Attached files
file | filename |
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EX-32.1 - EXHIBIT 32.1 - HUMAN GENOME SCIENCES INC | c03614exv32w1.htm |
EX-12.1 - EXHIBIT 12.1 - HUMAN GENOME SCIENCES INC | c03614exv12w1.htm |
EX-10.1 - EXHIBIT 10.1 - HUMAN GENOME SCIENCES INC | c03614exv10w1.htm |
EX-32.2 - EXHIBIT 32.2 - HUMAN GENOME SCIENCES INC | c03614exv32w2.htm |
EX-31.2 - EXHIBIT 31.2 - HUMAN GENOME SCIENCES INC | c03614exv31w2.htm |
EX-31.1 - EXHIBIT 31.1 - HUMAN GENOME SCIENCES INC | c03614exv31w1.htm |
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
OF THE SECURITIES EXCHANGE ACT OF 1934
For quarterly period ended June 30, 2010 | Commission File Number 001-14169 |
HUMAN GENOME SCIENCES, INC.
(Exact name of registrant)
Delaware | 22-3178468 | |
(State of organization) | (I.R.S. Employer Identification Number) |
14200 Shady Grove Road, Rockville, Maryland 20850-7464
(Address of principal executive offices and zip code)
(Address of principal executive offices and zip code)
(301) 309-8504
(Registrants telephone number)
(Registrants telephone number)
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 þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period
that the registrant was required to submit and post such files).
Yes o No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer or a smaller reporting company. See the definitions of large accelerated
filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
Large accelerated filer o | Accelerated filer þ | Non-accelerated filer o | Smaller reporting company o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act).
Yes o No þ
The number of shares of the registrants common stock outstanding on June 30, 2010 was 188,156,651.
TABLE OF CONTENTS
Page | ||||||||
Number | ||||||||
Item 1. Financial Statements |
||||||||
3 | ||||||||
4 | ||||||||
5 | ||||||||
7 | ||||||||
20 | ||||||||
29 | ||||||||
30 | ||||||||
30 | ||||||||
31 | ||||||||
49 | ||||||||
50 | ||||||||
Exhibit Volume | ||||||||
Exhibit 10.1 | ||||||||
Exhibit 12.1 | ||||||||
Exhibit 31.1 | ||||||||
Exhibit 31.2 | ||||||||
Exhibit 32.1 | ||||||||
Exhibit 32.2 |
2
Table of Contents
PART I. FINANCIAL INFORMATION
HUMAN GENOME SCIENCES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
Three months ended June 30, | Six months ended June 30, | |||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
(in thousands, except share and per share amounts) | ||||||||||||||||
Revenue: |
||||||||||||||||
Product sales |
$ | 13,120 | $ | 8,612 | $ | 26,668 | $ | 136,381 | ||||||||
Manufacturing and development services |
5,380 | 7,510 | 9,500 | 36,626 | ||||||||||||
Research and development collaborative agreements |
20,292 | 10,559 | 49,138 | 30,951 | ||||||||||||
Total revenue |
38,792 | 26,681 | 85,306 | 203,958 | ||||||||||||
Costs and expenses: |
||||||||||||||||
Cost of product sales |
7,527 | 6,391 | 15,095 | 14,569 | ||||||||||||
Cost of manufacturing and development services |
3,112 | 6,558 | 4,025 | 9,909 | ||||||||||||
Research and development expenses |
51,390 | 42,910 | 108,861 | 96,586 | ||||||||||||
General and administrative expenses |
23,755 | 12,802 | 42,092 | 27,080 | ||||||||||||
Facility-related exit costs |
| 11,434 | | 11,434 | ||||||||||||
Total costs and expenses |
85,784 | 80,095 | 170,073 | 159,578 | ||||||||||||
Income (loss) from operations |
(46,992 | ) | (53,414 | ) | (84,767 | ) | 44,380 | |||||||||
Investment income |
5,087 | 2,920 | 9,703 | 7,217 | ||||||||||||
Interest expense |
(14,794 | ) | (13,819 | ) | (29,460 | ) | (29,549 | ) | ||||||||
Gain on extinguishment of debt |
| | | 38,873 | ||||||||||||
Gain on sale of long-term equity investment |
| | | 5,259 | ||||||||||||
Charge for impaired investment |
| (1,250 | ) | | (1,250 | ) | ||||||||||
Other income (expense) |
(164 | ) | 152 | (217 | ) | (528 | ) | |||||||||
Income (loss) before taxes |
(56,863 | ) | (65,411 | ) | (104,741 | ) | 64,402 | |||||||||
Provision for income taxes |
| | | | ||||||||||||
Net income (loss) |
$ | (56,863 | ) | $ | (65,411 | ) | $ | (104,741 | ) | $ | 64,402 | |||||
Basic net income (loss) per share |
$ | (0.30 | ) | $ | (0.48 | ) | $ | (0.56 | ) | $ | 0.47 | |||||
Diluted net income (loss) per share |
$ | (0.30 | ) | $ | (0.48 | ) | $ | (0.56 | ) | $ | 0.47 | |||||
Weighted average shares outstanding, basic |
187,677,541 | 135,825,716 | 186,909,903 | 135,801,881 | ||||||||||||
Weighted average shares outstanding, diluted |
187,677,541 | 135,825,716 | 186,909,903 | 136,879,538 | ||||||||||||
The accompanying Notes to Consolidated Financial Statements are an integral part hereof.
