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Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

FORM 10-Q

 

 

 

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

For the quarterly period ended September 30, 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: 001-36172

 

 

ARIAD Pharmaceuticals, Inc.

(Exact name of registrant as specified in its charter)

 

 

 

Delaware   22-3106987

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

26 Landsdowne Street, Cambridge, Massachusetts 02139

(Address of principal executive offices) (Zip Code)

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

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

 

 

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

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

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

 

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

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

The number of shares of the registrant’s common stock outstanding as of October 31, 2014 was 187,212,428.

 

 

 


Table of Contents

ARIAD PHARMACEUTICALS, INC.

TABLE OF CONTENTS

 

         Page  

PART I.

 

FINANCIAL INFORMATION

     1   

ITEM 1.

 

UNAUDITED FINANCIAL STATEMENTS

     1   
 

Condensed Consolidated Balance Sheets – September 30, 2014 and December 31, 2013

     1   
 

Condensed Consolidated Statements of Operations for the Three Months and Nine Months Ended September  30, 2014 and 2013

     2   
 

Condensed Consolidated Statements of Comprehensive Loss for the Three Months and Nine Months Ended September 30, 2014 and 2013

     2   
 

Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2014 and 2013

     3   
 

Notes to Unaudited Condensed Consolidated Financial Statements

     4   

ITEM 2.

 

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

     25   

ITEM 3.

 

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     41   

ITEM 4.

 

CONTROLS AND PROCEDURES

     41   

PART II.

 

OTHER INFORMATION

     42   

ITEM 1.

 

LEGAL PROCEEDINGS

     42   

ITEM 1A.

 

RISK FACTORS

     42   

ITEM 6.

 

EXHIBITS

     42   
 

SIGNATURES

     43   
 

EXHIBIT INDEX

     44   


Table of Contents
PART I. FINANCIAL INFORMATION

 

ITEM 1. UNAUDITED FINANCIAL STATEMENTS

ARIAD PHARMACEUTICALS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

 

In thousands, except share and per share data    September 30,
2014
    December 31,
2013
 

ASSETS

    

Current assets:

    

Cash and cash equivalents

   $ 273,451      $ 237,179   

Accounts receivable

     7,262        1,305   

Inventory

     969        419   

Other current assets

     7,705        6,043   
  

 

 

   

 

 

 

Total current assets

     289,387        244,946   

Restricted cash

     11,326        11,357   

Property and equipment, net

     178,602        108,777   

Intangible and other assets, net

     4,377        5,814   
  

 

 

   

 

 

 

Total assets

   $ 483,692      $ 370,894   
  

 

 

   

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

    

Current liabilities:

    

Accounts payable

   $ 10,680      $ 11,363   

Current portion of long-term debt

     —          4,200   

Current portion of long-term facility lease obligation

     4,971        —     

Accrued compensation and benefits

     14,427        12,778   

Accrued product development expenses

     13,793        16,740   

Other accrued expenses

     10,098        8,977   

Current portion of deferred executive compensation

     —          2,511   

Current portion of deferred revenue

     2,090        472   

Other current liabilities

     16,807        15,136   
  

 

 

   

 

 

 

Total current liabilities

     72,866        72,177   
  

 

 

   

 

 

 

Convertible 3.625% senior notes, net

     154,991        —     
  

 

 

   

 

 

 

Other long-term debt

     —          4,900   
  

 

 

   

 

 

 

Long-term facility lease obligation

     166,277        99,412   
  

 

 

   

 

 

 

Other long-term liabilities

     8,331        8,580   
  

 

 

   

 

 

 

Deferred revenue

     135        308   
  

 

 

   

 

 

 

Stockholders’ equity:

    

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

    

Common stock, $.001 par value; authorized, 450,000,000 shares in 2014 and 2013; issued and outstanding, 187,141,895 shares in 2014 and 185,611,272 shares in 2013

     187        186   

Additional paid-in capital

     1,291,040        1,238,859   

Accumulated other comprehensive income (loss)

     (1,291     (1,535

Accumulated deficit

     (1,208,844     (1,051,993
  

 

 

   

 

 

 

Total stockholders’ equity

     81,092        185,517   
  

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 483,692      $ 370,894   
  

 

 

   

 

 

 

See notes to unaudited condensed consolidated financial statements.

 

1


Table of Contents

ARIAD PHARMACEUTICALS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
In thousands, except per share data    2014     2013     2014     2013  

Revenue:

        

Product revenue, net

   $ 14,499      $ 16,658      $ 34,371      $ 36,956   

License revenue

     183        66        4,203        228   

Service revenue

     —          8        3        24   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total revenue

     14,682        16,732        38,577        37,208   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses:

        

Cost of product revenue

     594        415        4,277        913   

Research and development expense

     27,600        45,145        87,948        127,076   

Selling, general and administrative expense

     33,622        37,395        99,411        108,977   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     61,816        82,955        191,636        236,966   
  

 

 

   

 

 

   

 

 

   

 

 

 

Loss from operations

     (47,134     (66,223     (153,059     (199,758
  

 

 

   

 

 

   

 

 

   

 

 

 

Other income (expense):

        

Interest income

     19        40        63        120   

Interest expense

     (3,720     (37     (4,312     (118

Foreign exchange gain (loss)

     881        (9     836        16   
  

 

 

   

 

 

   

 

 

   

 

 

 

Other income (expense), net

     (2,820     (6     (3,413     18   
  

 

 

   

 

 

   

 

 

   

 

 

 

Loss before provision for income taxes

     (49,954     (66,229     (156,472     (199,740

Provision for income taxes

     154        110        379        255   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

   $ (50,108   $ (66,339   $ (156,851   $ (199,995
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss per share – basic and diluted

   $ (0.27   $ (0.36   $ (0.84   $ (1.09
  

 

 

   

 

 

   

 

 

   

 

 

 

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

     187,034        185,238        186,703        182,859   
  

 

 

   

 

 

   

 

 

   

 

 

 

CONDENSED CONSOLIDATED STATEMENTS

OF COMPREHENSIVE LOSS

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
In thousands    2014     2013     2014     2013  

Net loss

   $ (50,108   $ (66,339   $ (156,851   $ (199,995
  

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss):

        

Net unrealized gains (losses) on marketable securities

     —          (5     —          (17

Cumulative translation adjustment

     120        (4     122        (30

Amortization of prior service cost included in net periodic pension cost

     40        —          122        —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss)

     160        (9     244        (47
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive loss

   $ (49,948   $ (66,348   $ (156,607   $ (200,042
  

 

 

   

 

 

   

 

 

   

 

 

 

See notes to unaudited condensed consolidated financial statements.

 

2


Table of Contents

ARIAD PHARMACEUTICALS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

 

     Nine Months Ended
September 30,
 
In thousands    2014     2013  

Cash flows from operating activities:

    

Net loss

   $ (156,851   $ (199,995

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

    

Depreciation, amortization and impairment charges

     6,079        2,847   

Stock-based compensation

     24,583        28,559   

Deferred executive compensation expense

     119        803   

Increase (decrease) from:

    

Accounts receivable

     (5,957     (7,024

Inventory

     1,549        (571

Other current assets

     (1,661     (6,570

Other assets

     103        (7,538

Accounts payable

     (166     7,101   

Accrued compensation and benefits

     1,649        1,216   

Accrued product development expenses

     (2,947     3,261   

Other accrued expenses

     1,154        1,722   

Other liabilities

     1,602        5,085   

Deferred revenue

     1,445        4,744   

Deferred executive compensation paid

     (2,631     (3,953
  

 

 

   

 

 

 

Net cash used in operating activities

     (131,930     (170,313
  

 

 

   

 

 

 

Cash flows from investing activities:

    

Proceeds from maturities of marketable securities

     —          35,000   

Change in restricted cash

     —          (6,133

Investment in property and equipment

     (2,475     (5,624
  

 

 

   

 

 

 

Net cash provided by (used in) investing activities

     (2,475     23,243   
  

 

 

   

 

 

 

Cash flows from financing activities:

    

Proceeds from issuance of convertible debt

     192,921        —     

Proceeds from the issuance of warrants

     27,580        —     

Purchase of convertible bond hedges

     (43,220     —     

Repayment of long-term borrowings

     (9,100     (1,575

Principal payments under capital lease obligation

     —          (15

Proceeds from issuance of common stock, net of issuance costs

     —          310,037   

Proceeds under lease financing obligation

     —          1,294   

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

     3,059        5,632   

Payment of tax withholding obligations related to stock compensation

     (716     (3,216
  

 

 

   

 

 

 

Net cash provided by financing activities

     170,524        312,157   
  

 

 

   

 

 

 

Effect of exchange rates on cash

     153        (30
  

 

 

   

 

 

 

Net increase in cash and cash equivalents

     36,272        165,057   

Cash and cash equivalents, beginning of period

     237,179        119,379   
  

 

 

   

 

 

 

Cash and cash equivalents, end of period

   $ 273,451      $ 284,436   
  

 

 

   

 

 

 

Supplemental non-cash investing and financing disclosure:

    

Capitalization of construction-in-progress related to facility lease obligation

   $ 71,818      $ 66,728   
  

 

 

   

 

 

 

Investment in property and equipment included in accounts payable or accruals

   $ 187      $ 1,217   
  

 

 

   

 

 

 

See notes to unaudited condensed consolidated financial statements.

 

3


Table of Contents

ARIAD PHARMACEUTICALS, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS

 

1. Business

ARIAD is a global oncology company focused on transforming the lives of cancer patients with breakthrough medicines. The Company’s mission is to discover, develop and commercialize small-molecule drugs to treat cancer in patients with the greatest and most urgent unmet medical need – aggressive cancers where current therapies are inadequate.

The Company’s lead cancer medicine is Iclusig® (ponatinib) which is approved in the United States and Europe for the treatment of adult patients with chronic myeloid leukemia (“CML”) and Philadelphia chromosome-positive acute lymphoblastic leukemia (“Ph+ ALL”). The Company is pursuing regulatory approval of Iclusig in additional geographies and developing Iclusig in additional cancer indications. The Company has two other product candidates in development, AP26113 and ridaforolimus. AP26113 is being studied in patients with advanced solid tumors, including non-small cell lung cancer. The Company is conducting a pivotal Phase 2 clinical trial of AP26113 in patients with locally advanced or metatastic non-small cell lung cancer. Ridaforolimus is being developed for use on cardiovascular stents and other medical devices by Medinol, Ltd. and ICON Medical Corp. In addition to its clinical development programs, the Company has a focused drug discovery program centered on small-molecule therapies that are molecularly targeted to cell-signaling pathways implicated in cancer.

Following regulatory approvals, the Company commenced sales and marketing of Iclusig in the United States in January 2013 and in Europe in the second half of 2013.

On October 9, 2013, the Company announced results of its review of updated clinical data from the pivotal PACE (Ponatinib Ph+ ALL and CML Evaluation) trial of Iclusig and actions that it was taking following consultations with the U.S. Food and Drug Administration (“FDA”). Based upon its review and the FDA consultations, the Company paused patient enrollment in all clinical trials of Iclusig and the FDA placed a partial clinical hold on all new patient enrollment in clinical trials of Iclusig. In response to a request by the FDA, on October 31, 2013, the Company announced that it temporarily suspended the marketing and commercial distribution of Iclusig in the United States. On December 20, 2013, the Company announced that the FDA approved revised U.S. prescribing information (“USPI”), and a Risk Evaluation and Mitigation Strategy (“REMS”), that allowed for the immediate resumption of marketing and commercial distribution of Iclusig. Sales of Iclusig in the United States resumed in January 2014.

Based upon the announcements and actions taken in October 2013 noted above, the Company engaged in discussions with the European Medicines Agency (“EMA”), regarding potentially revised prescribing information for Iclusig. On November 8, 2013, the EMA announced that Iclusig’s product information should be updated to include strengthened warnings for cardiovascular risk and guidance on optimizing the patient’s cardiovascular therapy before starting treatment. In addition, the EMA commenced an in-depth review, known as an Article 20 referral, of the benefits and risks of Iclusig to better understand the nature, frequency and severity of events obstructing the arteries or veins, the potential mechanism that leads to these side effects and whether there needs to be a revision in the European prescribing information for Iclusig. In October 2014, the Pharmacovigilance Risk Assessment Committee (“PRAC”) of the EMA concluded its review of Iclusig under the Article 20 referral procedure and recommended that Iclusig continue to be used in Europe in accordance with its already approved indications. Other recommendations made by the PRAC related to the Iclusig Summary of Medicinal Product Characteristics, or SmPC, include (1) patient monitoring for response according to standard clinical guidelines, (2) consideration of Iclusig dose-reduction following achievement of major cytogenetic response with subsequent monitoring of response, and (3) consideration of Iclusig discontinuation if a complete haematologic response has not been achieved by three months. Further information is provided

 

4


Table of Contents

indicating that the risk of vascular occlusive events is likely dose-related. An update of the Warning and Precautions and Undesirable Effects sections is also provided for inclusion in the Iclusig SmPC. PRAC’s recommendation was considered and adopted by the Committee for Medicinal Products for Human Use (“CHMP”) of the EMA in October 2014. The European Comission is expected to issue a final legally binding decision on Iclusig in December 2014 which will be valid throughout the European Union.

