|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE
SECURITIES EXCHANGE ACT OF 1934
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____ to _____
Commission File Number: 0-21696
ARIAD Pharmaceuticals,
Inc.
(Exact name of
Registrant as specified in its charter)
| Delaware
(State or other jurisdiction of incorporation or organization) |
22-3106987
(I.R.S. Employer Identification No.) |
26 Landsdowne
Street, Cambridge, Massachusetts 02139
(Address of principal executive offices)
(Zip Code)
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.
Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).
The number of shares of the Registrant’s common stock outstanding as of November 1, 2004 was 52,617,423.
| In thousands, except share and per share data | September
30, 2004 |
December
31, 2003 |
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| ASSETS | ||||||
| Current assets: | ||||||
| Cash and cash equivalents | $ | 70,323 | $ | 51,674 | ||
| Marketable securities | 17,109 | 15,066 | ||||
| Inventory and other current assets | 1,391 | 534 | ||||
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| Total current assets | 88,823 | 67,274 | ||||
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| Property and equipment: | ||||||
| Leasehold improvements | 12,693 | 12,690 | ||||
| Equipment and furniture | 6,109 | 5,927 | ||||
| Construction in progress | 320 | |||||
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| Total | 19,122 | 18,617 | ||||
| Less accumulated depreciation and amortization | (17,755 | ) | (17,690 | ) | ||
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| Property and equipment, net | 1,367 | 927 | ||||
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| Intangible and other assets, net | 6,609 | 6,083 | ||||
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| Total assets | $ | 96,799 | $ | 74,284 | ||
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| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||
| Current liabilities: | ||||||
| Current portion of long-term debt | $ | 1,800 | $ | 1,800 | ||
| Accounts payable | 2,779 | 754 | ||||
| Accrued compensation and benefits | 265 | 466 | ||||
| Accrued product development expenses | 4,016 | 880 | ||||
| Other accrued expenses | 861 | 1,045 | ||||
| Deferred revenue - current portion | 606 | 742 | ||||
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| Total current liabilities | 10,327 | 5,687 | ||||
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| Long-term debt | 5,225 | 6,575 | ||||
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| Deferred revenue | 539 | 591 | ||||
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| Deferred executive compensation | 3,097 | 2,105 | ||||
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| Stockholders’ equity: | ||||||
| Common stock, $.001 par value; authorized, 145,000,000 shares in 2004 | ||||||
| and
60,000,000 shares in 2003; issued and outstanding, 52,614,241 shares in 2004 and 46,817,032 shares in 2003 |
53 | 47 | ||||
| Additional paid-in capital | 258,833 | 215,343 | ||||
| Deferred compensation | (328 | ) | (22 | ) | ||
| Accumulated other comprehensive (loss) income | (45 | ) | 1 | |||
| Accumulated deficit | (180,902 | ) | (156,043 | ) | ||
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| Total stockholders’ equity | 77,611 | 59,326 | ||||
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| Total liabilities and stockholders’ equity | $ | 96,799 | $ | 74,284 | ||
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See notes to unaudited condensed consolidated financial statements.
1
| In thousands, except share and per share data | Three
Months Ended September 30, |
Nine
Months Ended September 30, |
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| 2004 | 2003 | 2004 | 2003 | |||||||||
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| License revenue | $ | 185 | $ | 190 | $ | 563 | $ | 469 | ||||
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| Operating expenses: | ||||||||||||
| Research and development | 7,401 | 3,292 | 18,836 | 11,039 | ||||||||
| General and administrative | 2,386 | 1,292 | 7,169 | 3,414 | ||||||||
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| Total operating expenses | 9,787 | 4,584 | 26,005 | 14,453 | ||||||||
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| Loss from operations | (9,602 | ) | (4,394 | ) | (25,442 | ) | (13,984 | ) | ||||
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| Other income (expense): | ||||||||||||
| Interest income | 281 | 54 | 778 | 175 | ||||||||
| Interest expense | (58 | ) | (59 | ) | (195 | ) | (206 | ) | ||||
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| Total other income (expense) | 223 | (5 | ) | 583 | (31 | ) | ||||||
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| Net loss | $ | (9,379 | ) | $ | (4,399 | ) | $ | (24,859 | ) | $ | (14,015 | ) |
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| Net loss per common share (basic and diluted) | $ | (.18 | ) | $ | (.11 | ) | $ | (.49 | ) | $ | (.38 | ) |
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| Weighted average number of shares of common | ||||||||||||
| stock outstanding | 52,544,234 | 38,992,031 | 50,840,247 | 36,885,579 | ||||||||
See notes to unaudited condensed consolidated financial statements.