3
Table of Contents
HUMAN GENOME SCIENCES, INC.
CONSOLIDATED BALANCE SHEETS
June 30, | December 31, | |||||||
2010 | 2009 | |||||||
(in thousands) | ||||||||
Assets |
||||||||
Current assets: |
||||||||
Cash and cash equivalents |
$ | 280,913 | $ | 567,667 | ||||
Short-term investments |
329,928 | 151,528 | ||||||
Collaboration receivables |
6,917 | 10,356 | ||||||
Accounts receivable |
18,459 | 23,892 | ||||||
Inventory |
23,249 | 20,149 | ||||||
Prepaid expenses and other current assets |
5,333 | 7,176 | ||||||
Total current assets |
664,799 | 780,768 | ||||||
Marketable securities |
370,909 | 384,028 | ||||||
Property, plant and equipment (net of accumulated depreciation) |
257,733 | 263,123 | ||||||
Restricted investments |
89,321 | 88,437 | ||||||
Collaboration
receivables, net of current portion |
30,209 | 6,920 | ||||||
Long-term equity investments |
2,968 | 3,016 | ||||||
Other assets |
3,656 | 4,338 | ||||||
TOTAL ASSETS |
$ | 1,419,595 | $ | 1,530,630 | ||||
Liabilities and Stockholders Equity |
||||||||
Current liabilities: |
||||||||
Accounts payable and accrued expenses |
$ | 42,075 | $ | 42,369 | ||||
Accrued payroll and related taxes |
17,976 | 30,997 | ||||||
Deferred revenues |
10,870 | 88,565 | ||||||
Accrued exit expenses |
2,239 | 2,227 | ||||||
Total current liabilities |
73,160 | 164,158 | ||||||
Convertible subordinated debt |
361,066 | 349,807 | ||||||
Lease financing |
249,648 | 248,628 | ||||||
Deferred revenues, net of current portion |
32,571 | 1,978 | ||||||
Deferred rent |
9,564 | 8,665 | ||||||
Accrued exit expenses, net of current portion |
1,358 | 1,979 | ||||||
Total liabilities |
727,367 | 775,215 | ||||||
Stockholders equity: |
||||||||
Preferred stock |
| | ||||||
Common stock |
1,881 | 1,853 | ||||||
Additional paid-in capital |
2,974,043 | 2,932,863 | ||||||
Accumulated other comprehensive income |
7,711 | 7,365 | ||||||
Accumulated deficit |
(2,291,407 | ) | (2,186,666 | ) | ||||
Total stockholders equity |
692,228 | 755,415 | ||||||
TOTAL LIABILITIES AND STOCKHOLDERS EQUITY |
$ | 1,419,595 | $ | 1,530,630 | ||||
The accompanying Notes to Consolidated Financial Statements are an integral part hereof.
4
Table of Contents
HUMAN GENOME SCIENCES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Six months ended June 30, | ||||||||
2010 | 2009 | |||||||
(in thousands) | ||||||||
Cash flows from operating activities: |
||||||||
Net income (loss) |
$ | (104,741 | ) | $ | 64,402 | |||
Adjustments to reconcile net income (loss) to net cash provided by (used in)
operating activities: |
||||||||
Stock-based compensation expense |
10,819 | 6,320 | ||||||
Depreciation and amortization |
10,631 | 10,635 | ||||||
Amortization of debt discount |
11,267 | 11,163 | ||||||
Charge for impaired investment |
| 1,250 | ||||||
Facility-related exit costs |
| 11,434 | ||||||
Accrued interest on short-term investments, marketable securities and restricted investments |
2,394 | 628 | ||||||
Gain on extinguishment of long-term debt |
| (38,873 | ) | |||||
Gain on sale of long-term equity investment |
| (5,259 | ) | |||||
Non-cash expenses and other |
229 | 1,277 | ||||||
Changes in operating assets and liabilities: |
||||||||
Collaboration receivables |
(19,850) | 11,327 | ||||||
Accounts receivable |
5,433 | (3,394 | ) | |||||
Inventory |
(3,100 | ) | | |||||
Prepaid expenses and other assets |
1,900 | (49 | ) | |||||
Accounts payable and accrued expenses |
(251 | ) | (8,186 | ) | ||||
Accrued payroll and related taxes |
(13,021 | ) | (4,407 | ) | ||||
Deferred revenues |
(47,102 | ) | (19,647 | ) | ||||
Accrued exit expenses |
(760 | ) | 626 | |||||
Deferred rent |
843 | 987 | ||||||
Net cash provided by (used in) operating activities |
(145,309 | ) | 40,234 | |||||
Cash flows from investing activities: |
||||||||
Purchase of short-term investments and marketable securities |
(479,438 | ) | (67,048 | ) | ||||
Proceeds from sale and maturities of short-term investments and
marketable securities |
313,416 | 98,119 | ||||||
Capital expenditures property, plant, and equipment |
(4,338 | ) | (5,916 | ) | ||||
Proceeds from sale of long-term equity investment |
| 5,259 | ||||||
Release of restricted investments |
100 | 2,507 | ||||||
Net cash provided by (used in) investing activities |
(170,260 | ) | 32,921 | |||||
Cash flows from financing activities: |
||||||||
Purchase of restricted investments |
(15,279 | ) | (14,645 | ) | ||||
Proceeds from sale and maturities of restricted investments |
13,770 | 13,374 | ||||||
Proceeds from issuance of common stock |
31,349 | 413 | ||||||
Purchase of treasury stock |
(1,025 | ) | (16 | ) | ||||
Extinguishment of long-term debt |
| (49,998 | ) | |||||
Net cash provided by (used in) financing activities |
28,815 | (50,872 | ) | |||||
Net increase (decrease) in cash and cash equivalents |
(286,754 | ) | 22,283 | |||||
Cash and cash equivalents beginning of period |
567,667 | 15,248 | ||||||
Cash and cash equivalents end of period |
$ | 280,913 | $ | 37,531 | ||||
The accompanying Notes to Consolidated Financial Statements are an integral part hereof.