 

2. Accounting Policies

Basis of Presentation

In the opinion of the Company’s management, the accompanying unaudited condensed consolidated financial statements contain all adjustments (consisting of items of a normal and recurring nature) necessary to present fairly the financial position as of September 30, 2014, the results of operations for the three-month and nine-month periods ended September 30, 2014 and 2013 and the cash flows for the nine-month periods ended September 30, 2014 and 2013, in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”). The information included in this quarterly report on Form 10-Q should be read in conjunction with the Company’s consolidated financial statements and the accompanying notes included in its Annual Report on Form 10-K for the year ended December 31, 2013 (the “2013 Form 10-K”). The Company’s accounting policies are described in the “Notes to Consolidated Financial Statements” in the 2013 Form 10-K and updated, as necessary, in this Form 10-Q. The year-end consolidated balance sheet data presented for comparative purposes were derived from the audited financial statements included in the 2013 Form 10-K. The results of operations for the three-month and nine-month periods ended September 30, 2014 are not necessarily indicative of the operating results for the full year or for any other subsequent interim period.

Accounting Estimates

The preparation of the consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts and disclosure of assets and liabilities at the date of the consolidated financial statements and the reported amounts and disclosure of revenue and expenses during the reporting period. Significant estimates included in the Company’s financial statements include estimates associated with revenue recognition and the related adjustments, research and development accruals, inventory reserves, stock-based compensation and leased buildings under construction. Actual results could differ from those estimates.

Reclassifications

In the condensed consolidated statement of cash flows for the nine months ended September 30, 2014, vendor advances have been aggregated with other current assets. This reclassification was not material.

Restricted Cash

Restricted cash consists of cash balances held as collateral for outstanding letters of credit related to the lease of the Company’s laboratory and office facilities and other purposes. At September 30, 2014, the Company’s restricted cash balance was $11.3 million, which includes $9.2 million established as security for a letter of credit related to the lease agreement entered into in January 2013, and amended in September 2013, for lab and office space in a new facility under construction in Cambridge, Massachusetts.

Accounts Receivable

The Company extends credit to customers based on its evaluation of the customer’s financial condition. The Company records receivables for all billings when amounts are due under standard terms. Accounts receivable are stated at amounts due net of applicable prompt pay discounts and other contractual

 

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adjustments as well as an allowance for doubtful accounts. The Company assesses the need for an allowance for doubtful accounts by considering a number of factors, including the length of time trade accounts receivable are past due, the customer’s ability to pay its obligation and the condition of the general economy and the industry as a whole. The Company will write-off accounts receivable when the Company determines that they are uncollectible.

Inventories

The Company outsources the manufacturing of Iclusig and uses contract manufacturers that produce the raw and intermediate materials used in the production of Iclusig as well as the finished product. The Company currently has one supplier qualified for each step in the manufacturing process and is in the process of qualifying additional suppliers. Accordingly, the Company has concentration risk and relies on its currently approved contract manufacturers for supply of its product.

In order to support production of inventory, the Company may be required to provide payments to vendors in advance of production. These amounts are included in “other current assets” on the accompanying condensed consolidated balance sheets.

Inventories are composed of raw materials, intermediate materials, which are classified as work-in-process, and finished goods, which are goods that are available for sale. The Company states inventories at the lower of cost or net realizable value. The Company determines the cost of its inventories on a specific identification basis. If the Company identifies excess, obsolete or unsalable items, it writes down its inventory to its net realizable value in the period in which the impairment is identified. These adjustments are recorded based upon various factors related to the product, including the level of product manufactured by the Company, the level of product in the distribution channel, current and projected demand and the expected shelf-life of the product. Inventories that are not expected to be used within one year are included in “other assets, net” on the accompanying condensed consolidated balance sheets.

Prior to receiving approval from the FDA on December 14, 2012 to sell Iclusig, the Company expensed all costs incurred related to the manufacture of Iclusig as research and development expense because of the inherent risks associated with the development of a drug candidate, the uncertainty about the regulatory approval process and the lack of history for the Company of regulatory approval of drug candidates.

Shipping and handling costs for product shipments are recorded as incurred in cost of product revenue along with costs associated with manufacturing the product sold and any inventory reserves or write-downs.

Revenue Recognition

Revenue is recognized when there is persuasive evidence that an arrangement exists, delivery has occurred or services have been rendered, the price is fixed and determinable and collection is reasonably assured. Revenue arrangements with multiple elements are divided into separate units of accounting if certain criteria are met, including whether the delivered element has stand-alone value to the customer. When deliverables are separable, consideration received is allocated to the separate units of accounting based on the relative selling price of each deliverable and the appropriate revenue recognition principles are applied to each unit.

Product Revenue, Net

From the launch of Iclusig in January 2013 until its temporary suspension in October 2013, the Company sold Iclusig in the United States to a limited number of specialty pharmacies, which dispensed the product directly to patients, and specialty distributors, which in turn sold the product to hospital pharmacies and community practice pharmacies (collectively, healthcare providers) for the treatment of

 

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patients. Commencing with the re-launch of Iclusig in January 2014, the Company now sells Iclusig in the United States through an exclusive relationship with Biologics, Inc. (“Biologics”), a specialty pharmacy. Biologics dispenses the product directly to patients. In Europe, the Company sells Iclusig to retail pharmacies and hospital pharmacies, which dispense product directly to patients. Biologics and these retail pharmacies and hospital pharmacies are referred to as the Company’s customers.

The Company provides the right of return to customers in the United States for unopened product for a limited time before and after its expiration date. European customers are provided the right to return product only in limited circumstances, such as damaged product. Given the Company’s limited sales history for Iclusig and the inherent uncertainties in estimating product returns, the Company has determined that the shipments of Iclusig to its United States customers, thus far, do not meet the criteria for revenue recognition at the time of shipment. The Company invoices Biologics upon shipment of Iclusig and records accounts receivable, with a corresponding liability for deferred revenue equal to the gross invoice price. The Company then recognizes revenue, assuming all other revenue recognition criteria have been met, when Iclusig is sold through, which occurs when Biologics dispenses Iclusig directly to the patient. For European customers, who are provided with a limited right of return, the criteria for revenue recognition is met at the time of shipment and revenue is recognized at that time, provided all other revenue recognition criteria are met.

In connection with the temporary suspension of marketing and commercial distribution of Iclusig in October 2013, the Company terminated its then existing contracts with specialty pharmacies and specialty distributors in the United States. In addition, the Company accepted product returns for Iclusig in connection with the temporary suspension. These returns primarily related to Iclusig held by specialty pharmacies and specialty distributors for which revenue had not yet been recognized.

The Company has written contracts or standard terms of sale with each of its customers and delivery occurs when the customer receives Iclusig. The Company evaluates the creditworthiness of each of its customers to determine whether collection is reasonably assured. In order to conclude that the price is fixed and determinable, the Company must be able to (i) calculate its gross product revenues from the sales to its customers and (ii) reasonably estimate its net product revenues. The Company calculates gross product revenues based on the wholesale acquisition cost that the Company charges its customers for Iclusig. The Company estimates its net product revenues by deducting from its gross product revenues (i) trade allowances, such as invoice discounts for prompt payment and customer fees, (ii) estimated government and private payor rebates, chargebacks and discounts, such as Medicare and Medicaid reimbursements in the United States, and (iii) estimated costs of incentives offered to certain indirect customers including patients. These deductions from gross revenue to determine net revenue are also referred to as gross to net deductions.

Trade Allowances: The Company provides invoice discounts on Iclusig sales to certain of its customers for prompt payment and pays fees for certain distribution services, such as fees for certain data that its customers provide to the Company. The Company deducts the full amount of these discounts and fees from its gross product revenues at the time such discounts and fees are earned by such customers.

Rebates, Chargebacks and Discounts: In the United States, the Company contracts with Medicare, Medicaid, and other government agencies (collectively, “payers”) to make Iclusig eligible for purchase by, or for partial or full reimbursement from, such payers. The Company estimates the rebates, chargebacks and discounts it will provide to payers and deducts these estimated amounts from its gross product revenues at the time the revenues are recognized. The Company’s estimates of rebates, chargebacks and discounts are based on (1) the contractual terms of agreements in place with payers, (2) the government-mandated discounts applicable to government funded programs, and (3) the estimated payer mix. Government rebates that are invoiced directly to the Company are recorded in accrued liabilities on the condensed consolidated balance sheet. In Europe, the

 

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Company is subject to mandatory rebates and discounts in markets where government-sponsored healthcare systems are the primary payers for healthcare. These rebates and discounts are recorded in accrued expenses on the condensed consolidated balance sheet.

Other Incentives: Other incentives that the Company offers to indirect customers include co-pay assistance rebates provided by the Company to commercially insured patients who have coverage for Iclusig and who reside in states that permit co-pay assistance programs. The Company’s co-pay assistance program is intended to reduce each participating patient’s portion of the financial responsibility for Iclusig’s purchase price to a specified dollar amount. In each period, the Company records the amount of co-pay assistance provided to eligible patients based on the terms of the program. Other incentives in the nine month period ended September 30, 2014 include product returns from customers related to the temporary suspension of marketing and distribution of Iclusig in the United States.

The following table summarizes activity in each of the above product revenue allowances and reserve categories for the nine-month period ended September 30, 2014:

 

In thousands    Trade
Allowances
    Rebates,
Chargebacks
and Discounts
    Other
Incentives
    Total  

Balance, January 1, 2014

   $ 18     $ 515     $ 77     $ 610  

Provision

     126        685        389        1,200  

Payments or credits

     (101     (539     (188     (828
  

 

 

   

 

 

   

 

 

   

 

 

 

Balance, March 31, 2014

     43        661        278        982   

Provision

     176        628        134        938   

Payments or credits

     (167     (476     (377     (1,020
  

 

 

   

 

 

   

 

 

   

 

 

 

Balance, June 30, 2014

     52       813       35       900  

Provision

     195        954        221        1,370   

Payments or credits

     (192     (534     (82     (808
  

 

 

   

 

 

   

 

 

   

 

 

 

Balance, September 30, 2014

   $ 55      $ 1,233      $ 174      $ 1,462   
  

 

 

   

 

 

   

 

 

   

 

 

 

The reserves above, included in the Company’s condensed consolidated balance sheets are summarized as follows:

 

In thousands    September 30,
2014
     December 31,
2013
 

Reductions of accounts receivable

   $ —         $ 64   

Component of other accrued expenses

     1,462         546   
  

 

 

    

 

 

 

Total

   $ 1,462       $ 610   
  

 

 

    

 

 

 

In 2012, prior to the Company obtaining marketing authorization for Iclusig in Europe, the French regulatory authority granted an Autorisation Temporaire d’Utilisation (ATU), or Temporary Authorization for Use, for Iclusig for the treatment of patients with CML and Ph+ ALL under a nominative program on a patient-by-patient basis. The Company began shipping Iclusig under this program during the year ended December 31, 2012. This program concluded on September 30, 2013. Upon completion of the ATU program, the Company became eligible to ship Iclusig directly to customers in France as of October 1, 2013. Shipments under these programs have not met the criteria for revenue recognition as the price for these shipments is not yet fixed or determinable. The price of Iclusig in France will become fixed or determinable upon completion of pricing and reimbursement negotiations, which is expected in the first half of 2015. At that time, the Company will record revenue related to cumulative shipments as of that date in France, net of any amounts that will be refunded to the health authority based on the results of the pricing and reimbursement negotiations.

 

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The aggregate gross selling price of the shipments under these programs amounted to $17.3 million through September 30, 2014, including $1.7 million for the three-month period ended September 30, 2014, of which $16.0 million was received as of September 30, 2014.

Concentration of Credit Risk

Financial instruments which potentially subject the Company to concentrations of credit risk consist of accounts receivable from customers and cash held at financial institutions. The Company believes that such customers and financial institutions are of high credit quality. As of September 30, 2014, a portion of the Company’s cash and cash equivalent accounts were concentrated at a single financial institution, which potentially exposes the Company to credit risks. The Company does not believe that there is significant risk of non-performance by the financial institution and the Company’s cash on deposit at this financial institution is fully liquid.

For the three-month and nine-month periods ended September 30, 2014, Biologics accounted for 72 percent and 67 percent of net product revenue, respectively. As of September 30, 2014, Biologics accounted for 75 percent of accounts receivable. No other customer accounted for more than 10 percent of net product revenue or accounts receivable.

For the three-month period ended September 30, 2013, three individual customers accounted for 24 percent, 14 percent and 14 percent of net product revenue, respectively. For the nine-month period ended September 30, 2013, three individual customers accounted for 24 percent, 15 percent, and 14 percent of net product revenue, respectively. As of September 30, 2013, four individual customers accounted for 21 percent, 17 percent, 14 percent, and 10 percent of accounts receivable, respectively. No other customer accounted for more than 10 percent of net product revenue or accounts receivable.

Geographic Information

For the three-month and nine-month periods ended September 30, 2014, product revenue from customers outside the United States totaled 28% and 33%, respectively, with 17% and 22% of product revenue, respectively, representing product revenue from customers in Germany. For the three-month and nine-month periods ended September 30, 2013, product revenue from customers outside the United States totaled 6% and 3%, respectively, with 5% and 2% of product revenue, respectively, representing product revenue from customers in Germany.

Long lived assets outside the United States as of September 30, 2014 were $1.4 million and were not material as of December 31, 2013.

License and Service Revenue

The Company generates revenue from license and collaboration agreements with third parties related to use of the Company’s technology and/or development and commercialization of product candidates. Such agreements may provide for payment to the Company of up-front payments, periodic license payments, milestone payments and royalties. The Company also generates service revenue from license agreements with third parties related to internal services provided under such agreements. Service revenue is recognized as the services are delivered.

In January 2005, the Company entered into a non-exclusive license agreement with Medinol Ltd. (“Medinol”), a leading innovator in stent technology, pursuant to which Medinol agreed to develop and commercialize stents and other medical devices to deliver ridaforolimus to prevent restenosis, or reblockage, of injured vessels following interventions in which stents are used in conjunction with balloon angioplasty. During the three-month period ended March 31, 2014, the commencement of patient enrollment in Medinol’s clinical trials, along with the submission of an investigational device exemption, or IDE, to the FDA, triggered milestone payments to the Company of $3.8 million. These milestones were recorded as license revenue upon achievement.