2
| Nine
Months Ended September 30, |
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| In thousands | 2004 | 2003 | ||||
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| Cash flows from operating activities: | ||||||
| Net loss | $ | (24,859 | ) | $ | (14,015 | ) |
| Adjustments to reconcile net loss to net cash used in operating activities: | ||||||
| Depreciation and amortization | 751 | 1,326 | ||||
| Non-cash executive compensation expense | 1,022 | 320 | ||||
| Stock-based compensation | 517 | 38 | ||||
| Increase (decrease) from: | ||||||
| Inventory and other current assets | (857 | ) | (70 | ) | ||
| Other assets | 25 | 29 | ||||
| Accounts payable | 2,025 | (1,140 | ) | |||
| Accrued compensation and benefits | (201 | ) | (152 | ) | ||
| Accrued product development expenses | 3,136 | (376 | ) | |||
| Other accrued expenses | (184 | ) | (747 | ) | ||
| Deferred revenue | (188 | ) | 1,141 | |||
| Deferred executive compensation | (137 | ) | (108 | ) | ||
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| Net cash used in operating activities | (18,950 | ) | (13,754 | ) | ||
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| Cash flows from investing activities: | ||||||
| Proceeds from sales and maturities of marketable securities | 16,590 | 10,500 | ||||
| Purchases of marketable securities | (18,534 | ) | (29,732 | ) | ||
| Purchase of property and equipment | (761 | ) | (294 | ) | ||
| Investment in intangible assets | (516 | ) | (411 | ) | ||
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| Net cash used in investing activities | (3,221 | ) | (19,937 | ) | ||
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| Cash flows from financing activities: | ||||||
| Proceeds from long-term debt borrowings | 7,500 | |||||
| Repayment of borrowings | (1,350 | ) | (7,665 | ) | ||
| Proceeds from issuance of common stock, net of issuance costs | 40,001 | 9,338 | ||||
| Proceeds from issuance of stock pursuant to stock option and purchase plans | 2,169 | 370 | ||||
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| Net cash provided by financing activities | 40,820 | 9,543 | ||||
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| Net increase (decrease) in cash and cash equivalents | 18,649 | (24,148 | ) | |||
| Cash and cash equivalents, beginning of period | 51,674 | 26,850 | ||||
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| Cash and cash equivalents, end of period | $ | 70,323 | $ | 2,702 | ||
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See notes to unaudited condensed consolidated financial statements.
3
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, 2004, the results of operations for the three-month and nine-month periods ended September 30, 2004 and 2003 and cash flows for the nine-month periods ended September 30, 2004 and 2003. The results of operations for the nine-month period ended September 30, 2004 are not necessarily indicative of the results to be expected for the full year. These financial statements should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2003, which includes consolidated financial statements and notes thereto for the years ended December 31, 2003, 2002 and 2001.
The Company has classified its marketable securities as available-for-sale and, accordingly, carries such securities at aggregate fair value. At September 30, 2004, all of the Company’s marketable securities consisted of United States agency securities.
At September 30, 2004, the aggregate fair value and amortized cost of the Company’s marketable securities were $17.1 million. Gross unrealized gains and losses were $0 and $45,000, respectively, at September 30, 2004.
At December 31, 2003, the aggregate fair value and amortized cost of the Company’s marketable securities were $15.1 million. Gross unrealized gains and losses were $1,000 and $0, respectively, at December 31, 2003.
Gains and losses on investment security transactions are reported on the specific-identification method. Realized gains and losses on sales of marketable securities were not material during the nine months ended September 30, 2004. Changes in market values resulted in an increase in net unrealized loss of $46,000 for the nine-month period ended September 30, 2004.
Intangible and other assets, net, was comprised of the following at September 30, 2004 and December 31, 2003:
| In thousands | 2004 | 2003 | |||||
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| Capitalized patent and license costs | $ | 8,582 | $ | 8,122 | |||
| Less accumulated amortization | (3,891 | ) | (3,369 | ) | |||
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| 4,691 | 4,753 | ||||||
| Unvested deferred executive compensation (Note 5) | 1,863 | 1,251 | |||||
| Other | 55 | 79 | |||||
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| $ | 6,609 | $ | 6,083 | ||||
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4
The cost of purchased patents, costs incurred in filing patent applications and certain license fees are capitalized. Capitalized costs related to issued patents are amortized over a period not to exceed seventeen years or the remaining life of the patent, whichever is shorter, using the straight-line method. Capitalized license fees are amortized over the period to which they relate. Amortization expense amounted to $522,000 and $506,000 for the nine months ended September 30, 2004 and 2003, respectively. In addition, capitalized patent and license costs are expensed when it is determined that such technology will not be pursued. The Company expensed $25,000 and $0 for the three months ended September 30, 2004 and 2003, respectively, and $57,000 and $484,000 for the nine months ended September 30, 2004 and 2003, respectively, in accordance with this policy.