5
Table of Contents
SUPPLEMENTAL SCHEDULE OF CASH FLOW INFORMATION, NON-CASH OPERATING, INVESTING AND FINANCING
ACTIVITIES
Six months ended June 30, | ||||||||
2010 | 2009 | |||||||
(in thousands) | ||||||||
Cash paid (received) during the period for: |
||||||||
Interest |
$ | 16,492 | $ | 17,132 | ||||
Income taxes |
$ | (1,165 | ) | $ | |
During the six months ended June 30, 2010 and 2009, lease financing increased with respect to the
Companys leases with BioMed Realty Trust, Inc. (BioMed) by $1,020 and $1,146, respectively, on a
non-cash basis. Because the payments are less than the amount of the calculated interest expense
for the first nine years of the leases, the lease financing balance will increase during this
period.
During
the six months ended June 30, 2010 and 2009, the Company recorded non-cash accretion of $151
and $300, respectively, related to its exit accrual for certain space.
The accompanying Notes to Consolidated Financial Statements are an integral part hereof.
6
Table of Contents
HUMAN GENOME SCIENCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Quarter Ended June 30, 2010
(dollars in thousands, except per share data)
For the Quarter Ended June 30, 2010
(dollars in thousands, except per share data)
Note 1. Summary of Significant Accounting Policies
Basis of presentation
The accompanying unaudited consolidated financial statements of Human Genome Sciences, Inc. (the
Company) have been prepared in accordance with U.S. generally accepted accounting principles for
interim financial information. In the opinion of the Companys management, the consolidated
financial statements reflect all adjustments necessary to present fairly the results of operations
for the three and six months ended June 30, 2010 and 2009, the Companys financial position at June
30, 2010, and the cash flows for the six months ended June 30, 2010 and 2009. These adjustments
are of a normal recurring nature.
Certain notes and other information have been condensed or omitted from the interim consolidated
financial statements presented in this Quarterly Report on Form 10-Q. Therefore, these financial
statements should be read in conjunction with the Companys 2009 Annual Report on Form 10-K.
The results of operations for the six months ended June 30, 2010 are not necessarily indicative of
future financial results.
Recent accounting pronouncements
In January 2010, the Financial Accounting Standards Board (FASB) issued Accounting Standards
Update (ASU) 2010-06, Improving Disclosures about Fair Value Measurements (ASU 2010-06). ASU
2010-06 requires disclosing the amounts of significant transfers in and out of Level 1 and 2 fair
value measurements and to describe the reasons for the transfers. The disclosures were effective
for reporting periods beginning after December 15, 2009, and had no material impact on the
Companys financial statements for the period ended June 30, 2010. Additionally, disclosures of
the gross purchases, sales, issuances and settlements activity in Level 3 fair value measurements
will be required for fiscal years beginning after December 15, 2010. The Company does not expect
the provisions of ASU 2010-06 to have a material effect on its consolidated results of operations,
financial position or liquidity.
In April 2010, FASB issued ASU No. 2010-17, Milestone Method of Revenue Recognition (ASU
2010-17), which provides guidance on defining a milestone and determining when it may be
appropriate to apply the milestone method of revenue recognition for research or development
transactions. Research or development arrangements frequently include payment provisions whereby a
portion or all of the consideration is contingent upon milestone events such as successful
completion of phases in a study or achieving a specific result from the research or development
efforts. The amendments in this ASU provide guidance on the criteria that should be met for
determining whether the milestone method of revenue recognition is appropriate. ASU 2010-17 is
effective for fiscal years and interim periods within those years beginning on or after June 15,
2010, with early adoption permitted. This ASU is effective for the Company on January 1,
2011. The Company is currently evaluating the impact, if any, ASU 2010-17 will have on its
consolidated results of operations, financial position or liquidity.
7
Table of Contents
HUMAN GENOME SCIENCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Quarter Ended June 30, 2010
(dollars in thousands, except per share data)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Quarter Ended June 30, 2010
(dollars in thousands, except per share data)
Note 2. Comprehensive Income (Loss)
The Companys unrealized gains or losses on available-for-sale short-term investments, marketable
securities and long-term equity investments and cumulative foreign currency translation adjustment
activity are required to be included in other comprehensive income (loss).