 

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On February 20, 2014, the Company received notice from Merck & Co., Inc. (“Merck”) that it is terminating the license agreement between the two parties to develop, manufacture and commercialize ridaforolimus for oncology indications. Per the terms of the license agreement, this termination will become effective nine months from the date of the notice (November 20, 2014), at which time all rights to ridaforolimus in oncology licensed to Merck will be returned to the Company.

 

3. Inventory

All of the Company’s inventories relate to the manufacturing of Iclusig. The following table sets forth the Company’s inventories as of September 30, 2014 and December 31, 2013:

 

In thousands    September 30,
2014
    December 31,
2013
 

Raw materials

   $ —        $ —     

Work in process

     885        3,170   

Finished goods

     969        234   
  

 

 

   

 

 

 

Total

     1,854        3,404   

Current portion

     (969     (419
  

 

 

   

 

 

 

Non-current portion included in “intangible and other assets, net”

   $ 885      $ 2,985   
  

 

 

   

 

 

 

Upon approval of Iclusig by the FDA on December 14, 2012, the Company began capitalizing inventory costs for Iclusig manufactured in preparation for the product launch in the United States. In periods prior to December 14, 2012, the Company expensed costs associated with Iclusig, including raw materials, work in process and finished goods, as development expenses. The Company has not capitalized inventory costs related to its other drug development programs. Non-current inventory consists primarily of raw materials and work-in-process which were purchased or manufactured in order to provide adequate supply of Iclusig in the United States and Europe and to support continued clinical development.

 

4. Property and Equipment, Net

Property and equipment, net, was comprised of the following at September 30, 2014 and December 31, 2013:

 

In thousands    September 30,
2014
    December 31,
2013
 

Leasehold improvements

   $ 21,942      $ 25,714   

Equipment and furniture

     24,487        23,466   

Construction in progress

     171,304        99,908   
  

 

 

   

 

 

 
     217,733        149,088   

Less accumulated depreciation and amortization

     (39,131     (40,311
  

 

 

   

 

 

 
   $ 178,602      $ 108,777   
  

 

 

   

 

 

 

As of September 30, 2014, the Company has recorded construction in progress and a facility lease obligation of $171.3 million related to a lease for a new facility under construction in Cambridge, Massachusetts. See Note 9 for further information.

 

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Depreciation and amortization expense was $1.3 million and $1.1 million for the three-month periods ended September, 2014 and 2013, respectively, and $3.9 million and $2.8 million for the nine-month periods ended September 30, 2014 and 2013, respectively.

 

5. Intangible and Other Assets, Net

Intangible and other assets, net, were comprised of the following at September 30, 2014 and December 31, 2013:

 

In thousands    September 30,
2014
    December 31,
2013
 

Capitalized patent and license costs

   $ 5,975      $ 5,975   

Less accumulated amortization

     (5,028     (5,007
  

 

 

   

 

 

 
     947        968   

Inventory, non-current

     885        2,985   

Other assets

     2,545        1,861   
  

 

 

   

 

 

 
   $ 4,377      $ 5,814   
  

 

 

   

 

 

 

 

6. Other Current Liabilities

Other current liabilities were comprised of the following at September 30, 2014 and December 31, 2013:

 

In thousands    September 30,
2014
     December 31,
2013
 

Amounts received in advance of revenue recognition

   $ 16,071       $ 10,434   

Amounts due to former customers

     195         4,172   

Other

     541         530   
  

 

 

    

 

 

 
   $ 16,807       $ 15,136   
  

 

 

    

 

 

 

Amounts received in advance of revenue recognition consists of payments received from customers in France. Amounts due to former customers consists of amounts due for product returns.

 

7. Long-term Debt

3.625% Convertible Notes due 2019

On June 17, 2014, the Company issued $200.0 million aggregate principal amount of 3.625% convertible senior notes due 2019 (the “convertible notes”). The Company received net proceeds of $192.9 million from the sale of the convertible notes, after deducting fees of $6.0 million and expenses of $1.1 million. At the same time, the Company used $43.2 million of the net proceeds from the sale of the convertible notes to pay the cost of the convertible bond hedges, as described below, after such cost was partially offset by $27.6 million in proceeds to the Company from the sale of warrants in the warrant transactions also described below.

The convertible notes are governed by the terms of an indenture between the Company, as issuer, and Wells Fargo Bank, National Association, as the trustee. The convertible notes are senior unsecured obligations and bear interest at a rate of 3.625% per year, payable semi-annually in arrears on June 15 and December 15 of each year, beginning on December 15, 2014. The convertible notes will mature on June 15, 2019, unless earlier repurchased or converted. The convertible notes will be convertible into cash, shares of the Company’s common stock, or a combination thereof, at the Company’s election, at an initial conversion rate of approximately 107.5095 shares of common stock per $1,000 principal amount of the convertible notes, which corresponds to an initial conversion price of approximately $9.30 per share of

 

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the Company’s common stock and represents a conversion premium of approximately 32.5% based on the last reported sale price of the Company’s common stock of $7.02 on June 11, 2014, the date the notes offering was priced. The principal amount of the notes exceeded the if-converted value as of September 30, 2014.

The conversion rate is subject to adjustment from time to time upon the occurrence of certain events, but will not be adjusted for any accrued and unpaid interest. At any time prior to the close of business on the business day immediately preceding December 15, 2018, holders may convert their convertible notes at their option only under the following circumstances:

 

    during any calendar quarter commencing after the calendar quarter ending on December 31, 2014 (and only during such calendar quarter), if the last reported sale price of our common stock for at least 20 trading days (whether or not consecutive) during a period of 30 consecutive trading days ending on the last trading day of the immediately preceding calendar quarter is greater than or equal to 130% of the conversion price, or approximately $12.00 per share, on each applicable trading day;

 

    during the five business day period after any five consecutive trading day period, or the measurement period, in which the trading price per $1,000 principal amount of the convertible notes for each trading day of the measurement period was less than 98% of the product of the last reported sale price of the Company’s common stock and the conversion rate on each such trading day; or

 

    upon the occurrence of specified corporate events.

On or after December 15, 2018 until the close of business on the second scheduled trading day immediately preceding the maturity date, holders may convert all or any portion of their convertible notes, in multiples of $1,000 principal amount, at their option regardless of the foregoing circumstances. Upon conversion, the Company will satisfy its conversion obligation by paying or delivering, as the case may be, cash, shares of common stock, or a combination thereof, at its election.

If a make-whole fundamental change, as described in the indenture, occurs and a holder elects to convert its convertible notes in connection with such make-whole fundamental change, such holder may be entitled to an increase in the conversion rate as described in the indenture.

The Company may not redeem the convertible notes prior to the maturity date and no “sinking fund” is provided for the convertible notes, which means that the Company is not required to periodically redeem or retire the convertible notes. Upon the occurrence of certain fundamental changes involving the Company, holders of the convertible notes may require the Company to repurchase for cash all or part of their convertible notes at a repurchase price equal to 100% of the principal amount of the convertible notes to be repurchased, plus accrued and unpaid interest.

The indenture does not contain any financial or maintenance covenants or restrictions on the payments of dividends, the incurrence of indebtedness or the issuance or repurchase of securities by the Company or any of its subsidiaries. The indenture contains customary terms and covenants and events of default. If an event of default (other than certain events of bankruptcy, insolvency or reorganization involving the Company or any of its significant subsidiaries) occurs and is continuing, the trustee by notice to us, or the holders of at least 25% in principal amount of the outstanding convertible notes by written notice to the Company and the trustee, may declare 100% of the principal and accrued and unpaid interest, if any, on all of the convertible notes to be due and payable. Upon such a declaration of acceleration, such principal and accrued and unpaid interest, if any, will be due and payable immediately. Upon the occurrence of certain events of bankruptcy, insolvency or reorganization involving the Company or any of its significant subsidiaries, 100% of the principal of and accrued and unpaid interest, if any, on all of the

 

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convertible notes will become due and payable automatically. Notwithstanding the foregoing, the indenture provides that, to the extent the Company elects and for up to 180 days, the sole remedy for an event of default relating to certain failures by the Company to comply with certain reporting covenants in the indenture consists exclusively of the right to receive additional interest on the convertible notes.

In accordance with accounting guidance for debt with conversion and other options, the Company separately accounts for the liability and equity components of the convertible notes by allocating the proceeds between the liability component and the embedded conversion option, or equity component, due to the Company’s ability to settle the convertible notes in cash, common stock or a combination of cash and common stock, at the Company’s option. The carrying amount of the liability component was calculated by measuring the fair value of a similar liability that does not have an associated convertible feature. The allocation was performed in a manner that reflected the Company’s non-convertible debt borrowing rate for similar debt. The equity component of the convertible notes was recognized as a debt discount and represents the difference between the proceeds from the issuance of the convertible notes and the fair value of the liability of the convertible notes on their date of issuance. The excess of the principal amount of the liability component over its carrying amount, or debt discount, is amortized to interest expense using the effective interest method over the five year life of the convertible notes. The approximate remaining discount amortization period as of September 30, 2014 was 56.5 months. The equity component will not be remeasured for changes in fair value as long as it continues to meet the conditions for equity classification.

The outstanding convertible note balances as of September 30, 2014 consisted of the following:

 

In thousands    September 30,
2014
 

Liability component:

  

Principal

   $ 200,000   

Less: debt discount, net

     45,009   
  

 

 

 

Net carrying amount

   $ 154,991   
  

 

 

 

Equity component

   $ 40,896   
  

 

 

 

In connection with the issuance of the convertible notes, the Company incurred approximately $1.1 million of debt issuance costs, which primarily consisted of legal, accounting and other professional fees, and allocated these costs to the liability and equity components based on the allocation of the proceeds. Of the total $1.1 million of debt issuance costs, $254,000 was allocated to the equity component and recorded as a reduction to additional paid-in capital and $825,000 was allocated to the liability component and recorded in other assets on the balance sheet. The portion allocated to the liability component is amortized to interest expense over the expected life of the convertible notes using the effective interest method.

 

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The Company determined the expected life of the debt was equal to the five-year term on the convertible notes. The effective interest rate on the liability component was 9.625% for the period from the date of issuance through September 30, 2014. The following table sets forth total interest expense recognized related to the convertible notes during the three-month and nine-month periods ended September 30, 2014:

 

In thousands    Three Months
Ended
September 30,
2014
     Nine Months
Ended
September 30,
2014
 

Contractual interest expense

   $ 1,812       $ 2,074   

Amortization of debt discount

     1,872         2,141   

Amortization of debt issuance costs

     33         38   
  

 

 

    

 

 

 

Total interest expense

   $ 3,717       $ 4,253   
  

 

 

    

 

 

 

Convertible Bond Hedge and Warrant Transactions

In connection with the pricing of the convertible notes and in order to reduce the potential dilution to the Company’s common stock and/or offset any cash payments in excess of the principal amount due upon conversion of the convertible notes, on June 12, 2014, the Company entered into convertible note hedge transactions covering approximately 21.5 million shares of the Company’s common stock underlying the $200.0 million aggregate principal amount of the convertible notes with JPMorgan Chase Bank, National Association, an affiliate of JPMorgan Securities LLC (the “Counter Party”). The convertible bond hedges have an exercise price of approximately $9.30 per share, subject to adjustment upon certain events, and are exercisable when and if the convertible notes are converted. Upon conversion of the convertible notes, if the price of the Company’s common stock is above the exercise price of the convertible bond hedges, the Counter Party will deliver shares of the Company’s common stock and/or cash with an aggregate value approximately equal to the difference between the price of the Company’s common stock at the conversion date and the exercise price, multiplied by the number of shares of the Company’s common stock related to the convertible bond hedges being exercised. The convertible bond hedges are separate transactions entered into by the Company and are not part of the terms of the convertible notes or the warrants, discussed below. Holders of the convertible notes will not have any rights with respect to the convertible bond hedges. The Company paid $43.2 million for these convertible bond hedges and recorded this amount as a reduction to additional paid-in capital.

At the same time, the Company also entered into separate warrant transactions with the Counter Party relating to, in the aggregate, approximately 21.5 million shares of the Company’s common stock underlying the $200.0 million aggregate principal amount of the convertible notes. The initial exercise price of the warrants is $12.00 per share, subject to adjustment upon certain events, which is approximately 70% above the last reported sale price of the Company’s common stock of $7.02 per share on June 11, 2014. Upon exercise, the Company will deliver shares of the Company’s common stock and /or cash with an aggregate value equal to the excess of the price of the Company’s common stock on the exercise date and the exercise price, multiplied by the number of shares, of the Company’s common stock underlying the exercise. The warrants will be exercisable and will expire in equal installments for a period of 100 trading days beginning on September 15, 2019. The warrants were issued to the Counter Party pursuant to the exemption from registration set forth in Section 4(a)(2) of the Securities Act. The Company received $27.6 million for these warrants and recorded this amount as an increase to additional paid-in capital.

Aside from the initial payment of a $43.2 million premium to the Counter Party under the convertible bond hedges, which cost is partially offset by the receipt of a $27.6 million premium under the warrants, the Company is not required to make any cash payments to the Counter Party under the convertible bond hedges and will not receive any proceeds if the warrants are exercised.