Long-term debt was comprised of the following at September 30, 2004 and December 31, 2003:
| In thousands | 2004 | 2003 | |||||
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| Bank
term note at prime rate or LIBOR +2% (average of 3.51% at September 30, 2004) |
$ | 7,025 | $ | 8,375 | |||
| Less current portion | (1,800 | ) | (1,800 | ) | |||
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| Long-term debt | $ | 5,225 | $ | 6,575 | |||
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The loan is secured by a lien on all assets of the Company excluding intellectual property, which the Company has agreed not to pledge to any other party. This loan is payable in monthly installments of $150,000, plus interest, with a balloon payment of $2.7 million in March 2007. The loan requires the Company to maintain a minimum of $12.0 million in unrestricted cash, cash equivalents and investments. The agreement also contains certain covenants that restrict additional indebtedness, additional liens, sales of assets and dividends, distributions or repurchases of common stock.
The aggregate future principal payments of the above debt agreement are $450,000 for the remainder of 2004, $1.8 million in each of 2005 and 2006, and $2.975 million in 2007.
Under the Company’s deferred executive compensation plan, participants may be granted options to purchase shares of certain designated mutual funds at a discount equal to the amount of the award. The options vest equally over four years. When the Company awards grants under the plan to participants, the Company records an asset and a liability equal to the fair value of the unvested grant at that date. The asset is amortized over the vesting period of four years. The liability is adjusted quarterly to reflect changes in the fair value of the underlying mutual funds, with a charge or credit included in the determination of net income or loss, as well as any payments made under the plan. In September 2004, the Company approved the 2004 grants to certain officers. The Company recorded an asset and liability of $1.0 million which represents the fair value of the grant at inception. Total expense related to this plan amounted to $516,000 and $320,000 for the nine months ended September 30, 2004 and 2003, respectively.
Net loss per share amounts have been computed based on the weighted average number of common shares outstanding during each period. Because of the net loss reported in each period, diluted and basic per share amounts are the same. For the nine months ended September 30, 2004 and September 30, 2003, options to purchase 6,095,508 and 5,655,165 shares of common stock, respectively, were not included in the computation of net loss per share, because the effect would have been anti-dilutive.
5
On December 19, 2003, the Company filed a shelf registration statement with the United States Securities and Exchange Commission (“SEC”) registering 7,000,000 shares of its common stock. The filing was declared effective on January 9, 2004. On March 29, 2004, the Company sold 5,060,000 of these registered shares in an underwritten public offering at a price of $8.50 per share for net proceeds of $40.0 million. At September 30, 2004, the Company has 1,940,000 shares that remain available for issuance under the shelf registration.
Lehman Brothers served as lead underwriter in the above noted public offering for which they received $1,399,090 in underwriting discounts and commissions. The spouse of one of our Directors is a vice chairman of Lehman Brothers.
The Company uses the intrinsic value method to measure compensation expense associated with grants of stock options to employees. On a pro forma basis, had the Company used the fair value method to measure compensation for all stock options, the net loss and net loss per share would have been reported as follows:
| In thousands (except share and per share data) | Three
Months Ended September 30, |
Nine
Months Ended September 30, |
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| 2004 | 2003 | 2004 | 2003 | |||||||||
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| Net loss, as reported | $ | (9,379 | ) | $ | (4,399 | ) | $ | (24,859 | ) | $ | (14,015 | ) |
| Effect of stock options if valued at fair value | (994 | ) | (1,187 | ) | (3,096 | ) | (2,852 | ) | ||||
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| Pro forma net loss | $ | (10,373 | ) | $ | (5,586 | ) | $ | (27,955 | ) | $ | (16,867 | ) |
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| Net loss per share, as reported | $ | (.18 | ) | $ | (.11 | ) | $ | (.49 | ) | $ | (.38 | ) |
| Effect of stock options if valued at fair value | (.02 | ) | (.03 | ) | (.06 | ) | (.08 | ) | ||||
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| Pro forma net loss per share | $ | (.20 | ) | $ | (.14 | ) | $ | (.55 | ) | $ | (.46 | ) |
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The above disclosure, required by Statement of Financial Accounting Standard (“SFAS”) No. 123, includes only the effect of grants made subsequent to January 1, 1996. For purposes of calculating the above disclosure, the fair value of options on their grant date was measured using the Black-Scholes option pricing model. Key assumptions used to apply this pricing model included a risk-free interest rate of 3.7% for 2004, and 3.5% for 2003, expected lives of the option grants ranging from one to six years and expected rates of volatility for the underlying stock of 115% for both 2004 and 2003. Using this model, the weighted average fair value per option for all options granted to employees in 2004 and 2003 was $6.00 and $3.26, respectively.