During the three and six months ended June 30, 2010 and 2009, total comprehensive income (loss)
amounted to:
Three months ended June 30, | Six months ended June 30, | |||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
Net income (loss) |
$ | (56,863 | ) | $ | (65,411 | ) | $ | (104,741 | ) | $ | 64,402 | |||||
Net unrealized gains (losses): |
||||||||||||||||
Short-term investments and marketable securities |
97 | 8,407 | 1,301 | 8,754 | ||||||||||||
Long-term equity investment in VIA Pharmaceuticals |
(12 | ) | | (10 | ) | | ||||||||||
Restricted investments |
(265 | ) | 1,056 | (276 | ) | 1,140 | ||||||||||
Foreign currency translation |
(29 | ) | 46 | (58 | ) | 594 | ||||||||||
Subtotal |
(209 | ) | 9,509 | 957 | 10,488 | |||||||||||
Reclassification adjustments for (gains) losses realized
in net income (loss) |
(713 | ) | 15 | (611 | ) | (875 | ) | |||||||||
Total comprehensive income (loss) |
$ | (57,785 | ) | $ | (55,887 | ) | $ | (104,395 | ) | $ | 74,015 | |||||
The effect of income taxes on items in other comprehensive income is $0 for all periods presented.
8
Table of Contents
HUMAN GENOME SCIENCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Quarter Ended June 30, 2010
(dollars in thousands, except per share data)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Quarter Ended June 30, 2010
(dollars in thousands, except per share data)
Note 3. Investments
Available-for-sale investments, including accrued interest, at June 30, 2010 and December 31, 2009
were as follows:
June 30, 2010 | ||||||||||||||||
Gross | Gross | |||||||||||||||
Amortized | Unrealized | Unrealized | Fair | |||||||||||||
Cost | Gains | Losses | Value | |||||||||||||
U.S. Treasury and agencies |
$ | | $ | | $ | | $ | | ||||||||
Government-sponsored enterprise securities |
177,773 | 1,670 | (15 | ) | 179,428 | |||||||||||
Corporate debt securities |
149,700 | 939 | (139 | ) | 150,500 | |||||||||||
Subtotal Short-term investments |
327,473 | 2,609 | (154 | ) | 329,928 | |||||||||||
Government-sponsored enterprise securities |
122,525 | 1,652 | (12 | ) | 124,165 | |||||||||||
Corporate debt securities |
244,521 | 3,361 | (1,138 | ) | 246,744 | |||||||||||
Subtotal Marketable securities |
367,046 | 5,013 | (1,150 | ) | 370,909 | |||||||||||
Restricted cash and cash equivalents |
7,830 | | | 7,830 | ||||||||||||
U.S. Treasury and agencies |
1,301 | 10 | | 1,311 | ||||||||||||
Government-sponsored enterprise securities |
23,555 | 396 | (1 | ) | 23,950 | |||||||||||
Corporate debt securities |
55,226 | 1,083 | (79 | ) | 56,230 | |||||||||||
Subtotal Restricted investments |
87,912 | 1,489 | (80 | ) | 89,321 | |||||||||||
Total |
$ | 782,431 | $ | 9,111 | $ | (1,384 | ) | $ | 790,158 | |||||||
December 31, 2009 | ||||||||||||||||
Gross | Gross | |||||||||||||||
Amortized | Unrealized | Unrealized | Fai | |||||||||||||
Cost | Gains | Losses | Value | |||||||||||||
U.S. Treasury and agencies |
$ | 7,997 | $ | 32 | $ | | $ | 8,029 | ||||||||
Government-sponsored enterprise securities |
34,667 | 672 | (29 | ) | 35,310 | |||||||||||
Corporate debt securities |
107,283 | 1,099 | (193 | ) | 108,189 | |||||||||||
Subtotal Short-term investments |
149,947 | 1,803 | (222 | ) | 151,528 | |||||||||||
Government-sponsored enterprise securities |
172,191 | 2,009 | (673 | ) | 173,527 | |||||||||||
Corporate debt securities |
208,824 | 2,106 | (429 | ) | 210,501 | |||||||||||
Subtotal Marketable securities |
381,015 | 4,115 | (1,102 | ) | 384,028 | |||||||||||
Restricted cash and cash equivalents |
6,693 | | | 6,693 | ||||||||||||
U.S. Treasury and agencies |
| | | | ||||||||||||
Government-sponsored enterprise securities |
20,316 | 394 | (17 | ) | 20,693 | |||||||||||
Corporate debt securities |
59,612 | 1,470 | (31 | ) | 61,051 | |||||||||||
Subtotal Restricted investments |
86,621 | 1,864 | (48 | ) | 88,437 | |||||||||||
Total |
$ | 617,583 | $ | 7,782 | $ | (1,372 | ) | $ | 623,993 | |||||||
9
Table of Contents
HUMAN GENOME SCIENCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Quarter Ended June 30, 2010
(dollars in thousands, except per share data)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Quarter Ended June 30, 2010
(dollars in thousands, except per share data)
Note 3. Investments (continued)
See Note 9, Fair Value Measurements, for the fair value of the Companys financial assets and
liabilities.
The Companys restricted investments with respect to its headquarters (Traville) and large-scale
manufacturing facility (LSM) leases will serve as collateral for a security deposit for the
duration of the leases, although the Company has the ability to reduce the restricted investments
that are in the form of securities for the Traville and LSM facility leases by substituting cash
security deposits. For the Traville and LSM leases, the Company is required to maintain restricted
investments of at least $46,000, or $39,500 if in the form of cash, in order to satisfy the
security deposit requirements of these leases.