 

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Other Long Term Debt

Other long-term debt consisted of the following at September 30, 2014 and December 31, 2013:

 

In thousands    September 30,
2014
     December 31,
2013
 

Bank term loan

   $ —         $ 9,100   

Less current portion

     —           (4,200
  

 

 

    

 

 

 
   $ —         $ 4,900   
  

 

 

    

 

 

 

The bank term loan provided for quarterly payments of principal and interest with final scheduled maturity on December 31, 2015. The loan bore interest at LIBOR plus 1.25 to 2.25 percent, depending on the percentage of the Company’s liquid assets on deposit with or invested through the bank, or at the prime rate. The loan was secured by a lien on all assets of the Company excluding intellectual property, which the Company agreed not to pledge to any other party. The loan required the Company to maintain a minimum of $15.0 million in unrestricted cash, cash equivalents and investments. The loan also contained certain covenants that restricted additional indebtedness, additional liens and sales of assets, and dividends, distributions or repurchases of common stock. The term loan was paid in full on June 17, 2014.

 

8. Executive Compensation Plan

Under the Company’s deferred executive compensation plan, the Company accrues a liability for the value of the awards made under the plan ratably over the vesting period. There were no awards in 2013, and 2014. The net expense for this plan was $0 and $119,000 for the three-month periods ended September 30, 2014 and 2013, respectively, and $119,000 and $803,000 for the nine-month periods ended September 30, 2014 and 2013, respectively. As of September 30, 2014, all amounts previously deferred under this plan have been paid out.

 

9. Leases and Facility Lease Obligation

Facility Leases

The Company conducts the majority of its operations in a 100,000 square foot office and laboratory facility under a non-cancelable operating lease that extends to July 2019 with two consecutive five-year renewal options. The Company maintains an outstanding letter of credit of $1.4 million in accordance with the terms of the amended lease. In May 2012, the Company entered into a three-year operating lease agreement for an additional 26,000 square feet of office space. Future non-cancelable minimum annual rental payments through July 2019 under these leases are approximately $1.8 million in 2014, $6.7 million in 2015, $5.9 million in 2016, $6.0 million in 2017, $6.1 million in 2018, and $3.6 million in total thereafter.

Binney Street, Cambridge, Massachusetts

In January 2013, the Company entered into a lease agreement for approximately 244,000 square feet of laboratory and office space in two adjacent, connected buildings which are under construction in Cambridge, Massachusetts. Under the terms of the original lease, the Company leased all of the rentable space in one of the two buildings and a portion of the available space in the second building. In September 2013, the Company entered into a lease amendment to lease all of the remaining space, approximately 142,000 square feet, in the second building, for an aggregate of 386,000 square feet in both buildings. The terms of the lease amendment were consistent with the terms of the original lease. Construction of the core and shell of the building is expected to be completed in early 2015 at which time construction of tenant improvements in the building will commence. Construction of the tenant improvements is expected to be completed in late 2015 or early 2016.

In connection with this lease, the landlord is providing a tenant improvement allowance for the costs associated with the design, engineering, and construction of tenant improvements for the leased facility. The tenant improvements will be in accordance with the Company’s plans and include fit-out of the

 

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buildings to construct appropriate laboratory and office space, subject to approval by the landlord. To the extent the stipulated tenant allowance provided by the landlord is exceeded, the Company is obligated to fund all costs incurred in excess of the tenant allowance. The scope of the planned tenant improvements do not qualify as “normal tenant improvements” under the lease accounting guidance. Accordingly, for accounting purposes, the Company is the deemed owner of the buildings during the construction period.

As construction progresses, the Company records the project construction costs incurred as an asset, along with a corresponding facility lease obligation, on the consolidated balance sheet for the total amount of project costs incurred whether funded by the Company or the landlord. Upon completion of the buildings, the Company will determine if the asset and corresponding financing obligation should continue to be carried on its consolidated balance sheet under the appropriate accounting guidance. Based on the current terms of the lease, the Company expects to continue to be the deemed owner of the buildings upon completion of the construction period. As of September 30, 2014, the Company has recorded construction in progress and a facility lease obligation of $171.3 million (including the current portion of the obligation of $5.0 million).

The initial term of the lease is for 15 years from substantial completion of the buildings with options to renew for three terms of five years each at market-based rates. The base rent is subject to increases over the term of the lease. Based on the original and amended leased space, the non-cancelable minimum annual lease payments for the annual periods beginning upon commencement of the lease are $5.3 million, $8.4 million, $26.6 million, $30.4 million and $30.9 million in the first five years of the lease and $347.1 million in total thereafter, plus the Company’s share of the facility operating expenses and other costs that are reimbursable to the landlord under the lease. The Company has the right to sublease portions of the space and is currently planning to sublease approximately 170,000 square feet of the total of 386,000 square feet available.

The Company maintains a letter of credit as security for the lease of $9.2 million, which is supported by restricted cash.

Lausanne, Switzerland

In January 2013, the Company entered into a lease agreement for approximately 22,000 square feet of office space in a building which the Company occupied in 2014. The term of the lease is for ten years, with options for extension of the term and an early termination at the Company’s option after five years. Future non-cancelable minimum annual lease payments under this lease are expected to be approximately $261,000 in 2014, $1.1 million in 2015, 2016, 2017 and 2018 and $5.5 million in total thereafter.

Total rent expense for the leases described above as well as other Company leases for the three-month and nine-month periods ended September 30, 2014 and 2013 was $1.9 million and $1.5 million, respectively, and $5.7 million and $4.4 million, respectively. Contingent rent expense for the three-month and nine-month periods ended September 30, 2014 and 2013 was $167,000 and $186,000, respectively, and $519,000 and $526,000, respectively. Total future non-cancelable minimum annual rental payments for the leases described above as well as other Company leases, for the next five years and thereafter are $2.3 million, $14.0 million, $15.6 million, $33.7 million, $37.6 million and $387.2 million, respectively, not including any offset from potential sublease payments.

 

10. Income Taxes

The Company utilizes the asset and liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are determined based on the difference between the financial statement carrying amounts and tax basis of assets and liabilities using enacted tax rates in effect for years in which the temporary differences are expected to reverse. The Company provides a valuation allowance when it is more likely than not that deferred tax assets will not be realized.

 

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The Company’s tax provision reflects that the Company has an international corporate structure and certain subsidiaries are profitable on a stand-alone basis. Accordingly, a tax provision is reflected for the taxes incurred in such jurisdictions. In addition, the Company has recognized a prepaid tax related to the tax consequences arising from intercompany transactions and is amortizing such prepaid tax over the period that the assets transferred are being amortized. The total provision for income taxes for the three-month and nine-month periods ended September 30, 2014 was $154,000 and $379,000, respectively.

The Company does not recognize a tax benefit for uncertain tax positions unless it is more likely than not that the position will be sustained upon examination by tax authorities, including resolution of any related appeals or litigation processes, based on the technical merits of the position. The tax benefit that is recorded for these positions is measured at the largest amount of cumulative benefit that has greater than a 50 percent likelihood of being realized upon ultimate settlement. Deferred tax assets that do not meet these recognition criteria are not recorded and the Company recognizes a liability for uncertain tax positions that may result in tax payments. If such unrecognized tax benefits were realized and not subject to valuation allowances, the entire amount would impact the tax provision. No uncertain tax positions are expected to be resolved within the next twelve months.

 

11. Stockholders’ Equity

Common Stock

On January 29, 2013, the Company sold 16,489,893 shares of its common stock in an underwritten public offering at a purchase price of $19.60 per share. Net proceeds of this offering, after underwriting discounts and commissions and expenses, were approximately $310.0 million.

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

 

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Changes in Stockholders’ Equity

The changes in stockholders’ equity for the nine-month period ended September 30, 2014 were as follows:

 

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

Balance, January 1, 2014

     185,896,080       $ 186       $ 1,238,859      $ (1,535   $ (1,051,993   $ 185,517   

Issuance of common stock pursuant to ARIAD stock plans

     1,245,815         1         3,058            3,059   

Stock-based compensation

           24,583            24,583   

Payment of tax withholding obligations related to stock-based compensation

           (716         (716

Equity component of convertible debt

           40,896            40,896   

Purchase of convertible bond hedge

           (43,220         (43,220

Sale of warrants

           27,580            27,580   

Net loss

             244        (156,851     (156,607
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Balance, September 30, 2014

     187,141,895       $ 187       $ 1,291,040      $ (1,291   $ (1,208,844   $ 81,092   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

 

12. Fair Value of Financial Instruments

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

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

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

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

As of September 30, 2014 and December 31, 2013, the Company did not hold any assets recorded at fair value.

At September 30, 2014 and December 31, 2013 the carrying amounts of cash equivalents, accounts payable and accrued liabilities approximate fair value because of their short-term nature. The carrying amount of the Company’s bank term loan at December 31, 2013 approximated fair value due to its variable interest rate and other terms. All such measurements are Level 2 measurements in the fair value hierarchy. The carrying amount of the Company’s leased buildings under construction in Cambridge, Massachusetts and the related long-term facility lease obligation reflect replacement cost, which approximates fair value. This measurement is a Level 3 fair value measurement. The fair value of the convertible notes, which

 

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differs from their carrying value, is influenced by interest rates and stock price and stock price volatility and is determined by prices for the convertible notes observed in market trading, which are Level 2 inputs. The estimated fair value of the convertible notes, face value of $200 million, was $184.5 million at September 30, 2014.

 

13. Stock-Based Compensation

The Company awards stock options and other equity-based instruments to its employees, directors and consultants and provides employees the right to purchase common stock (collectively “share-based payments”), pursuant to stockholder approved plans. The Company’s statements of operations included total compensation cost from share-based payments for the three-month and nine-month periods ended September 30, 2014 and 2013, as follows:

 

     Three Months Ended
September 30,
     Nine Months Ended
September 30,
 
In thousands    2014      2013      2014      2013  

Compensation cost from:

           

Stock options

   $ 3,583       $ 4,935       $ 12,427       $ 13,047   

Stock and stock units

     3,961         3,553         11,787         15,147   

Purchases of common stock at a discount

     94         142         369         365   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 7,638       $ 8,630       $ 24,583       $ 28,559   
  

 

 

    

 

 

    

 

 

    

 

 

 

Compensation cost included in:

           

Research and development expenses

   $ 3,229       $ 3,913       $ 10,570       $ 12,329   

Selling, general and administrative expenses

     4,409         4,717         14,013         16,230   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 7,638       $ 8,630       $ 24,583       $ 28,559   
  

 

 

    

 

 

    

 

 

    

 

 

 

Stock Options

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

Stock option activity under the Company’s stock plans for the nine-month period ended September 30, 2014 was as follows:

 

     Number of
Shares
    Weighted
Average

Exercise Price
Per Share
 

Options outstanding, January 1, 2014

     10,379,668      $ 10.83   

Granted

     1,493,560      $ 7.35   

Forfeited

     (1,333,975   $ 13.83   

Exercised

     (632,521   $ 4.44   
  

 

 

   

Options outstanding, September 30, 2014

     9,906,732      $ 10.31   
  

 

 

   

Stock and Stock Unit Grants

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

 

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Stock and stock unit activity under the Company’s stock plans for the nine-month period ended September 30, 2014 was as follows:

 

     Number of
Shares
    Weighted
Average

Grant Date
Fair Value
 

Outstanding, January 1, 2014

     2,047,600      $ 14.18   

Granted/Awarded

     2,479,500      $ 7.35   

Forfeited

     (269,668   $ 9.33   

Vested or restrictions lapsed

     (646,313   $ 13.55   
  

 

 

   

Outstanding, September 30, 2014

     3,611,119      $ 9.96   
  

 

 

   

Included in stock and stock units outstanding in the above table as of September 30, 2014 are 258,400 performance share units that will vest annually, in equal increments, over the next two years on the anniversary date of the achievement of the performance condition, which was the marketing authorization of Iclusig by the European Commission that occurred in July 2013.

Stock and stock units outstanding in the above table as of September 30, 2014 also include 333,000 performance share units awarded in 2013. The number of shares that may vest, if any, related to the 2013 performance share unit awards is dependent on the achievement, and timing of the achievement, of the performance criteria defined for the award. The compensation cost for such performance-based stock awards will be based on the awards that ultimately vest and the grant date fair value of those awards. The Company begins to recognize compensation expense related to performance share units when achievement of the performance condition is probable. The Company has concluded that it is probable that the performance condition related to the 2013 performance share unit awards will be met. The performance condition is based upon continued success in specific research and development initiatives. The total compensation expense for these performance share units may be up to 60% higher if the performance condition for this award is met prior to December 31, 2014.

Stock and stock units outstanding in the above table as of September 30, 2014 also include 1,066,000 performance share units awarded on January 31, 2014. The vesting of fifty percent of the award is dependent upon the achievement of specific commercial objectives by the end of 2015 and the vesting of the remainder is dependent upon the achievement, and timing of the achievement, of specific research and development objectives. The Company has concluded that it is probable that these performance conditions will be met. The total compensation expense for the portion related to the research and development objectives may be up to 60% higher depending on the timing of the achievement of the specific performance objectives.

 

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14. Accumulated Other Comprehensive Income (Loss)

The changes in accumulated other comprehensive income (loss) for the three-month and nine-month periods ended September 30, 2014 were as follows:

 

In thousands    Cumulative
Translation
Adjustment
    Defined
Benefit
Pension
Obligation
    Total  

Balance, July 1, 2014

   $ (38   $ (1,413   $ (1,451

Other comprehensive losses

     120        40        160   
  

 

 

   

 

 

   

 

 

 

Balance, September 30, 2014

   $ 82      $ (1,373   $ (1,291
  

 

 

   

 

 

   

 

 

 

 

In thousands    Cumulative
Translation
Adjustment
    Defined
Benefit
Pension
Obligation
    Total  

Balance, January 1, 2014

   $ (40   $ (1,495   $ (1,535

Other comprehensive losses

     122        122        244   
  

 

 

   

 

 

   

 

 

 

Balance, September 30, 2014

   $ 82      $ (1,373   $ (1,291
  

 

 

   

 

 

   

 

 

 

 

15. Net Loss Per Share

Basic net loss per share amounts have been computed based on the weighted-average number of common shares outstanding. Diluted net loss per share amounts have been computed based on the weighted-average number of common shares outstanding plus the dilutive effect of potential common shares. The computation of potential common shares has been performed using the treasury stock method. Because of the net loss reported in each period, diluted and basic net loss per share amounts are the same.