At December 31, 2003, the Company’s subsidiary, ARIAD Gene Therapeutics, Inc. (“AGTI”), had 5,195,779 shares of its common stock outstanding. Of this amount, the Company owned 4,157,143 shares or 80%, which allows it to consolidate for tax purposes the results of operations of AGTI with those of the Company. On January 17, 2004, stock options for a total of 87,428 shares of AGTI common stock held by minority interest holders were exercised prior to their expiration on that date. In order to maintain its 80% ownership interest in AGTI, the Company acquired an additional 351,909 shares of AGTI common stock on January 13, 2004. The purchase price of such shares was approximately $8.8 million, effected through the reduction of intercompany debt, representing the estimated fair value of such shares, and is subject to adjustment in certain circumstances.
6
After taking into account the above transactions, AGTI has a total of 5,635,116 shares of its common stock outstanding of which 80% are owned by ARIAD, 14% are owned by Stanford University, Harvard University, consultants and inventors, and 6% are owned by certain current members of the Company’s management and Board of Directors. Approximately 75% of the shares of common stock owned by the minority interest holders are subject to restrictions on transfer and a right of first refusal held by AGTI to repurchase such shares of AGTI common stock before sale of such shares to another purchaser. There are currently no outstanding options to purchase AGTI common stock, and no shares available for grant of additional options.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
We are engaged in the discovery and development of breakthrough medicines to treat cancer by regulating cell signaling with small molecules. Breakthrough medicines are products, created de novo, that may be used to treat diseases in innovative ways. We are developing a comprehensive approach to treating patients with aggressive and advanced-stage disease for whom current therapies are inadequate. We have also developed a proprietary portfolio of cell-signaling regulation technologies, our ARGENT technology, to control intracellular processes with small molecules, providing versatile tools for use in cell biology, functional genomics, proteomics and drug discovery research and useful in regulated protein and cell therapy. Additionally, we have an exclusive license to pioneering technology and patents related to the discovery, development, and use of drugs to regulate NF-(kappa)B cell-signaling activity, which can be used to treat medically important disorders, including inflammation, sepsis, cancer and osteoporosis.
Since our inception in 1991, we have devoted substantially all of our resources to our research and development programs. We receive no revenue from the sale of pharmaceutical products, and most of our revenue to date has been received in connection with our past relationship with Aventis Pharmaceuticals, Inc. (“Aventis”), which is now part of the Sanofi-Aventis Group. Except for the gain on the sale of our fifty percent interest in the Hoechst-ARIAD Genomics Center LLC (“Genomics Center”) to Aventis in December 1999, which resulted in net income for fiscal 1999, we have not been profitable since inception. We expect to incur substantial operating losses for the foreseeable future, primarily due to costs associated with our pharmaceutical product development programs, including costs for clinical trials and product manufacturing, personnel and our intellectual property. We expect that losses will fluctuate from quarter to quarter and that these fluctuations may be substantial. As of September 30, 2004, we had an accumulated deficit of $180.9 million, cash, cash equivalents and marketable securities of $87.4 million and working capital of $78.5 million.
Our operating losses are primarily due to the costs associated with our pharmaceutical product development programs, personnel and our intellectual property. As our product development programs progress, we incur significant costs for toxicology and pharmacology studies, product development, manufacturing, clinical trials and regulatory support. These costs can vary significantly from quarter to quarter depending on the number of product candidates in development, the stage of development of each product candidate, the number of patients enrolled in and complexity of clinical trials and other factors. Costs associated with our intellectual property include legal fees and other costs to prosecute, maintain, protect and enforce our intellectual property, which can fluctuate from quarter to quarter depending on the status of patent issues being pursued.