In addition, the Company is also required to maintain $34,300 in restricted investments with
respect to two leases with the Maryland Economic Development Corporation (MEDCO) for its
small-scale manufacturing facility. The facility was financed primarily through a combination of
bonds issued by MEDCO (MEDCO Bonds) and loans issued to MEDCO by certain State of Maryland
agencies. The MEDCO Bonds are secured by letters of credit issued for the account of MEDCO which
expire in December 2011. The Company is required to maintain restricted investments which serve as
security for the MEDCO letters of credit reimbursement obligation.
The Companys restricted investments were $89,321 and $88,437 as of June 30, 2010 and December 31,
2009, respectively.
Short-term investments, Marketable securities and Restricted investments unrealized losses
The Companys gross unrealized losses and fair value of investments with unrealized losses were as
follows:
June 30, 2010 | ||||||||||||||||||||||||
Loss Position | Loss Position | |||||||||||||||||||||||
for Less Than | for Greater Than | |||||||||||||||||||||||
Twelve Months | Twelve Months | Total | ||||||||||||||||||||||
Fair | Unrealized | Fair | Unrealized | Fair | Unrealized | |||||||||||||||||||
Value | Losses | Value | Losses | Value | Losses | |||||||||||||||||||
Government-sponsored enterprise securities |
$ | 93,963 | $ | (15 | ) | $ | | $ | | $ | 93,963 | $ | (15 | ) | ||||||||||
Corporate debt securities |
81,166 | (139 | ) | | | 81,166 | (139 | ) | ||||||||||||||||
Subtotal Short-term investments |
175,129 | (154 | ) | | | 175,129 | (154 | ) | ||||||||||||||||
Government-sponsored enterprise securities |
88,362 | (12 | ) | | | 88,362 | (12 | ) | ||||||||||||||||
Corporate debt securities |
44,172 | (1,126 | ) | 1,156 | (12 | ) | 45,328 | (1,138 | ) | |||||||||||||||
Subtotal Marketable securities |
132,534 | (1,138 | ) | 1,156 | (12 | ) | 133,690 | (1,150 | ) | |||||||||||||||
Government-sponsored enterprise securities |
531 | (1 | ) | | | 531 | (1 | ) | ||||||||||||||||
Corporate debt securities |
3,866 | (79 | ) | | | 3,866 | (79 | ) | ||||||||||||||||
Subtotal Restricted investments |
4,397 | (80 | ) | | | 4,397 | (80 | ) | ||||||||||||||||
Total |
$ | 312,060 | $ | (1,372 | ) | $ | 1,156 | $ | (12 | ) | $ | 313,216 | $ | (1,384 | ) | |||||||||
10
Table of Contents
HUMAN GENOME SCIENCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Quarter Ended June 30, 2010
(dollars in thousands, except per share data)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Quarter Ended June 30, 2010
(dollars in thousands, except per share data)
Note 3. Investments (continued)
December 31, 2009 | ||||||||||||||||||||||||
Loss Position | Loss Position | |||||||||||||||||||||||
for Less Than | for Greater Than | |||||||||||||||||||||||
Twelve Months | Twelve Months | Total | ||||||||||||||||||||||
Fair | Unrealized | Fair | Unrealized | Fair | Unrealized | |||||||||||||||||||
Value | Losses | Value | Losses | Value | Losses | |||||||||||||||||||
Government-sponsored enterprise
securities |
$ | 23,026 | $ | (29 | ) | $ | | $ | | $ | 23,026 | $ | (29 | ) | ||||||||||
Corporate debt securities |
24,751 | (181 | ) | 4,474 | (12 | ) | 29,225 | (193 | ) | |||||||||||||||
Subtotal Short-term investments |
47,777 | (210 | ) | 4,474 | (12 | ) | 52,251 | (222 | ) | |||||||||||||||
Government-sponsored enterprise securities |
154,032 | (673 | ) | | | 154,032 | (673 | ) | ||||||||||||||||
Corporate debt securities |
76,595 | (405 | ) | 1,231 | (24 | ) | 77,826 | (429 | ) | |||||||||||||||
Subtotal Marketable securities |
230,627 | (1,078 | ) | 1,231 | (24 | ) | 231,858 | (1,102 | ) | |||||||||||||||
Government-sponsored enterprise securities |
7,317 | (17 | ) | 14 | | 7,331 | (17 | ) | ||||||||||||||||
Corporate debt securities |
6,212 | (31 | ) | | | 6,212 | (31 | ) | ||||||||||||||||
Subtotal Restricted investments |
13,529 | (48 | ) | 14 | | 13,543 | (48 | ) | ||||||||||||||||
Total |
$ | 291,933 | $ | (1,336 | ) | $ | 5,719 | $ | (36 | ) | $ | 297,652 | $ | (1,372 | ) | |||||||||
The Company has evaluated its investments and has determined that no investments have an
other-than-temporary impairment, as it has no intent to sell securities with unrealized losses and
it is not more likely than not that the Company will be required to sell any securities with
unrealized losses, given the Companys current and anticipated financial position.
The Company owned 287 available-for-sale U.S Treasury obligations, government-sponsored enterprise
securities and corporate debt securities at June 30, 2010. Of these 287 securities, 43 had
unrealized losses at June 30, 2010.
