartis have the right to exploit and license certain co-owned drug candidates. However, our agreements with CNRS and the University of Montpellier and with the University of Cagliari are currently governed by, and will be interpreted and enforced under, French and Italian law, respectively, which are different in substantial respects from United States law and which may be unfavorable to us in material respects. Under French law, co-owners of intellectual property cannot exploit, assign or license their individual rights without the permission of the co-owners. Similarly, under Italian law, co-owners of intellectual property cannot exploit or license their individual rights without the permission of the co-owners. Accordingly, if our agreements with the University of Cagliari terminate based on a breach, we may not be able to exploit, license or otherwise convey to Novartis or other third-parties our rights in certain products or drug candidates for a desired commercial purpose without the consent of the co-owner, which could materially affect our business and prevent us from developing certain drug candidates and selling our products.

Under United States law, a patent co-owner has the right to prevent another co-owner from suing infringers by refusing to join voluntarily in a suit to enforce a patent. Our amended and restated agreement with CNRS and the University of Montpellier and our license agreement, as amended, with the University of Cagliari provide that such parties will cooperate to enforce our jointly owned patents on our products or drug candidates. If these agreements terminate or the parties’ cooperation is not given or is withdrawn, or they refuse to join in litigation that requires their participation, we may not be able to enforce these patent rights or protect our markets.

Factors Related to Our Common Stock

Our common stock may have a volatile trading price.

The market price of our common stock could be subject to significant fluctuations. Some of the factors that may cause the market price of our common stock to fluctuate include:

 

    the results of ongoing and planned clinical trials of our drug candidates;

 

    developments in the market with respect to competing products or more generally the treatment of HCV;

 

    the results of preclinical studies and planned clinical trials of our other discovery-stage programs;

 

    future sales of, and the trading volume in, our common stock;

 

    the timing and success of the launch of products, if any, we successfully develop;

 

    the decision by Novartis to initiate a combination trial with one of our HCV drug candidates;

 

    the entry into key agreements, including those related to the acquisition or in-licensing of new programs, or the termination of key agreements;

 

    the results and timing of regulatory actions relating to the approval of our drug candidates;

 

39


Table of Contents
    the initiation of, material developments in or conclusion of litigation to enforce or defend any of our intellectual property rights;

 

    the initiation of, material developments in or conclusion of litigation to defend products liability claims;

 

    the failure of any of our drug candidates, if approved, to achieve commercial success;

 

    the results of clinical trials conducted by others on drugs that would compete with our drug candidates;

 

    issues in manufacturing our drug candidates or any approved products;

 

    the loss of key employees;

 

    adverse publicity related to our company, our products or our product candidates;

 

    changes in estimates or recommendations by securities analysts who cover our common stock;

 

    future financings through the issuance of equity or debt securities or otherwise;

 

    changes in the structure of health care payment systems;

 

    our cash position and period-to-period fluctuations in our financial results; and

 

    general and industry-specific economic conditions.

Moreover, the stock markets in general have experienced substantial volatility that has often been unrelated to the operating performance of individual companies. These broad market fluctuations may also adversely affect the trading price of our common stock.

We do not anticipate paying cash dividends, so you must rely on stock price appreciation for any return on your investment.

We anticipate retaining any future earnings for reinvestment in our research and development programs. Therefore, we do not anticipate paying cash dividends in the future. As a result, only appreciation of the price of our common stock will provide a return to stockholders. Investors seeking cash dividends should not invest in our common stock.

Sales of additional shares of our common stock could result in dilution to existing stockholders and cause the price of our common stock to decline.

Sales of substantial amounts of our common stock in the public market or the availability of such shares for sale, could adversely affect the price of our common stock. In addition, the issuance of common stock upon exercise of outstanding options could be dilutive and may cause the market price for a share of our common stock to decline. As of April 23, 2014, we had 150,843,352 shares of common stock issued and outstanding, together with outstanding options to purchase 8,617,947 shares of common stock with a weighted average exercise price of $6.74 per share.

Novartis has rights, subject to certain conditions, to require us to file registration statements covering their shares or to include its shares in registration statements that we may file for ourselves.

Concentrated ownership of our common stock by certain stockholders could delay or prevent a change in corporate control.

As of April 23, 2014, Baupost owned approximately 35% of our outstanding common stock and Novartis owned approximately 22% of our outstanding common stock. This concentration of ownership may harm the market price of our common stock by:

 

    delaying, deferring or preventing a change in control of our company;

 

    impeding a merger, consolidation, takeover or other business combination involving our company; or

 

    discouraging a potential acquirer from making a tender offer or otherwise attempting to obtain control of our company.