7
Because we currently receive no revenue from the sale of pharmaceutical products and receive only limited license revenue, we have most recently relied primarily on the capital markets as our source of funding. We also utilize long-term debt to supplement our funding, particularly as a means to fund investments in property and equipment and infrastructure needs. In addition, we may seek funding from collaborations with pharmaceutical, biotechnology and/or medical device companies for development and commercialization of our product candidates. These collaborations may take the form of licensing arrangements, co-development or joint venture arrangements or other structures. At this point in time, we have not provided any rights to any outside parties for the commercialization or marketing of our product candidates. If funding from these various sources is unavailable on reasonable terms, we may be required to reduce our operating expenses in order to conserve cash and capital by delaying, scaling back or eliminating one or more of our product development programs.
Our financial position and results of operations are affected by subjective and complex judgments, particularly in the areas of stock-based compensation to consultants, deferred compensation benefits for executives and key employees, and the carrying value of intangible assets.
In determining expense related to stock-based compensation to consultants and the deferred executive compensation plan, recorded balances are adjusted at each reporting period to reflect fair value utilizing the Black-Scholes option pricing model that takes into account, among other things, the price and volatility of our common stock or other underlying securities, a risk-free discount rate, and an estimate of the life of the option contract. Fluctuations in those factors can result in uneven expense charges or credits to our statements of operations. If, for example, the price and volatility of our common stock were 10% greater as of September 30, 2004, we would have recognized an increase of $8,000 in stock-based compensation to consultants for the nine months ended September 30, 2004. Similarly, if the market prices of the underlying securities in our executive deferred compensation plan were 10% higher at September 30, 2004, we would have recognized an additional $184,000 in compensation expense for the nine months ended September 30, 2004.
At September 30, 2004, we reported $4.7 million of intangible assets consisting of costs related primarily to purchased and issued patents, patent applications and licenses, net of accumulated amortization. These costs are being amortized over the estimated useful lives of the underlying patents or licenses. Changes in these lives or a decision to discontinue using the technologies could result in material changes to our balance sheet and statement of operations. For example, for the nine months ended September 30, 2004 and 2003, we expensed $57,000 and $484,000, respectively, of unamortized costs related to certain intangible assets which we are not actively developing any longer. We have concluded that the carrying value of our remaining intangible assets is not currently impaired because they are utilized in our product development programs and/or continue to be viable technologies for collaborations or licensing efforts which we continue to pursue. If we were to abandon the underlying technologies or terminate our efforts to pursue collaborations or license agreements, we may be required to write off a portion of the carrying value of our intangible assets.
We recognized revenue of $185,000 for the quarter ended September 30, 2004 compared to $190,000 for the corresponding period in 2003. The revenue is generated from license agreements related to our ARGENT cell-signaling regulation technology.
8
Research and development expenses amounted to $7.4 million for the quarter ended September 30, 2004 compared to $3.3 million for the corresponding period in 2003, an increase of $4.1 million or 125%. The largest component of our research and development expenses is direct external costs associated with our product development programs. These expenses increased by $3.3 million in the quarter ended September 30, 2004 as compared to the corresponding period in 2003. Such expenses for our lead product candidate, AP23573, increased as a result of enrollment in clinical trials and manufacturing costs to support the trials, as well as product and process development work to advance the product towards commercialization. Direct external expenses for our other product development programs, in pre-clinical testing, did not change materially from the quarter ended September 30, 2003 to the quarter ended September 30, 2004.
Research and development expenses also increased due to higher personnel and related costs ($544,000), as a result of an increase in the number of personnel and salary adjustments, as well as miscellaneous increases in supplies, consulting fees and travel expenses in support of our research and development programs.
General and administrative expenses amounted to $2.4 million for the quarter ended September 30, 2004, compared to $1.3 million for the corresponding period in 2003, an increase of $1.1 million or 85%. Professional fees increased by $503,000 to $997,000 for the quarter ended September 30, 2004 as compared to $494,000 for the corresponding period in 2003 due primarily to costs related to our patent infringement litigation with Eli Lilly and Company (“Lilly”). The increase in general and administrative expenses was also due to the awarding in January 2004 of restricted stock grants, in lieu of stock options, to our Chief Executive Officer and each of the other members of our Board of Directors. The value of these awards is being amortized to expense throughout 2004. In the quarter ended September 30, 2004, we recorded an expense of $324,000 related to these awards. Other increases in general and administrative expenses included increased personnel costs due to salary adjustments and hiring initiatives, and professional fees related to compliance with the internal control requirements of the Sarbanes-Oxley Act of 2002, and miscellaneous increases in insurance, state taxes and travel expenses.