The Companys equity investments in privately-held companies for which no readily available fair
value information is available are carried at cost. There were no events or circumstances during
the six months ended June 30, 2010 that would have a significant adverse effect on the fair value
of these investments. Long-term equity investments in publicly-traded companies are carried at
market value based on quoted market prices and unrealized gains and losses for these investments
are reported as a separate component of stockholders equity until realized.
11
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HUMAN GENOME SCIENCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Quarter Ended June 30, 2010
(dollars in thousands, except per share data)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Quarter Ended June 30, 2010
(dollars in thousands, except per share data)
Note 3. Investments (continued)
Other Information
The following table summarizes maturities of the Companys short-term investments, marketable
securities and restricted investments at June 30, 2010:
Short-term | Marketable | Restricted | ||||||||||||||||||||||
Investments | Securities | Investments | ||||||||||||||||||||||
Amortized | Fair | Amortized | Fair | Amortized | Fair | |||||||||||||||||||
Cost | Value | Cost | Value | Cost | Value | |||||||||||||||||||
Less than one
year |
$ | 327,473 | $ | 329,928 | $ | | $ | | $ | 39,331 | $ | 39,764 | ||||||||||||
Due in year two
through year three |
| | 279,850 | 281,975 | 42,406 | 43,072 | ||||||||||||||||||
Due in year four
through year five |
| | 82,733 | 84,340 | 5,665 | 5,965 | ||||||||||||||||||
Due after five
years |
| | 4,463 | 4,594 | 510 | 520 | ||||||||||||||||||
Total |
$ | 327,473 | $ | 329,928 | $ | 367,046 | $ | 370,909 | $ | 87,912 | $ | 89,321 | ||||||||||||
The Companys short-term investments include mortgage-backed securities with an aggregate cost of
$77,247 and an aggregate fair value of $78,600 at June 30, 2010. The Companys marketable
securities include mortgage-backed securities with an aggregate cost of $86,841 and an aggregate
fair value of $88,362 at June 30, 2010. The Companys restricted investments include
mortgage-backed securities with an aggregate cost of $6,684 and an aggregate fair value of $6,812
at June 30, 2010. These securities have no single maturity date and, accordingly, have been
allocated on a pro rata basis to each maturity range based on each maturity ranges percentage of
the total value.
Realized gains and losses on securities sold before maturity, which are included in the Companys
investment income for the three and six months ended June 30, 2010 and 2009, and their respective
net proceeds were as follows:
Three months ended June 30, | Six months ended June 30, | |||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
Proceeds on sale of
investments prior
to maturity |
$ | 240,826 | $ | 71,577 | $ | 418,251 | $ | 162,580 | ||||||||
Realized gains |
1,153 | 45 | 1,478 | 1,678 | ||||||||||||
Realized losses |
(439 | ) | (61 | ) | (867 | ) | (803 | ) |
The cost of the securities sold is based on the specific identification method.
12
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HUMAN GENOME SCIENCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Quarter Ended June 30, 2010
(dollars in thousands, except per share data)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Quarter Ended June 30, 2010
(dollars in thousands, except per share data)
Note 4. Collaborations and U.S. Government Agreement
Collaboration Agreement with GSK
During 2006, the Company entered into a license agreement with GlaxoSmithKline (GSK) for the
co-development and commercialization of BENLYSTA® arising from an option GSK exercised
in 2005, relating to an earlier collaboration agreement. The agreement grants GSK a co-development
and co-commercialization license, under which both companies will jointly conduct activities
related to the development and sale of products in the United States and abroad. The Company and
GSK share Phase 3 and 4 development costs, and will share sales and marketing expenses and profits
of any product commercialized under the agreement. The Company will have primary responsibility
for bulk manufacturing and for commercial manufacturing of the finished drug product. In partial
consideration of the rights granted to GSK in this agreement, the Company received a non-refundable
payment of $24,000 during 2006 and is recognizing this payment as revenue over the remaining
clinical development period, currently estimated to end in late 2010. The Company recognized
revenue of $1,033 for both the three months ended June 30, 2010 and 2009. The Company recognized
revenue of $2,067 and $2,670 for the six months ended June 30, 2010 and 2009, respectively.
Collaboration Agreement with Novartis
During 2006, the Company entered into an agreement with Novartis International Pharmaceutical Ltd.
(Novartis) for the co-development and commercialization of ZALBINTM. Under the
agreement, the Company and Novartis will co-commercialize ZALBIN in the United States, and will
share U.S. commercialization costs and U.S. profits equally. Novartis will be responsible for
commercialization outside the U.S. and will pay the Company a royalty on those sales. The Company
will have primary responsibility for the bulk manufacture of ZALBIN, and Novartis will have primary
responsibility for commercial manufacturing of the finished drug product. The Company is entitled
to payments aggregating up to approximately $507,500, including a non-refundable up-front license
fee, upon the successful attainment of certain milestones. The Company and Novartis will share
clinical development costs.
In June 2010, the Company announced that it had received preliminary written feedback from the U.S.
Food and Drug Administration (FDA) regarding the Biologics License Application (BLA) it filed
in November 2009 for ZALBIN. The FDA expressed concerns regarding the risk benefit assessment of
ZALBIN dosed at 900-mcg every two weeks. Although the BLA review is ongoing, the Company has
concluded that licensure of this dosing regimen is unlikely. The Company and Novartis are
considering further development of ZALBIN dosed every four weeks.