 

40


Table of Contents

An investment in our common stock may decline in value as a result of announcements of business developments by us or our competitors.

The market price of our common stock is subject to substantial volatility as a result of announcements by us or other companies in our industry. As a result, purchasers of our common stock may not be able to sell their shares of common stock at or above the price at which they purchased such stock. Announcements which may subject the price of our common stock to substantial volatility include but are not limited to:

 

    the results of our clinical trials pertaining to any of our drug candidates, including the results of our collaboration with Janssen;

 

    the results of discovery, preclinical studies and clinical trials by us or our competitors;

 

    the acquisition of technologies, drug candidates or products by us or our competitors;

 

    the development of new technologies, drug candidates or products by us or our competitors;

 

    regulatory actions with respect to our drug candidates or products or those of our competitors, including those relating to clinical trials, such as clinical holds imposed by regulatory authorities, marketing authorizations, pricing and reimbursement;

 

    the timing and success of launches of any product we successfully develop;

 

    the market acceptance of any products we successfully develop;

 

    significant changes to our existing business model;

 

    the initiation of, material developments in or conclusion of litigation to enforce or defend any of our intellectual property rights; and

 

    significant acquisitions, strategic partnerships, joint ventures or capital commitments by us or our competitors.

In addition, if we fail to reach an important research, development or commercialization milestone or result by a publicly expected deadline, even if by only a small margin, there could be a significant impact on the market price of our common stock. Additionally, as we approach the announcement of important clinical data or other significant information and as we announce such results and information, we expect the price of our common stock to be particularly volatile and negative results would have a substantial negative impact on the price of our common stock.

We could be subject to class action litigation due to stock price volatility, which, if such litigation occurs, will distract our management and could result in substantial costs or large judgments against us.

The stock market frequently experiences extreme price and volume fluctuations. In August 2012, we experienced a significant decline in our stock price based, in part, on the FDA’s decision to place a partial clinical hold on IDX184 and a clinical hold on IDX19368, two of our drug candidates for the treatment of HCV. We experienced a significant decline in our stock price based, in part, in March 2013 on the USPTO decision in the first phase of the patent interference and in June 2013 on the FDA’s decision to put on hold the initiation of clinical trials in the United States for IDX20963. In addition, the market prices of securities of companies in the biotechnology and pharmaceutical industry have been extremely volatile and have experienced fluctuations that have often been unrelated or disproportionate to the operating performance of these companies. These fluctuations could adversely affect the market price of our common stock. In the past, securities class action litigation has often been brought against companies following periods of volatility in the market prices of their securities. Due to the volatility in our stock price, we may be the target of similar litigation in the future.

Securities litigation could result in substantial costs and divert our management’s attention and resources, which could cause serious harm to our business, operating results and financial condition.

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

None.

 

41


Table of Contents

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

None.

Item 5. Other Information

None.

Item 6. Exhibits

See Exhibit Index on the page immediately preceding the exhibits for a list of the exhibits filed as a part of this Quarterly Report, which Exhibit Index is incorporated herein by reference.

 

42


Table of Contents

SIGNATURES

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

 

Date: May 1, 2014     By:  

/s/ RONALD C. RENAUD, JR.

      Ronald C. Renaud, Jr.
     

President and Chief Executive Officer and Director

(Principal Executive Officer)

Date: May 1, 2014     By:  

/s/ DANIELLA BECKMAN

      Daniella Beckman
     

Chief Financial Officer and Treasurer

(Principal Financial Accounting Officer)

 

43


Table of Contents

EXHIBIT INDEX

 

Exhibit
No.

  

Description

  31.1    Certification of Chief Executive Officer pursuant to Rule 13a-14(a)/Rule 15d-14(a) of the Securities Exchange Act of 1934, as amended.
  31.2    Certification of Chief Financial Officer pursuant to Rule 13a-14(a)/Rule 15d-14(a) of the Securities Exchange Act of 1934, as amended.
  32.1    Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
  32.2    Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101    INSTANCE DOCUMENT
101    SCHEMA DOCUMENT
101    CALCULATION LINKBASE DOCUMENT
101    DEFINITION LINKBASE DOCUMENT
101    LABELS LINKBASE DOCUMENT
101    PRESENTATION LINKBASE DOCUMENT

 

44