We expect that our operating expenses will increase over the next twelve months due to the expansion of clinical trials and related product development and manufacturing costs for our lead product candidate, AP23573, and the continued development of our pre-clinical product candidates, including the conduct of pharmacology and toxicology studies. Operating expenses may fluctuate from quarter to quarter. The actual amount of any increase in operating expenses will depend on the progress of our product development programs, including pre-clinical and clinical studies and product manufacturing, the status of our patent infringement litigation with Lilly and our ability to raise funding through equity offerings, partnerships, licensing, joint ventures or other sources.
Interest income increased by $227,000 to $281,000 for the quarter ended September 30, 2004 compared to $54,000 for the corresponding period in 2003, primarily as a result of a higher level of funds invested during the third quarter of 2004.
Interest expense decreased to $58,000 for the quarter ended September 30, 2004 from $59,000 for the corresponding period in 2003. The decrease resulted primarily from lower loan balances during the third quarter of 2004.
9
We reported a loss from operations of $9.6 million for the quarter ended September 30, 2004 compared to a loss from operations of $4.4 million for the corresponding period in 2003, an increase in loss of $5.2 million, or 118%. We expect operating losses will be substantial for the foreseeable future as our product development activities continue, and these losses are expected to fluctuate from quarter to quarter as a result of differences in the timing and composition of revenue earned and expense incurred.
We reported a net loss of $9.4 million for the quarter ended September 30, 2004 compared to a net loss of $4.4 million for the corresponding period in 2003, an increase in net loss of $5.0 million or 113%, and a net loss per share of $.18 and $.11 (basic and diluted), respectively.
We recognized revenue of $563,000 for the nine months ended September 30, 2004 compared to $469,000 for the corresponding period in 2003. The increase in revenue is due to license agreements into which we entered in the first and second quarters of 2003 related to our ARGENT cell-signaling regulation technology.
Research and development expenses increased to $18.8 million for the nine months ended September 30, 2004 compared to $11.0 million for the corresponding period in 2003, an increase of $7.8 million or 71%. Direct external costs associated with our product development programs increased by $7.4 million for the nine months ended September 30, 2004 as compared to the corresponding period in 2003. Such expenses for our lead product candidate, AP23573, increased as a result of enrollment in clinical trials and manufacturing costs to support the trials, as well as product and process development work to advance the product towards commercialization. Direct external expenses for our other product development programs, in preclinical testing, also increased due to the conduct of toxicology and pharmacology studies.
Research and development expenses also increased due to higher personnel and related costs ($763,000) as a result of an increase in the number of personnel and salary adjustments and miscellaneous increases in supplies, consulting fees and travel expenses in support of our research and development programs. Increases in research and development expenses were partially offset by decreases in write-offs of capitalized license and patent costs ($427,000) and termination or buy-out of equipment leases in 2003 ($229,000).
General and administrative expenses increased to $7.2 million for the nine months ended September 30, 2004, compared to $3.4 million for the corresponding period in 2003, an increase of $3.8 million or 110%. Professional fees increased by $2.2 million to $3.2 million for the nine months ended September 30, 2004 as compared to $1.0 million for the corresponding period in 2003 due primarily to costs related to our patent infringement litigation with Lilly. The increase in general and administrative expenses was also due to the awarding in January 2004 of restricted stock grants, in lieu of stock options, to our Chief Executive Officer and each of the other members of our Board of Directors. In the nine months ended September 30, 2004, we recorded an expense of $973,000 related to these awards. Other increases in general and administrative expenses included salary adjustments, professional fees related to business development and other corporate initiatives, including compliance with the internal control requirements of the Sarbanes-Oxley Act of 2002, and miscellaneous increases in insurance, state taxes and travel expenses.
10
Interest income increased by $603,000 to $778,000 for the nine months ended September 30, 2004 compared to $175,000 for the corresponding period in 2003, primarily as a result of a higher level of funds invested during the third quarter of 2004.
Interest expense decreased to $195,000 for the nine months ended September 30, 2004 from $206,000 for the corresponding period in 2003. The decrease resulted primarily from lower loan balances during the nine months ended September 30, 2004.
We reported a loss from operations of $25.4 million for the nine months ended September 30, 2004 compared to a loss from operations of $14.0 million for the corresponding period in 2003, an increase in loss of $11.4 million, or 82%. We expect operating losses will be substantial for the foreseeable future as our product development activities continue, and these losses are expected to fluctuate from quarter to quarter as a result of differences in the timing and composition of revenue earned and expense incurred.
We reported a net loss of $24.9 million for the nine months ended September 30, 2004 compared to a net loss of $14.0 million for the corresponding period in 2003, an increase in net loss of $10.9 million or 77%, and a net loss per share of $.49 and $.38 (basic and diluted), respectively.