As of June 30, 2010, the Company has contractually earned and received payments aggregating
$207,500. The Company is recognizing these payments as revenue ratably over the estimated
remaining development period. In the second quarter of 2010, the Company revised its estimate of
the remaining development period (originally estimated to end in late 2010) to be in late 2014
based on the current estimated development timeline for the four-week dosing regimen. The Company
recognized revenue of $19,070 and $8,852 for the three months ended June 30, 2010 and 2009,
respectively. The Company recognized revenue of $46,672 and $17,704 for the six months ended June
30, 2010 and 2009, respectively. As of June 30, 2010 the Company has an aggregate of approximately
$36,133 in both current and non-current deferred revenue with respect to this collaboration.
13
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HUMAN GENOME SCIENCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Quarter Ended June 30, 2010
(dollars in thousands, except per share data)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Quarter Ended June 30, 2010
(dollars in thousands, except per share data)
Note 4. Collaborations and U.S. Government Agreement (continued)
Collaboration reimbursements
Research and development expenses for the three months ended June 30, 2010 and 2009 are net of
$18,952 and $8,749, respectively, of costs reimbursed or reimbursable by GSK and Novartis.
Research and development expenses for the six months ended June 30, 2010 and 2009 are net of
$34,705 and $21,254, respectively, of costs reimbursed or reimbursable by GSK and Novartis. The
Company shares certain research and development costs including personnel costs, outside services,
manufacturing, and overhead with GSK and Novartis under cost sharing provisions in the
collaboration agreements.
U.S. Government Agreement
The Company entered into a contract with the U.S. Government (USG) in 2005, under which the
Company agreed to develop and supply raxibacumab to the Strategic National Stockpile (SNS).
Through a contract amendment in 2009, the USG agreed to purchase 45,000 doses of raxibacumab for
the SNS, to be delivered over a three-year period, beginning in 2009. The Company expects to
receive approximately $142,000 from this order as deliveries are completed, including $17,693
earned and recognized as product revenue during 2009 (all in the fourth quarter). During the three
and six months ended June 30, 2010 the Company earned and recognized $13,120 and $26,668,
respectively.
During 2006, the USG exercised its option under the 2005 contract to purchase 20,001 doses of
raxibacumab for the SNS, which the Company delivered during the six months ended June 30, 2009.
The Company recognized $8,612 in product revenue and $332 in manufacturing and development services
revenue for the three months ended June 30, 2009 related to this order. The Company recognized
$136,381 in product revenue and $26,328 in manufacturing and development services revenue for the
six months ended June 30, 2009 related to this order.
Aegera Agreement
During 2007, the Company entered into a collaboration and license agreement with Aegera
Therapeutics, Inc. (Aegera) of Montreal, Canada under which the Company acquired exclusive
worldwide rights (excluding Japan) to develop and commercialize certain oncology molecules and
related backup compounds to be chosen during a three-year research period. Aegera will be entitled
to receive up to $295,000 in development and commercial milestone payments, including a $5,000
milestone payment made by the Company during 2008. Aegera will receive royalties on net sales in
the Companys territory. In North America, Aegera will have the option to co-promote with the
Company, under which Aegera will share certain expenses and profits in lieu of its royalties. The
Company incurred and expensed research costs of $579 and $580 related to the Aegera agreement
during the three months ended June 30, 2010 and 2009, respectively, and $1,169 and $1,167 during
the six months ended June 30, 2010 and 2009 respectively.
14
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HUMAN GENOME SCIENCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Quarter Ended June 30, 2010
(dollars in thousands, except per share data)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Quarter Ended June 30, 2010
(dollars in thousands, except per share data)
Note 5. Other Financial Information
Collaboration Receivables
Collaboration receivables of $6,917 includes $6,611 in unbilled receivables from GSK and Novartis
in connection with the Companys cost-sharing agreements, primarily related to net cost
reimbursements due for the three months ended June 30, 2010.
Non-current collaboration receivables of $30,209 and $6,920 as
of June 30, 2010 and December 31, 2009, respectively, relate to amounts due to the Company by GSK and Novartis for manufacturing costs incurred to
produce pre-launch commercial product. Within the December 31, 2009
balance sheet, the $6,920 non-current collaboration receivables
balance has been reclassified from Other assets to conform to current
period presentation.
Inventory
Inventories consist of the following, which are all related to raxibacumab:
June 30, 2010 | December 31, 2009 | |||||||
Raw materials |
$ | 9,721 | $ | 4,293 | ||||
Work-in-process |
10,518 | 9,512 | ||||||
Finished goods |
3,010 | 6,344 | ||||||
$ | 23,249 | $ | 20,149 | |||||
Note 6. Commitments and Other Matters
The Company is party to various claims and legal proceedings from time to time. The Company is not
aware of any legal proceedings that it believes could have, individually or in the aggregate, a
material adverse effect on its results of operations, financial condition or liquidity.
Note 7. Facility-Related Exit Costs
As a result of the Companys past facilities consolidation efforts, the Company has exited various
facility leases since 2004 and recorded exit and impairment charges relating to those exits. The
Company reviews the adequacy of its estimated exit accrual on an ongoing basis, and adjusts its
exit accrual as a result of changes in facts or assumptions.