The calculation of net loss and the number of shares used to compute basic and diluted earnings per share for the three-month and nine-month periods ended September 30, 2014 and 2013 were as follows:

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
In thousands, except per share data    2014     2013     2014     2013  

Net loss

   $ (50,108   $ (66,339   $ (156,851   $ (199,995
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss per share – basic and diluted

   $ (0.27   $ (0.36   $ (0.84   $ (1.09
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average shares – basic and diluted

     187,034        185,238        186,703        182,859   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

16. Restructuring Actions

In the fourth quarter of fiscal 2013, the Company incurred expenses of $4.8 million associated with an employee workforce reduction of approximately 155 positions that was designed to reduce the Company’s operating expenses and extend its cash runway. The Company recorded $2.2 million of the employee separation costs in research and development expense and $2.6 million in selling, general and administrative expense in the three-month period end December 31, 2013.

 

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A rollforward of the restructuring liability for the nine-month period ended September 30, 2014 is as follows:

 

In thousands  

Balance, January 1, 2014

   $ 2,220   

Charges

     —     

Amounts paid

     (2,220
  

 

 

 

Balance, September 30, 2014

   $ —     
  

 

 

 

The restructuring charges were paid by end of June 30, 2014. On the accompanying condensed consolidated balance sheets, the restructuring liability balance was classified as a component of accrued compensation and benefits.

 

17. Defined Benefit Pension Obligation

On March 1, 2013, the Company established a defined benefit pension plan for employees in its Switzerland subsidiary. The plan provides benefits to employees upon retirement, death or disability.

The net periodic benefit cost for the defined benefit pension plan for the three-month and nine-month periods ended September 30, 2014 was as follows:

 

In thousands    Three Months
Ended
September 30,
2014
    Nine Months
Ended
September 30,
2014
 

Service cost

   $ 234      $ 761   

Interest cost

     40        119   

Expected return on plan assets

     (34     (101

Amortization of prior service cost

     37        110   
  

 

 

   

 

 

 

Net periodic benefit cost

   $ 277      $ 889   
  

 

 

   

 

 

 

The net periodic benefit costs and contributions to the plan for the nine-month period ended September 30, 2014 were not material. The Company expects to contribute $942,000 in total to the plan in 2014.

 

18. Litigation

On October 10, 2013, October 17, 2013, December 3, 2013 and December 6, 2013, purported shareholder class actions, styled Jimmy Wang v. ARIAD Pharmaceuticals, Inc., et al., James L. Burch v. ARIAD Pharmaceuticals, Inc., et al., Greater Pennsylvania Carpenters’ Pension Fund v. ARIAD Pharmaceuticals, Inc., et al, and Nabil Elmachtoub v. ARIAD Pharmaceuticals, Inc., et al, respectively, were filed in the United States District Court for the District of Massachusetts (the “District Court”), naming the Company and certain of its officers as defendants. The lawsuits allege that the defendants made material misrepresentations and/or omissions of material fact regarding clinical and safety data for Iclusig in its public disclosures during the period from December 12, 2011 through October 8, 2013 or October 17, 2013, in violation of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, as amended, and Rule 10b-5 promulgated thereunder. On January 9, 2014, the District Court consolidated the actions and appointed lead plaintiffs. On February 18, 2014, the lead plaintiffs filed an amended complaint as contemplated by the order of the District Court. The amended complaint extends the class period for the Securities Exchange Act claims through October 30, 2013. In addition, plaintiffs allege that certain of the Company’s officers, directors and certain underwriters made material misrepresentations and/or omissions of material fact regarding clinical and safety data for Iclusig in connection with the Company’s January 24, 2013 follow-on public offering of common stock in violation of Sections 11 and 15 of the Securities Act of 1933, as amended. The plaintiffs seek unspecified monetary damages on behalf of the putative class and an award of costs and

 

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expenses, including attorney’s fees. On April 14, 2014, the defendants and the underwriters filed separate motions to dismiss the amended complaint. On June 10, 2014, the District Court heard oral argument on the motion to dismiss but has not yet ruled on them.

On November 6, 2013, a purported derivative lawsuit, styled Yu Liang v. ARIAD Pharmaceuticals, Inc., et al., was filed in the United States District Court for the District of Massachusetts (the “District Court”), on behalf of the Company naming its directors and certain of its officers as defendants. On December 6, 2013, an additional purported derivative lawsuit, styled Arkady Livitz v. Harvey J. Berger, et al, was filed in the District Court. The lawsuits allege that the Company’s directors and certain of its officers breached their fiduciary duties related to the clinical development and commercialization of Iclusig and by making misrepresentations regarding the safety and commercial marketability of Iclusig. The lawsuits also assert claims for unjust enrichment and corporate waste, and for misappropriation of information and insider trading by the officers named as defendants. On January 23, 2014, the District Court consolidated the actions. On February 3, 2014, the plaintiffs designated the Yu Liang complaint as the operative complaint as contemplated by the order of the District Court. The plaintiffs seek unspecified monetary damages, changes in the Company’s corporate governance policies and internal procedures, restitution and disgorgement from the individually named defendants, and an award of costs and expenses, including attorney fees. On March 5, 2014, the defendants filed a motion to dismiss the complaint. In response, on March 26, 2014, the plaintiffs filed an amended complaint. On April 23, 2014, the defendants filed a motion to dismiss the amended complaint. On July 23, 2014, the District Court heard oral argument on the motion to dismiss but has not ruled on it.

The Company believes that these actions are without merit. At this time, the Company has not recorded a liability related to damages in connection with these matters because it believes that any potential loss is not currently probable or reasonably estimable under U.S. GAAP. In addition, due to the early stages of the matters described above, the Company cannot reasonably estimate the possible loss or range of loss, if any, that may result from these matters.

From time to time, the Company may be subject to various claims and legal proceedings. If the potential loss from any claim, asserted or unasserted, or legal proceedings is considered probable and the amount is reasonably estimated, the Company will accrue a liability for the estimated loss.

 

19. Recent Accounting Pronouncements

In July 2013, the FASB issued ASU 2013-11, Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists. ASU 2013-11 requires, unless certain conditions exists, an unrecognized tax benefit or a portion of an unrecognized tax benefit to be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, similar to a tax loss or a tax credit carryforward. The Company has adopted the provisions of this standard beginning January 1, 2014. The adoption of the standard did not have a material impact on the Company’s consolidated financial statements.

 

20. Subsequent Event

In October 2014, the Company entered into an agreement with Bellicum Pharmaceuticals, Inc. (“Bellicum”) to restructure and amend an existing license agreement between the companies for the Company’s cell-signaling technology. The restructured agreement gives Bellicum a worldwide exclusive license, with the right to sublicense, to the Company’s cell-signaling technology for broad use in human cell therapies for all diseases. Under the terms of the agreement, the Company will receive $50 million, payable in three installments ($15 million paid upon execution of the agreement, $20 million due by June 30, 2015 and $15 million due by June 30, 2016) in exchange for granting Bellicum a fully paid-up license to this technology and return of shares of Bellicum common stock owned by the Company upon receipt of the second installment payment.

 

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The second and third installment payments may be accelerated under certain circumstances and can be prepaid at any time. The agreement can be terminated by either party upon a specified uncured material breach of the agreement and by the Company upon Bellicum’s failure to make the installment payments after specified dates.

 

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

The information set forth below should be read in conjunction with our unaudited condensed consolidated financial statements and the notes thereto included herein, as well as our audited consolidated financial statements and the notes thereto contained in our Annual Report on Form 10-K for the year ended December 31, 2013. Unless stated otherwise, references in this Quarterly Report on Form 10-Q to “we,” “us,” or “our” refer to ARIAD Pharmaceuticals, Inc., a Delaware corporation, and our subsidiaries unless the context requires otherwise.

Overview

ARIAD is a global oncology company focused on transforming the lives of cancer patients with breakthrough medicines. Our mission is to discover, develop and commercialize small-molecule drugs to treat cancer in patients with the greatest and most urgent unmet medical need – aggressive cancers where current therapies are inadequate.

Our first approved cancer medicine is Iclusig® (ponatinib), which is approved in the United States and Europe for the treatment of adult patients with chronic myeloid leukemia, or CML, and Philadelphia chromosome-positive acute lymphoblastic leukemia, or Ph+ ALL. We are pursuing regulatory approval of Iclusig in additional geographies and developing Iclusig in additional cancer indications. We have two other product candidates in development, AP26113 and ridaforolimus. AP26113 is being studied in patients with advanced solid tumors, including non-small cell lung cancer. Ridaforolimus is being developed for use on cardiovascular stents and other medical devices by Medinol, Ltd., or Medinol, and ICON Medical Corp., or ICON. In addition to our clinical development programs, we have a focused drug discovery program centered on small-molecule therapies that are molecularly targeted to cell-signaling pathways implicated in cancer.

Iclusig and our product candidates, AP26113 and ridaforolimus, were discovered internally by our scientists based on our expertise in computational chemistry and structure-based drug design.

Recent Developments

The following information updates our previous disclosures in Part II, Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our Annual Report on Form 10-K for the year ended December 31, 2013 as updated by our disclosures in Part II, Item 2 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our subsequent Quarterly Reports on Form 10-Q.

In 2013, the European Medicines Agency, or EMA, commenced an in-depth review, known as an Article 20 referral, of the benefits and risks of Iclusig to better understand the nature, frequency and severity of events obstructing the arteries or veins, the potential mechanism that leads to these side effects and whether there needs to be a revision in European prescribing information for Iclusig. In October 2014, the Pharmacovigilance Risk Assessment Committee, or PRAC, of the EMA concluded its review of Iclusig under the Article 20 referral procedure and recommended that Iclusig continue to be used in Europe in accordance with its already approved indications. Other recommendations made by the PRAC related to the Iclusig Summary of Medicinal Product Characteristics, or SmPC, include (1) patient monitoring for response according to standard clinical guidelines, (2) consideration of Iclusig dose-reduction following achievement of major cytogenetic response with subsequent monitoring of response, and (3) consideration of Iclusig discontinuation if a complete haematologic response has not been achieved by three months. Further information is provided indicating that the risk of vascular occlusive events is likely dose-related. An update of the Warning and Precautions and Undesirable Effects sections is also provided for inclusion in the Iclusig SmPC. PRAC’s recommendation was considered and adopted by the Committee for Medicinal Products for Human Use, or CHMP, of the EMA in October 2014. The European Comission is expected to issue a final legally binding decision on Iclusig in December 2014 which will be valid throughout the European Union.

 

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Critical Accounting Policies and Estimates

Our financial position and results of operations are affected by subjective and complex judgments, particularly in the areas of revenue recognition, accrued product development expenses, inventory, leased buildings under construction and stock-based compensation expense. We evaluate our estimates, judgments and assumptions on an ongoing basis. Actual results may differ from these estimates under different assumptions or conditions. For a discussion of our critical accounting estimates, read Part II, Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our Annual Report on Form 10-K for the year ended December 31, 2013, as updated by the following:

Revenue Recognition

Product Revenue, net

Through October 31, 2013, we sold Iclusig in the United States through a limited number of specialty distributors and specialty pharmacies. Upon receiving approval to resume marketing and commercial distribution of Iclusig in the United States in January 2014, we began selling Iclusig through an exclusive specialty pharmacy, Biologics, Inc., or Biologics. Biologics dispenses Iclusig directly to patients in fulfillment of prescriptions. We record a receivable from the shipment of product to Biologics once title and risk of loss is transferred. We provide the right of return to Biologics for unopened product for a limited time before and after its expiration date. In the United States, we defer the recognition of revenue until Iclusig is dispensed by Biologics to the patient. Revenue recognition is deferred due to the inherent uncertainties in estimating future returns of Iclusig, including estimated product demand and the limited shelf life of Iclusig.

Rebates, Chargebacks and Discounts

If we increased our estimate of the percentage of patients receiving Iclusig covered by third-party payors entitled to government-mandated discounts by five percentage points, our United States net product revenues would decrease by approximately 1 percent in the nine-month period ended September 30, 2014.

Accrued Product Development Expenses

At September 30, 2014, we reported accrued product development expenses of $13.8 million on our condensed consolidated balance sheet.

Stock-Based Compensation Expense

We recognized stock-based compensation expense of $7.6 million and $24.6 million in the three-month and nine-month periods ended September 30, 2014, respectively, for performance awards that are expected to vest in the future.

Results of Operations

For the three months ended September 30, 2014 and 2013

Revenue

On January 20, 2014, we resumed marketing and commercial distribution of Iclusig in the United States through an exclusive specialty pharmacy, Biologics, with a wholesale price of approximately $125,000 for

 

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an annual supply of the approved dose of Iclusig. The price charged for an annual supply of Iclusig in Europe is approximately 75% of the current price charged in the United States, on a wholesale basis. In the United States, we recognize revenue on a sell-through basis. In Europe, we recognize revenue upon shipment to our customers, provided that all other revenue recognition criteria are met. Product revenue is reduced by certain gross to net deductions. Our revenues for the three-month period ended September 30, 2014, as compared to the corresponding period in 2013, were as follows:

 

     Three Months Ended September 30,      Increase/  
In thousands    2014      2013      (decrease)  

Product revenue, net

   $ 14,499       $ 16,658       $ (2,159

License revenue

     183         66         117   

Service revenue

     —           8         (8
  

 

 

    

 

 

    

 

 

 
   $ 14,682       $ 16,732       $ (2,050
  

 

 

    

 

 

    

 

 

 

Adjustments for trade allowances, rebates, chargebacks and discounts and other incentives that reduced gross product revenues are summarized as follows:

 

     Three Months Ended September 30,     Increase/  
In thousands    2014     2013     (decrease)  

Trade allowances

   $ 195      $ 409      $ (214

Rebates, chargebacks and discounts

     954        1,100        (146

Other incentives

     221        29        192   
  

 

 

   

 

 

   

 

 

 

Total adjustments

   $ 1,370      $ 1,538      $ (168
  

 

 

   

 

 

   

 

 

 

Gross product revenue

   $ 15,869      $ 18,196      $ (2,327
  

 

 

   

 

 

   

 

 

 

Percentage of gross product revenue

     8.6     8.4  
  

 

 

   

 

 

   

The decrease in net product revenue reflects a decrease in units shipped in the United States due to the decreased demand associated with the revised U.S. prescribing information for Iclusig. This decrease was offset in part by an 8% price increase in the United States in the first quarter of 2014 that accompanied the re-launch of Iclusig in the United States and by revenues of Iclusig in Europe following Europe commercial launch in the second half of 2013.