We have financed our operations and investments primarily through registered direct and underwritten public offerings of our equity securities and through research revenue and other transactions resulting from our collaboration with Aventis from 1995 to 1999, including the sale of our 50% interest in the Genomics Center in December 1999. In addition, we have financed our operations through the issuance of long-term debt, operating and capital lease transactions, certain licensing transactions, interest income, and other sources.
During the nine months ended September 30, 2004, we realized net cash from sales and issuances of our common stock of $42.2 million. This was primarily the result of the completion of an underwritten public offering on March 29, 2004 under which we sold 5,060,000 shares of our common stock at $8.50 per share for net proceeds of $40.0 million. In addition, we realized $2.2 million during the nine months ended September 30, 2004 from the issuance of common stock pursuant to our stock option and employee stock purchase plans.
The primary uses of our cash are to fund our operations and working capital requirements and, to a lesser degree, to repay our long-term debt, to invest in intellectual property and to purchase equipment as needed for our business. Our uses of cash were as follows:
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| Nine
Months Ended September 30, |
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| In thousands | 2004 | 2003 | ||||
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| Net cash used in operating activities | $ | 18,950 | $ | 13,754 | ||
| Repayment of long-term debt borrowings, net of proceeds | 1,350 | 165 | ||||
| Investment in intangible assets | 516 | 411 | ||||
| Purchase of equipment | 761 | 294 | ||||
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| $ | 21,577 | $ | 14,624 | |||
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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 months ended September 30, 2004 increased by $10.9 million as compared to the corresponding period in 2003 due to the costs of advancing our product candidates through pre-clinical and clinical phases of development and the costs related to our litigation with Lilly, offset in part by certain non-recurring costs in 2003 and savings in other operating expenses. However, as a result of increases in our accounts payable and accrued expenses from December 31, 2003 to September 30, 2004, our net cash used in operations increased by only $5.2 million for the nine months ended September 30, 2004 compared with the corresponding period of 2003. Also, as noted above, we expect that our loss from operations will increase throughout 2004 and into 2005 due to continued progress in development of our product candidates, and we expect that our net cash used in operations will increase accordingly. We also expect that our investment in intangible assets, consisting of our intellectual property, and our capital expenditures will also increase in support of our product development activities.
We have substantial fixed contractual obligations under various research and licensing agreements, consulting and employment agreements, lease agreements and long-term debt instruments. These contractual obligations were comprised of the following as of September 30, 2004:
| In thousands | Total | Payments Due By Period | |||||||||||||
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In 2004 |
2005 through 2007 |
2008 through 2009 |
After 2009 |
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| Long-term debt | $ | 7,025 | $ | 450 | $ | 6,575 | $ | — | $ | — | |||||
| Operating leases, net of sub-leases | 1,549 | 128 | 1,421 | — | — | ||||||||||
| Other long-term obligations * | 7,613 | 759 | 6,259 | 230 | 365 | ||||||||||
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| Total fixed contractual obligations | $ | 16,187 | $ | 1,337 | $ | 14,255 | $ | 230 | $ | 365 | |||||
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| * | Other long-term obligations are comprised primarily of employment agreements and licensing agreements. |
At September 30, 2004, we had cash, cash equivalents and marketable securities totaling $87.4 million and working capital of $78.5 million compared to cash, cash equivalents and marketable securities totaling $66.7 million and working capital of $61.6 million at December 31, 2003.
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We will require substantial additional funding for our research and development programs, including pre-clinical development and clinical trials, for operating expenses including intellectual property protection and enforcement, for the pursuit of regulatory approvals, and for establishing manufacturing, marketing and sales capabilities. In order to fund our needs, we may (1) sell common stock through public or private offerings as market conditions permit, (2) enter into partnerships for our product candidates, or (3) license our cell-signaling technologies, including our ARGENT and NF-(kappa)B intellectual property portfolios. We have available 1,940,000 million shares of our common stock under a currently effective shelf registration statement which may be used to raise capital. However, adequate funding may not be available when needed or on terms acceptable to us.
Based on our current operating plans, we believe that our currently available funds will be adequate to satisfy our capital and operating requirements through 2006. However, there can be no assurance that changes in our research and development plans, litigation or other future events affecting our revenues or operating expenses will not result in the earlier depletion of our funds.
Safe harbor statement under the Private Securities Litigation Reform Act of 1995: Except for the historical information contained in this Quarterly Report on Form 10-Q, the matters discussed herein are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements are identified by the use of words such as “anticipate,” “estimate,” “expect,” “project,” “intend,” “plan,” “believe,” and other words and terms of similar meaning in connection with any discussion of future operating or financial performance. Such statements are based on management’s current 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 include, but are not limited to, risks and uncertainties regarding our ability to accurately estimate the actual research and development expenses and other costs associated with the preclinical and clinical development of our product candidates, the adequacy of our capital resources and the availability of additional funding, risks and uncertainties regarding our ability to successfully conduct preclinical and clinical studies of its product candidates, risks and uncertainties that clinical trial results at any phase of development may be adverse or may not be predictive of future result or lead to regulatory approval of any of our product candidates, and risks and uncertainties relating to regulatory oversight, intellectual property claims, the timing, scope, cost and outcome of legal proceedings, future capital needs, key employees, dependence on our collaborators and manufacturers, markets, economic conditions, products, services, prices, reimbursement rates, competition and other risks detailed under the heading “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2003, which has been filed with the Securities and Exchange Commission. As a result of these and other factors, actual events or results could differ materially from those described herein. We are not under any obligation, and we expressly disclaim any obligation, to update or alter any forward-looking statements, whether as a result of new information, future events or otherwise.
We invest our available funds in accordance with our investment policy to preserve principal, maintain proper liquidity to meet operating needs and maximize yields. Our investment policy specifies credit quality standards for our investments and limits the amount of credit exposure to any single issue, issuer or type of investment.
We invest cash balances in excess of operating requirements first in short-term, highly liquid securities, with maturities of 90 days or less, and money market accounts. Depending on our level of available funds and our expected cash requirements, we may invest a portion of our funds in marketable securities, consisting generally of corporate debt and U.S. government and agency securities. Maturities of our marketable securities are generally limited to periods necessary to fund our liquidity needs and may not in any case exceed three years.
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At September 30, 2004, the maturities of our marketable securities did not exceed six months. These securities are classified as available-for-sale. Available-for-sale securities are recorded on the balance sheet at fair market value with unrealized gains or losses reported as a separate component of stockholders’ equity (accumulated other comprehensive income or loss). Gains and losses on marketable security transactions are reported on the specific-identification method. Interest income is recognized when earned. A decline in the market value of any available-for-sale security below cost that is deemed other than temporary results in a charge to earnings and establishes a new cost basis for the security.
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 current short-term nature of these investments. In particular, at September 30, 2004, because our available funds are invested solely in short-term securities with maturities of six months or less, our risk of loss due to changes in interest rates is not material.
We have an executive compensation plan which provides participants, in lieu of a cash bonus, an option to purchase certain designated mutual funds at a discount equal to the amount of the bonus. These deferred compensation arrangements are accounted for as derivatives under SFAS No. 133. The fair value of the derivatives is reflected as a liability on our balance sheet. As of September 30, 2004, in the event of a hypothetical 10% increase (decrease) in the fair market value of the underlying mutual funds and after giving effect to the related volatility change, we would incur approximately $184,000 of additional (less) compensation expense.
At September 30, 2004, we had a $7.0 million bank term note which bears interest at prime or, alternatively, LIBOR + 2%. This note is sensitive to interest rate risk. In the event of a hypothetical 10% increase in the interest rate on which the loan is based (42.5 basis points), we would incur approximately $26,000 of additional interest expense per year based on expected balances over the next twelve months.
(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 Exchange Act Rules 13a-15(e) and 15d-15(e)) 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 adequate and effective to ensure that material information relating to us, including our consolidated subsidiaries, was made known to them by others within those entities, 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 the last fiscal quarter, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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The information contained in Part II, Item 1 of our Quarterly Report on Form 10-Q for the quarter ended June 30, 2004 (File No. 0-21826) is incorporated herein by reference.
| 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. |
| ARIAD and the ARIAD logo are our registered trademarks and ARGENT is our trademark. The domain name and website address www.ariad.com, and all rights thereto, are registered in the name of, and owned by, ARIAD. The information in our website is not intended to be part of this Quarterly Report on Form 10-Q. We include our website address herein only as an inactive textual reference and do not intend it to be an active link to our website. |
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Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Date: November 8, 2004 |
ARIAD Pharmaceuticals,
Inc. (Registrant) By: /s/ Harvey J. Berger, M.D. —————————————— Harvey J. Berger, M.D. Chairman and Chief Executive Officer By: /s/ Edward M. Fitzgerald —————————————— Edward M. Fitzgerald Senior Vice President and Chief Financial Officer (Duly authorized officer, principal financial officer and chief accounting officer) |
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| Exhibit No. | Title |
| 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. |
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