We recognized $183,000 of license revenue in the three months ended September 30, 2014, pursuant to license agreements related to ridaforolimus and our ARGENT technology, in accordance with our revenue recognition policy.

We expect product revenue will increase in the final fiscal quarter of 2014 compared to the three-month period ended September 30, 2014 as we continue to market and distribute Iclusig in the United States and Europe. We also expect license revenue in the final fiscal quarter of 2014 will increase compared to the three-month period ended September 30, 2014 reflecting the impact of the agreement we entered into with Bellicum Pharmaceuticals, Inc. in October 2014 to restructure the license agreement between the parties for our cell-signaling technology, as described in Note 20 to the accompanying financial statements.

 

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Operating Expenses

Cost of Product Revenue

Our cost of product revenue for the three-month period ended September 30, 2014, as compared to the corresponding period in 2013, consists of the following:

 

     Three Months Ended September 30,      Increase/  
In thousands    2014      2013      (decrease)  

Inventory cost of Iclusig sold

   $ 130       $ 96       $ 34   

Shipping and handling costs

     104         159         (55

Provision for excess inventory

     360         160         200   
  

 

 

    

 

 

    

 

 

 
   $ 594       $ 415       $ 179   
  

 

 

    

 

 

    

 

 

 

Prior to receiving regulatory approval for Iclusig from the FDA in December 2012, we expensed, as research and development costs, all costs incurred in the manufacturing of Iclusig to be sold upon commercialization. In addition, in the fourth quarter of 2013, we wrote down significant amounts of inventory that we estimated to be excess inventory. For Iclusig sold in the three-month period ended September 30, 2014, a small percentage of manufacturing costs incurred had previously been expensed. Therefore, the cost of inventory sold included limited manufacturing costs and the cost of packaging and labeling for commercial sales. If product related costs had not previously been expensed as research and development prior to receiving FDA approval or written-off, the cost to produce the Iclusig sold would have been approximately $139,000 and $240,000 respectively, and total cost of product revenue would have been approximately $603,000 and $563,000 respectively, during the three-month periods ended September 30, 2014 and 2013.

Cost of product revenue for the three-month periods ended September 30, 2014 and 2013 also includes a provision for excess inventory of $360,000 and $160,000 respectively. During the three-month period ended September 30, 2014, the provision was due to inventory produced during the quarter in accordance with minimum lot size requirements that was deemed to be excess upon receipt of the inventory and for units that are not expected to be sold.

Research and Development Expenses

Research and development expenses decreased by $17.5 million, or 39% percent, to $27.6 million in the three-month period ended September 30, 2014, compared to $45.1 million in the corresponding period in 2013, for the reasons set forth below.

The research and development process necessary to develop a pharmaceutical product for commercialization is subject to extensive regulation by numerous governmental authorities in the United States and other countries. This process typically takes years to complete and requires the expenditure of substantial resources. Current requirements include:

 

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

 

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

 

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

 

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

 

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

 

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

We group our research and development, or R&D, expenses into two major categories: direct external expenses and all other R&D expenses. Direct external expenses consist of costs of outside parties to conduct and manage clinical trials, to develop manufacturing processes and manufacture product candidates, to conduct laboratory studies and similar costs related to our clinical programs. These costs are accumulated and tracked by product or product candidate. All other R&D expenses consist of costs to compensate personnel, to purchase lab supplies and services, to lease, operate and maintain our facility, equipment and overhead and similar costs of our research and development efforts. These costs apply to our clinical programs as well as our preclinical studies and discovery research efforts. Product candidates are designated as clinical programs once we have filed an IND with the FDA, or a similar filing with regulatory agencies outside the United States, for the purpose of commencing clinical trials in humans.

Our R&D expenses for the three-month period ended September 30, 2014, as compared to the corresponding period in 2013, were as follows:

 

     Three Months Ended September 30,      Increase/  
In thousands    2014      2013      (decrease)  

Direct external expenses:

        

Iclusig

   $ 5,144       $ 18,296       $ (13,152

AP26113

     3,548         5,555         (2,007

All other R&D expenses

     18,908         21,294         (2,386
  

 

 

    

 

 

    

 

 

 
   $ 27,600       $ 45,145       $ (17,545
  

 

 

    

 

 

    

 

 

 

In 2014 and 2013, our clinical programs consisted of (i) Iclusig, our pan BCR-ABL inhibitor, and (ii) AP26113, our ALK inhibitor.

Direct external expenses for Iclusig were $5.1 million in the three-month period ended September 30, 2014, a decrease of $13.2 million as compared to the corresponding period in 2013. The decrease is primarily due to decreases in clinical trial costs of $5.2 million, contract manufacturing costs of $7.2 million and other costs of $800,000. The decrease in clinical trial costs relates primarily to the discontinuation of the Phase 3 EPIC trial in October 2013 and decreasing activities in the Phase 2 PACE trial. The decrease in manufacturing costs was due to the completion of large scale development activities for Iclusig at a contract manufacturer. Other costs decreased due to reduction in stability and other studies related to use of new manufacturers for Iclusig.

We expect that our direct external expenses for Iclusig will increase in the final fiscal quarter of 2014 as compared to the three-month period ended September 30, 2014 as we continue to treat more patients in our ongoing clinical trials, initiate additional clinical trials and conduct additional studies to support continued development of Iclusig.

Direct external expenses for AP26113 were $3.5 million in the three-month period ended September 30, 2014, a decrease of $2.0 million as compared to the corresponding period in 2013. The decrease in expenses for AP26113 was due primarily to decreases of $256,000 in clinical trial costs, $1.2 million in contract manufacturing costs and $509,000 in other supporting costs. Clinical trial costs decreased due to completion or wind-down of several Phase 1/2 clinical trials, offset in part by an increase in costs related to on-going enrollment in the ALTA pivotal trial for AP26113, which we initiated in March 2014. Contract manufacturing costs decreased due to decreased process development and validation activities. We expect that our direct external expenses for AP26113 will increase in the final fiscal quarter of 2014 as compared to the three-month period ended September 30, 2014 as we continue to enroll patients in the ALTA pivotal trial for AP26113 and conduct additional studies to support continued development and potential regulatory approval of AP26113.

 

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All other R&D expenses decreased by $2.5 million in the three-month period ended September 30, 2014, as compared to the corresponding period in 2013. This decrease was due to a decrease in personnel expenses of $2.5 million, primarily related to a decrease in salaries of $1.5 million, due to the reduction in workforce in the United States in November 2013, and a decrease in stock-based compensation expense of $801,000 due to the workforce reduction and lower values attributable to current stock-based compensation grants. These decreases were offset in part by an increase in professional fees of $364,000 due primarily to an increase in managed services for systems and technology support. We expect that all other R&D expenses will remain consistent in the final fiscal quarter of 2014 as compared to the three-month period ended September 30, 2014.

The successful development of our product candidates is uncertain and subject to a number of risks. We cannot be certain that any of our products or product candidates will prove to be safe and effective or will meet all of the applicable regulatory requirements needed to receive and maintain marketing approval. Data from preclinical studies and clinical trials are susceptible to varying interpretations that could delay, limit or prevent regulatory approval or could result in label warnings related to or recalls of approved products. We expect that the negative developments related to Iclusig in 2013 will adversely impact our efforts to further develop and commercialize Iclusig in CML and Ph+ ALL patients. Our ability to obtain sources of product revenue from the successful development of our product candidates will depend on, among other things, our efforts to develop Iclusig in other patient populations and cancers, as well as the success of AP26113 and any other product candidates. Other risks associated with our products and product candidates are described in the section entitled “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2013, as updated in our subsequent periodic and current reports filed with the SEC.

Selling, General and Administrative Expenses

Selling, general and administrative expenses decreased by $3.8 million, or 10% percent, to $33.6 million in the three-month period ended September 30, 2014, compared to $37.4 million in the corresponding period in 2013. Personnel expenses decreased by $1.5 million in the three-month period ending September 30, 2014 compared to the corresponding period in 2013, primarily due to the impact of the reduction in our workforce in the United States announced in the fourth quarter of 2013, offset in part by an increase in personnel expenses in Europe as we added personnel in connection with the launch of Iclusig in various European countries starting in the second half of 2013. Expenses for professional services decreased by $2.4 million in the three-month period ended September 30, 2014 compared to the corresponding period in 2013 reflecting a reduction in sales and marketing initiatives and other consulting services of $3.6 million, that supported initial commercial launch of Iclusig in the United States in the first three quarters of 2013 offset in part by an increase in legal expenses related to litigation matters. The decreases were offset in part by increases in other expenses of $1.1 million due to increased medical affairs initiatives related to Iclusig. We expect that our selling, general and administrative expenses will increase in the final fiscal quarter of 2014 as we continue to invest in the re-launch of Iclusig in the United States and the commercialization of Iclusig in Europe.

We expect that our operating expenses in total will increase in the final fiscal quarter of 2014 for the reasons described above. The actual amount of any increase in operating expenses will depend on, among other things, costs related to commercialization of Iclusig in the United States and Europe, the progress of our product development programs, including on-going and new clinical trials, results of continuing non-clinical studies and the costs of product and process development activities and product manufacturing.

 

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Other Income (Expense)

Interest Income/Expense

Interest income decreased to $19,000 in the three-month period ended September 30, 2014 from $40,000 in the corresponding period in 2013, as a result of a lower average balance of invested funds during 2014.

Interest expense increased to $3.7 million in the three-month period ended September 30, 2014 from $37,000 in the corresponding period in 2013 as a result of interest expense related to our $200 million convertible note issuance completed in June 2014 offset in part by the payoff of our bank term loan in June 2014.

Foreign Exchange Gain (Loss)

We recognized net foreign exchange transaction gains of $881,000 in the three-month period ended September 30, 2014 compared to losses of $9,000 in the corresponding period in 2013. The gains are a result of the impact of fluctuations in exchange rate on accounts denominated in foreign currencies.

Provision for Income Taxes

Our provision for income taxes for the three-month period ended September 30, 2014 was $154,000 compared to $110,000 in the corresponding period in 2013, and reflects estimated taxes for certain foreign subsidiaries.

Operating Results

We reported a loss from operations of $47.1 million in the three-month period ended September 30, 2014 compared to a loss from operations of $66.2 million in the corresponding period in 2013, a decrease of $19.1 million, or 29 percent. We also reported a net loss of $50.1 million in the three-month period ended September 30, 2014, compared to a net loss of $66.3 million in the corresponding period in 2013, a decrease in net loss of $16.2 million or 24 percent, and a net loss per share of $0.27 and $0.36, respectively. The decrease in net loss is largely due to the decrease in our operating expenses described above. We expect that our results of operations for the final fiscal quarter of 2014 will vary from those of the quarter ended September 30, 2014 and actual results will depend on a number of factors, including the success of our commercialization efforts for Iclusig in the United States and Europe, the final outcome of the EMA’s review of Iclusig, the progress of our product development programs, increases or decreases in number of employees and related personnel costs, increases in costs associated with commercial launch of Iclusig, the progress of our discovery research programs, the impact of any commercial and business development activities and other factors.

For the nine months ended September 30, 2014 and 2013

Revenue

Our revenues for the nine-month period ended September 30, 2014, as compared to the corresponding period in 2013, were as follows:

 

     Nine Months Ended September 30,      Increase/  
In thousands    2014      2013      (decrease)  

Product revenue, net

   $ 34,371       $ 36,956       $ (2,585

License revenue

     4,203         228         3,975   

Service revenue

     3         24         (21
  

 

 

    

 

 

    

 

 

 
   $ 38,577       $ 37,208       $ 1,369   
  

 

 

    

 

 

    

 

 

 

 

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Adjustments for trade allowances, rebates, chargebacks and discounts and other incentives that reduced gross product revenues are summarized as follows:

 

     Nine Months Ended September 30,     Increase/  
In thousands    2014     2013     (decrease)  

Trade allowances

   $ 497      $ 1,026      $ (529

Rebates, chargebacks and discounts

     2,267        2,198        69   

Other incentives

     744        96        648   
  

 

 

   

 

 

   

 

 

 

Total adjustments

   $ 3,508      $ 3,320      $ 188   
  

 

 

   

 

 

   

 

 

 

Gross product revenue

   $ 37,879      $ 40,276      $ (2,397
  

 

 

   

 

 

   

 

 

 

Percentage of gross product revenue

     9.3     8.2  
  

 

 

   

 

 

   

The decrease in net product revenue reflects a decrease in gross revenue resulting from a decrease in units shipped in the United States due to the decreased demand associated with the revised U.S. prescribing information for Iclusig. This decrease was offset in part by an 8% price increase in the United States in the first quarter of 2014 that accompanied the re-launch of Iclusig in the United States and by revenues of Iclusig in Europe following Europe commercial launch in the second half of 2013.

We recognized $4.2 million of license revenue in the nine months ended September 30, 2014, pursuant to license agreements related to ridaforolimus and our ARGENT technology, in accordance with our revenue recognition policy. On January 14, 2014, we jointly announced with Medinol the initiation of two registration trials of Medinol’s stent system that incorporates ridaforolimus. Under the terms of our agreement with Medinol, the commencement of enrollment in Medinol’s clinical trials, along with Medinol’s submission of an investigational device exemption, or IDE, with the FDA, trigged milestone payments to us of $3.8 million that were recorded as license revenue in the first quarter of 2014.

Operating Expenses

Cost of Product Revenue

Our cost of product revenue for the nine-month period ended September 30, 2014, as compared to the corresponding period in 2013, includes the following:

 

     Nine Months Ended September 30,      Increase/  
In thousands    2014      2013      (decrease)  

Inventory cost of Iclusig sold

   $ 292       $ 137       $ 155   

Shipping and handling costs

     445         374         71   

Provision for excess inventory

     3,540         402         3,138   
  

 

 

    

 

 

    

 

 

 
   $ 4,277       $ 913       $ 3,364   
  

 

 

    

 

 

    

 

 

 

For Iclusig sold in the nine-month periods ended September 30, 2014 and 2013, the majority of manufacturing costs incurred had previously been expensed. Therefore, the cost of inventory sold included limited manufacturing costs and the cost of packaging and labeling for commercial sales. If product related costs had not previously been expensed as research and development prior to receiving FDA approval or written-off, the cost to produce the Iclusig sold would have been approximately $769,000 and $510,000 respectively, and total cost of product revenue would have been approximately $4.8 million and $1.3 million, respectively, during the nine-month periods ended September 30, 2014 and 2013.

Cost of product revenue for the nine-month periods ended September 30, 2014 and 2013 also included a provision for excess inventory of $3.5 million and $402,000, respectively. During the nine-month period ended September 30, 2014, the provision was due to inventory produced during the period in accordance with minimum lot size requirements that was deemed to be excess upon receipt of the inventory and for units that are not expected to be sold.

 

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Research and Development Expenses

Research and development expenses decreased by $39.1 million, or 31 percent, to $87.9 million in the nine-month period ended September 30, 2014, compared to $127.1 million in the corresponding period in 2013, as follows:

 

     Nine Months Ended September 30,      Increase/  
In thousands    2014      2013      (decrease)  

Direct external expenses:

        

Iclusig

   $ 18,930       $ 49,419       $ (30,489

AP26113

     12,125         11,086         1,039   

All other R&D expenses

     56,893         66,571         (9,678
  

 

 

    

 

 

    

 

 

 
   $ 87,948       $ 127,076       $ (39,128
  

 

 

    

 

 

    

 

 

 

Direct external expenses for Iclusig were $18.9 million in the nine-month period ended September 30, 2014, a decrease of $30.5 million as compared to the corresponding period in 2013. The decrease is due to a decrease in clinical trial costs of $28.1 million and other costs of $2.4 million. The decreases in clinical trial costs relates primarily to the discontinuation of the Phase 3 EPIC trial and a pediatric trial in October 2013, the impact of clinical holds placed on certain trials including investigator sponsored trials and decreasing activities in the Phase 2 PACE trial. Other costs decreased due to reductions in or refunds of certain regulatory fees and completion of certain toxicology studies.

Direct external expenses for AP26113 were $12.1 million in the nine-month period ended September 30, 2014, an increase of $1.0 million as compared to the corresponding period in 2013. The increase in expenses for AP26113 was due primarily to an increase of $3.9 million in clinical trial costs offset in part by a decrease in contract manufacturing costs of $2.3 million. Clinical trial costs increased primarily due to activities and costs related to initiation of enrollment in the ALTA pivotal Phase 2 trial for AP26113. The decrease in contract manufacturing costs of $2.3 million was primarily due to decreased activities in process and formulation development of AP26113 as compared to 2013.

All other R&D expenses decreased by $9.7 million in the nine-month period ended September 30, 2014, as compared to the corresponding period in 2013. This decrease was due to a decrease in personnel costs of $8.6 million as well as decreases in general expenses of $1.2 million and lab expenses of $868,000 due to the reduction in workforce in the United States in November 2013. These decreases were offset in part by an increase in overhead expenses of $1.3 million due primarily to increased facility and related expenses.

Selling, General and Administrative Expenses

Selling, general and administrative expenses decreased by $9.6 million, or 9 percent, to $99.4 million in the nine-month period ended September 30, 2014, compared to $109.0 million in the corresponding period in 2013. Personnel expenses decreased by $4.0 million in the nine-month period ended September 30, 2014 as compared to the corresponding period in 2013, primarily due to the impact of the reduction of our workforce in the United States announced in the fourth quarter of 2013, offset in part by an increase in personnel expenses in Europe as we added personnel in connection with the launch of Iclusig in various European countries starting in the second half of 2013. Expenses for outside professional services decreased by $7.4 million in the nine-month period ended September 30, 2014 compared to the corresponding period in 2013 reflecting a reduction in sales and marketing initiatives and other consulting services that supported initial commercial launch of Iclusig in the United States in the first nine months of 2013, offset in part by an increase in legal expenses related to litigation matters. Overhead expenses increased by $1.7 million in the nine-month period ended September 30, 2014 as compared to the corresponding period in 2013, primarily due to increases in facility-related costs in Europe.

 

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Other Income (Expense)

Interest Income/Expense

Interest income decreased to $63,000 in the nine-month period ended September 30, 2014 from $120,000 in the corresponding period in 2013, as a result of a lower average balance of funds invested.

Interest expense increased to $4.3 million in the nine-month period ended September 30, 2014 from $118,000 in the corresponding period in 2013 as a result of interest expense related to our $200 million convertible note issuance completed in June 2014 offset in part by the payoff of our bank term loan in June 2014.

Foreign Exchange Gain (Loss)

We recognized net foreign exchange transaction gains of $836,000 in the nine-month period ended September 30, 2014 compared to gains of $16,000 in the corresponding period in 2013. The gains are a result of the impact of fluctuations in exchange rates on accounts denominated in foreign currencies.

Provision for Income Taxes

Our provision for income taxes for the nine-month period ended September 30, 2014 was $379,000 compared to $255,000 in the corresponding period in 2013, and reflects estimated taxes for certain foreign subsidiaries.

Operating Results

We reported a loss from operations of $153.1 million in the nine-month period ended September 30, 2014 compared to a loss from operations of $199.8 million in the corresponding period in 2013, a decrease of $46.7 million, or 23 percent. We also reported a net loss of $156.9 million in the nine-month period ended September 30, 2014, compared to a net loss of $200.0 million in the corresponding period in 2013, a decrease in net loss of $43.1 million or 22 percent, and a net loss per share of $0.84 and $1.09, respectively. The decrease in net loss is largely due to the decrease in our operating expenses as well as increases in license revenues described above.

Liquidity and Capital Resources

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

With sales of Iclusig in the United States from January through October 2013 and commencing again in January 2014, as well as sales in Europe since the second half of 2013, we have generated product revenues that have contributed to our cash flows. However, our cash flows generated from sales of Iclusig are not currently sufficient to fund operations and we will need to seek additional sources to fund our operations.

 

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Our balance sheet at September 30, 2014 includes property and equipment, net of $178.6 million, which represents an increase of $69.8 million from December 31, 2013. The increase is primarily due to the accounting, as described below, for our lease of new laboratory and office space in Cambridge, Massachusetts. In connection with the lease, the landlord is providing a tenant improvement allowance for the costs associated with the design, engineering and construction of tenant improvements. To the extent that the related costs exceed the allowance, we will be responsible to fund such excess. We do not anticipate any significant funding requirements in 2014. Any future funding requirements will be dependent on design, engineering and construction work, which will develop over time. As construction continues on the facility, the asset and corresponding facility lease obligation will continue to increase. Given our involvement in the design of tenant improvements for the leased facility, the lease establishes dates by which we are required to submit plans and drawings for tenant improvements consistent with the timeline for completion of the construction, including tenant improvements, and readiness of the facility for occupancy. In connection with the partial clinical hold of Iclusig imposed by the FDA and the temporary suspension of marketing and commercial distribution of Iclusig in the United States in October 2013, plans and drawings for the tenant improvements for this facility have not been approved by us and have not, at this time, been completed and submitted in accordance with the timelines specified in the lease. The delay of the submission of plans and drawings in accordance with the timelines specified in the lease will result in a delay in the completion of tenant improvements. Under the terms of the lease, if a delay in the completion of the tenant improvements results in a delay in the occupancy date for the facility, we will be required to commence rent payments for the facility prior to occupancy. We are currently in discussions with the landlord regarding revisions to our plans, the timelines related to submission of such plans and the completion of the tenant improvements and other matters in the lease. In addition, we have the right to sublease portions of the space and are currently planning to sublease approximately 170,000 square feet of the total 386,000 square feet available.

Sources of Funds

For the nine months ended September 30, 2014 and 2013, our sources of funds were as follows:

 

     Nine Months Ended
September 30,
 
In thousands    2014      2013  

Issuance of convertible debt and related transactions, net

   $ 177,281       $ —     

Sales/issuances of common stock:

     

In common stock offerings

     —           310,037   

Pursuant to stock option and purchase plans

     3,059         5,632   

Proceeds under lease financing obligations

     —           1,294   
  

 

 

    

 

 

 
   $ 180,340       $ 316,963   
  

 

 

    

 

 

 

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

In June 2014, we sold $200 million aggregate principal amount of convertible notes to investors through JPMorgan Securities, LLC and other initial purchasers in a private placement to qualified institutional buyers pursuant to Rule 144A under the Securities Act of 1933, as amended. Net proceeds of this offering were approximately $177.3 million after deducting fees and expenses of approximately $7.1 million and the cost of convertible bond hedges of $15.6 million (after such cost was partially offset by the proceeds to us from the sale of warrants). Details of the convertible notes, the bond hedges and the warrants are included in Note 7, “Long term debt”, to our condensed consolidated financial statements included in this Quarterly Report on Form 10-Q.

 

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On January 29, 2013, we sold 16,489,893 shares of our common stock in an underwritten public offering at a purchase price of $19.60 per share. Net proceeds of this offering, after underwriting discounts and commissions and expenses, were approximately $310.0 million.

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

Uses of Funds

The primary uses of our cash are to fund our operations and working capital requirements and, to a lesser degree, to repay our long-term debt and to invest in our property and equipment as needed for our business. For the nine-month periods ended September 30, 2014 and 2013, our uses of cash were as follows:

 

     Nine Months Ended
September 30,
 
In thousands    2014      2013  

Net cash used in operating activities

   $ 131,930       $ 170,313   

Repayment of long-term borrowings and capital leases

     9,100         1,590   

Increase in restricted cash

     —           6,133   

Investment in property and equipment

     2,475         5,624   

Payment of tax withholding obligations related to stock compensation

     716         3,216   
  

 

 

    

 

 

 
   $ 144,221       $ 186,876   
  

 

 

    

 

 

 

The net cash used in operating activities is comprised of our net losses, adjusted for non-cash expenses and working capital requirements. As noted above, our net loss for the nine-month period ended September 30, 2014 decreased by $43.1 million, as compared to the corresponding period in 2013, due primarily to the overall decrease in operating expenses of $45.3 million. Our net cash used in operating activities decreased by $38.4 million in the nine-month period ended September 30, 2014 as compared to the corresponding period in 2013, primarily reflecting the decrease in net loss offset in part by a decrease in working capital requirements.

Off-Balance Sheet Arrangements

As part of our ongoing business, we do not participate in transactions that generate relationships with unconsolidated entities for financial partnerships, such as entities often referred to as structured finance or special purpose entities which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. As of September 30, 2014, we maintained outstanding letters of credit of $11.3 million in accordance with the terms of our existing leases for our office and laboratory facilities, our new lease for office and laboratory space under construction, and for other purposes.

 

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Contractual Obligations

We have substantial fixed contractual obligations under the $200 million aggregate principal amount of convertible notes issued in June 2014, lease agreements, employment agreements, purchase commitments and benefit plans. These non-cancellable contractual obligations were comprised of the following as of September 30, 2014:

 

            Payments Due By Period  
In thousands    Total      In
2014
     2015
through
2017
     2018
through
2019
     After
2019
 

Long term debt

   $ 236,512       $ 3,887       $ 21,750       $ 210,875       $ —     

Lease agreements

     490,347         2,302         63,273         73,183         351,589   

Employment agreements

     17,467         1,999         15,468         —           —     

Purchase commitments

     37,443         2,714         22,081         3,750         8,898   

Other long-term obligations

     3,053         —           2,718         185         150   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total fixed contractual obligations

   $ 784,822       $ 10,902       $ 125,290       $ 287,993       $ 360,637   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Long-term debt reflects the payment at maturity of our $200 million of convertible notes issued in June 2014 and due on June 15, 2019. Interest on this debt accrues at a rate of 3.625% of the principal, or $7.25 million, annually and is payable in arrears in December and June of each year. We may not redeem the convertible notes prior to the maturity date and no “sinking fund” is provided for the convertible notes, which means that we are not required to periodically redeem or retire the convertible notes. Upon the occurrence of certain fundamental changes involving our company, holders of the convertible notes may require us to repurchase for cash all or part of their convertible notes at a repurchase price equal to 100% of the principal amount of the convertible notes to be repurchased, plus accrued and unpaid interest.

Leases consist of payments to be made on our building leases in Cambridge, Massachusetts and Lausanne, Switzerland, including future lease commitments related to leases executed for office and laboratory space in two buildings currently under construction in Cambridge. The minimum non-cancelable payments for the facility being constructed in Cambridge are included in the table above and include amounts related to the original lease and the lease amendment. We are the deemed owner for accounting purposes and have recognized a financing obligation associated with the cost of the buildings incurred to date for the buildings under construction in Cambridge, Massachusetts. In addition to minimum lease payments, the leases require us to pay additional amounts for our share of taxes, insurance, maintenance and operating expenses, which are not included in the above table. Employment agreements represent base salary payments under agreements with officers. Purchase commitments represent contractual commitments associated with certain clinical trial activities. Other long-term obligations are comprised primarily of our liability for unrecognized tax positions, which is classified in 2016, and our annual license commitments.

Liquidity

At September 30, 2014, we had cash and cash equivalents totaling $273.5 million and working capital of $216.5 million, compared to cash and cash equivalents totaling $237.2 million and working capital of $172.8 million at December 31, 2013. Of the $273.5 million of cash and cash equivalents at September 30, 2014, $15.5 million was in accounts held by our international subsidiaries. For the nine-month period ended September 30, 2014, we reported a net loss of $156.9 million and cash used in operating activities of $131.9 million. Based on our current operating plan, we believe that our cash and cash equivalents at September 30, 2014, together with anticipated sales of Iclusig, will be sufficient to fund our operations into the second half of 2016. This operating plan does not assume any further capital-raising activities or commercial transactions such as partnerships or distributorships.

 

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There is no assurance that we will be successful in commercializing Iclusig in the United States, in Europe or in other territories where we await regulatory approval or have yet to file for regulatory approval. We expect that the developments announced in October 2013 concerning the safety, marketing and commercial distribution and further clinical development of Iclusig in the United States (and the EMA’s review of Iclusig) will continue to adversely impact our efforts to commercialize Iclusig in CML and Ph+ ALL patients, and our ability to obtain product revenue will depend on our ability to continue to commercialize Iclusig in the United States, Europe and other territories, the success of our efforts to develop Iclusig in other patient populations and cancers, as well as the success of AP26113 and any other product candidates. If we are not successful in generating sufficient levels of sales from Iclusig and/or obtaining additional regulatory approvals, we will need to raise additional funding and/or revise our operating plans in order to conserve cash to fund our operations.

We have historically incurred operating losses and net losses related to our research and development activities. Although our R&D expenses have decreased in 2014 when compared to 2013, such decreases were due primarily to the impact of developments announced in October 2013 concerning the safety, marketing and commercial distribution and further clinical development of Iclusig on the timing of initiation and enrollment of patients in new and ongoing clinical trials of Iclusig and related costs. We expect that the lifting of the partial clinical holds previously placed on our clinical trials as well as the initiation of new studies will cause our R&D expenses for Iclusig to increase. For AP26113, we initiated enrollment in the ALTA pivotal trial of AP26113 in ALK-positive NSCLC patients in the first quarter of 2014. We also plan to continue to invest in discovery research and add to our pipeline of product candidates through these activities. We expect that our total research and development expenses will increase during the final fiscal quarter of 2014, compared to the quarter ended September 30, 2014, and into 2015 as we continue to treat more patients in our ongoing clinical trials, initiate additional clinical trials and conduct additional studies to support continued development of Iclusig and AP26113. We also expect that our selling, general and administrative expenses will increase during the final fiscal quarter of 2014, compared to the quarter ended September 30, 2014, and into 2015, as a result of the increased expenses related to supporting the marketing and distribution of Iclusig in the United States and Europe. There are many factors that will affect our level of spending on these activities, including our ability to successfully commercialize Iclusig in the United States and Europe, the number, size and complexity of, and rate of enrollment of patients in our continued or future clinical trials for Iclusig and AP26113, the extent of other development activities for Iclusig and AP26113, the progress of our preclinical and discovery research programs, the status of regulatory reviews and timing of potential additional regulatory approvals and commercial launch of Iclusig in additional countries in Europe and other markets and of our other product candidates, the size of the workforce and required systems and infrastructure necessary to support commercialization of Iclusig and our product candidates in multiple markets and other factors.

In October 2014, we entered into an agreement with Bellicum Pharmacetuicals, Inc., or Bellicum, to restructure and amend an existing license agreement between the companies for our cell-signaling technology as described in Note 20 to the accompanying financial statements. Under the terms of the agreement, we received a $15 million payment upon execution of the agreement and Bellicum agreed to pay us an additional $20 million by June 30, 2015 and $15 million by June 30, 2016 in exchange for granting Bellicum a fully paid-up license to this technology, return of shares of Bellicum common stock we own upon receipt of the second payment, and other consideration. Receipt of these payments will depend on Bellicum’s ability to raise additional funding and there can be no assurance that such payments will be made.

Under our license agreements with Medinol and ICON, we are eligible to receive milestone payments based on achievement of specified development, regulatory and/or sales objectives as well as royalty payments upon commercialization of products. The commencement of patient enrollment in Medinol’s clinical trials, along with Medinol’s submission of an investigational device exemption, or IDE, with the FDA, triggered milestone payments to us of $3.8 million in the first quarter of 2014. There can be no assurance that future regulatory approvals will be obtained or that we will receive any additional milestone or other payments under these license agreements.

 

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Until such time, if ever, that we generate revenues from sales of Iclusig and our product candidates sufficient to fund operations, we plan to continue to fund our operations by issuing common stock, debt or other securities in one or more public or private offerings, as market conditions permit or through the incurrence of additional debt from commercial lenders or other financing transactions. To the extent that we raise additional capital through the sale of equity or convertible debt securities, the ownership interest of our existing stockholders will be diluted, and the terms may include liquidation or other preferences that adversely affect the rights of our stockholders. Debt financing, if available, may involve agreements that include covenants limiting or restricting our ability to take specific actions, such as incurring debt, making capital expenditures or declaring dividends.

There can be no assurance that additional funds will be available when we need them on terms that are acceptable to us, or at all. If adequate funds are not available to us on a timely basis, we may be required to: (1) delay, limit, reduce or terminate preclinical studies, clinical trials or other clinical development activities or any pre-commercialization or commercialization activities for one or more of our approved products or product candidates; (2) delay, limit, reduce or terminate our discovery research or preclinical development activities; or (3) enter into licenses or other arrangements with third parties on terms that may be unfavorable to us or sell, license or relinquish rights to develop or commercialize our product candidates, approved products, technologies or intellectual property.

Securities Litigation Reform Act

Safe harbor statement under the Private Securities Litigation Reform Act of 1995: This Quarterly Report on Form 10-Q, contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements in connection with any discussion of future operating or financial performance are identified by the use of words such as “may,” “anticipate,” “estimate,” “expect,” “project,” “intend,” “plan,” “believe,” and other words and terms of similar meaning. Such statements are based on management’s expectations and are subject to certain factors, risks and uncertainties that may cause actual results, outcome of events, timing and performance to differ materially from those expressed or implied by such forward-looking statements. These risks and uncertainties include, but are not limited to, our ability to successfully, commercialize and generate profits from sales of Iclusig; competition from alternative therapies and acceptance of Iclusig by patients, physicians and third-party payors, particularly in light of changes to the product label; our ability to obtain approval for Iclusig outside of the United States and in additional countries in Europe and in additional indications; difficulties in forecasting sales or recognizing revenues for Iclusig; our reliance on third-party manufacturers, including sole-source suppliers, and/or specialty pharmacies and/or specialty distributors for the distribution of Iclusig ; the impact of adverse events or additional safety data, such as our announcements in October 2013 concerning a partial clinical hold of trials of Iclusig, safety warnings from the FDA, discontinuation of the EPIC trial and the temporary suspension of marketing and commercial distribution of Iclusig in the United States; the results of the EMA’s review of the benefits and risks of Iclusig; preclinical data and early-stage clinical data that may not be replicated in later-stage clinical studies or the receipt of additional adverse data as more patients are treated; the costs associated with our research, development, manufacturing and other activities; the conduct and results of preclinical and clinical studies of our product candidates; difficulties or delays in obtaining or maintaining regulatory approvals to market products; the timing of development and potential market opportunity for our products and product candidates; our reliance on our strategic partners, licensees and other key parties for the successful development, manufacturing and commercialization of our product candidates; the dilutive effective of conversions of some or all of our convertible notes due 2019, our ability to repay or refinance the notes, if not previously converted, and other impacts on our business, results of operations, financial condition or stock price as a result of this indebtedness and the related convertible note hedging and warrant transactions; the adequacy of our capital resources and the availability of

 

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additional funding; patent protection and third-party intellectual property claims; our failure to comply with extensive regulatory requirements; the occurrence of serious adverse events in patients being treated with Iclusig or our product candidates; the ability to manage our growth effectively; litigation, including our pending securities class action and derivative lawsuits; our operations in foreign countries; future capital needs; risks related to key employees, markets, economic conditions, health care reform, prices and reimbursement rates; and other factors detailed under the heading “Risk Factors” in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2013, and any updates to those risk factors contained in our subsequent periodic and current reports filed with the U.S. Securities and Exchange Commission. The information contained in this document is believed to be current as of the date of original issue. We do not intend to update any of the forward-looking statements after the date of this document to conform these statements to actual results or to changes in our expectations, except as required by law.

 

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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

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

Our investments are sensitive to interest rate risk. We believe, however, that the effect, if any, of reasonable possible near-term changes in interest rates on our financial position, results of operations and cash flows generally would not be material due to the short-term nature and high credit quality of these investments. At September 30, 2014, our available funds are invested solely in cash and cash equivalents and we do not have significant market risk related to interest rate movements.

In June 2014, we issued $200 million of convertible notes due June 15, 2019. The convertible notes have a fixed annual interest rate of 3.625% and we, therefore, do not have economic interest rate exposure on the convertible notes. However, the fair value of the convertible notes is exposed to interest rate risk. We do not carry the convertible notes at fair value on our balance sheet but present the fair value of the principal amount for disclosure purposes. Generally, the fair value of the convertible notes will increase as interest rates fall and decrease as interest rates rise. These convertible notes are also affected by the price and volatility of our common stock and will generally increase or decrease as the market price of our common stock changes. The estimated fair value of the $200 million face value convertible notes was $184.5 million at September 30, 2014.

 

ITEM 4. CONTROLS AND PROCEDURES

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

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

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

 

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PART II. OTHER INFORMATION

 

ITEM 1. LEGAL PROCEEDINGS

There have been no material developments in the legal proceedings disclosed in Part I, Item 3 of our Annual Report on Form 10-K for the fiscal year ended December 31, 2013, as updated in our Quarterly Report on Form 10-Q for the quarter ended June 30, 2014.

 

ITEM 1A. RISK FACTORS

There have been no material changes to the risk factors included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2013, as updated in our Quarterly Report on Form 10-Q for the quarter ended June  30, 2014.

ITEM 6. EXHIBITS

 

  10.1+    Form of Option Agreement under the ARIAD Pharmaceuticals, Inc. 2014 Long-Term Incentive Plan.
  10.2+    Form of Restricted Stock Unit Agreement under the ARIAD Pharmaceuticals, Inc. 2014 Long-Term Incentive Plan.
  10.3+    Form of Restricted Stock Agreement under the ARIAD Pharmaceuticals, Inc. 2014 Long-Term Incentive Plan.
  10.4+    Form of Performance Share Agreement under the ARIAD Pharmaceuticals, Inc. 2014 Long-Term Incentive Plan.
  31.1    Certification of the Chief Executive Officer.
  31.2    Certification of the Chief Financial Officer.
  32.1    Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101    The following materials from ARIAD Pharmaceutical, Inc.’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2014, formatted in XBRL (eXtensible Business Reporting Language): (i) Unaudited Condensed Consolidated Balance Sheets, (ii) Unaudited Condensed Consolidated Statements of Operations, (iii) Unaudited Condensed Consolidated Statements of Comprehensive Loss, (iv) Unaudited Condensed Consolidated Statements of Cash Flows, and (v) Notes to Unaudited Condensed Consolidated Financial Statements.

 

(+) Management contract or compensatory plan or arrangement.

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

 

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SIGNATURES

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

 

    ARIAD Pharmaceuticals, Inc.
    By:  

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

      Harvey J. Berger, M.D.
      Chairman and Chief Executive Officer
      (Principal executive officer)
    By:  

/s/ Edward M. Fitzgerald

      Edward M. Fitzgerald
      Executive Vice President, Chief Financial Officer
Date: November 7, 2014       (Principal financial officer and chief accounting officer)

 

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EXHIBIT INDEX

 

Exhibit
No.
   Title
  10.1+    Form of Option Agreement under the ARIAD Pharmaceuticals, Inc. 2014 Long-Term Incentive Plan.
  10.2+    Form of Restricted Stock Unit Agreement under the ARIAD Pharmaceuticals, Inc. 2014 Long-Term Incentive Plan.
  10.3+    Form of Restricted Stock Agreement under the ARIAD Pharmaceuticals, Inc. 2014 Long-Term Incentive Plan.
  10.4+    Form of Performance Share Agreement under the ARIAD Pharmaceuticals, Inc. 2014 Long-Term Incentive Plan.
  31.1    Certification of the Chief Executive Officer.
  31.2    Certification of the Chief Financial Officer.
  32.1    Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101    The following materials from ARIAD Pharmaceutical, Inc.’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2014, formatted in XBRL (eXtensible Business Reporting Language): (i) Unaudited Condensed Consolidated Balance Sheets, (ii) Unaudited Condensed Consolidated Statements of Operations, (iii) Unaudited Condensed Consolidated Statements of Comprehensive Loss, (iv) Unaudited Condensed Consolidated Statements of Cash Flows, and (v) Notes to Unaudited Condensed Consolidated Financial Statements.

 

(+) Management contract or compensatory plan or arrangement.

 

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