The following table summarizes the activity related to the liability for exit charges for the six
months ended June 30, 2010, all of which is facilities-related:
Balance as of January 1, 2010 |
$ | 4,206 | ||
Accretion recorded |
151 | |||
Subtotal |
4,357 | |||
Cash items |
(760 | ) | ||
Balance as of June 30, 2010 |
3,597 | |||
Less current portion |
(2,239 | ) | ||
$ | 1,358 | |||
15
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HUMAN GENOME SCIENCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Quarter Ended June 30, 2010
(dollars in thousands, except per share data)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Quarter Ended June 30, 2010
(dollars in thousands, except per share data)
Note 8. Stock-Based Compensation
The Company has a stock incentive plan (the Incentive Plan) under which options to purchase new
shares of the Companys common stock may be granted to employees, consultants and directors at an
exercise price no less than the quoted market value on the date of grant. The Incentive Plan also
provides for awards in the form of stock appreciation rights, restricted (nonvested) or
unrestricted stock awards, stock-equivalent units or performance-based stock awards. The Company
issues both qualified and non-qualified options under the Incentive Plan. The Company also has an
Employee Stock Purchase Plan (the Purchase Plan).
Stock-based compensation expense for the three and six months ended June 30, 2010 is not
necessarily representative of the level of stock-based compensation expense in future periods due
to, among other things, (1) the vesting period of the stock options and other awards and (2) the
fair value of additional stock option grants and other awards in future years.
The Company recorded stock-based compensation expense pursuant to these plans of $6,975 and $3,386
during the three months ended June 30, 2010 and 2009, respectively. The Company recorded
stock-based compensation expenses pursuant to these plans of $10,819 and $6,320 during the six
months ended June 30, 2010 and 2009, respectively. Stock-based compensation relates to stock
options, restricted stock units and restricted stock awards granted under the Incentive Plan.
Under the Incentive Plan, the Company issued 804,096 and 2,804,760 shares of common stock in
conjunction with stock option exercises during the three and six months ended June 30, 2010,
respectively. The Company granted 541,050 stock options with a weighted-average grant date fair
value of $15.71 per share under the Incentive Plan during the three months ended June 30, 2010.
The Company granted 4,162,061 stock options with a weighted-average grant date fair value of $17.95
per share under the Incentive Plan during the six months ended June 30, 2010.
During the three months ended June 30, 2010, the Company did not award any restricted stock units
(RSUs). During the six months ended June 30, 2010, the Company awarded 81,722 RSUs with a
weighted-average grant date fair value of $31.91 per share. During the same period, 79,982 RSUs
vested and the Company issued 48,484 shares of common stock to employees, net of 31,498 shares
purchased to satisfy the employees tax liability related to the RSUs vesting. This treasury stock
was retired as of June 30, 2010.
At June 30, 2010, the total authorized number of shares under the Incentive Plan, including prior
plans, was 54,809,554. Options available for future grant were 5,172,036 as of June 30, 2010.
16
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HUMAN GENOME SCIENCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Quarter Ended June 30, 2010
(dollars in thousands, except per share data)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Quarter Ended June 30, 2010
(dollars in thousands, except per share data)
Note 9. Fair Value Measurements
The FASB guidance regarding the fair value of all assets and liabilities defines fair value,
provides guidance for measuring fair value and requires certain disclosures. This guidance does not
require any new fair value measurements, but rather applies to all other accounting pronouncements
that require or permit fair value measurements. This guidance does not apply to measurements
related to share-based payments.
FASB ASC Topic 820 discusses valuation techniques, such as the market approach (comparable market
prices), the income approach (present value of future income or cash flow), and the cost approach
(cost to replace the service capacity of an asset or replacement cost). The guidance utilizes a
fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value
into three broad levels. The following is a brief description of those three levels:
Level 1: | Observable inputs such as quoted prices (unadjusted) in active markets for
identical assets or liabilities.
|
||
Level 2: | Inputs other than quoted prices that are observable for the asset or liability,
either directly or indirectly. These include quoted prices for similar assets or
liabilities in active markets and quoted prices for identical or similar assets or
liabilities in markets that are not active. |
||
Level 3: | Unobservable inputs that reflect the reporting entitys own assumptions. |
Active markets are those in which transactions occur with sufficient frequency and volume to
provide pricing information on an ongoing basis. Inactive markets are those in which there are few
transactions for the asset, prices are not current, or price quotations vary substantially either
over time or among market makers, or in which little information is released publicly. With regard
to the Companys financial assets subject to fair value measurements, the Company believes that all
of the assets it holds are actively traded because there is sufficient frequency and volume to
obtain pricing information on an ongoing basis.
The Companys assets and liabilities subject to fair value measurements on a recurring basis and
the related fair value hierarchy are as follows:
Fair Value | Fair Value Measurements as of June 30, 2010 | |||||||||||||||
as of | Using Fair Value Hierarchy | |||||||||||||||
Description | June 30, 2010 | Level 1 | Level 2 | Level 3 | ||||||||||||
Cash and cash equivalents |
$ | 280,913 | $ | 280,913 | $ | | $ | | ||||||||
Short-term investments |
329,928 | | 329,928 | | ||||||||||||
Marketable securities |
370,909 | | 370,909 | | ||||||||||||
Long-term equity investment |
0 | | | | ||||||||||||
Restricted investments |
89,321 | 9,141 | 80,180 | | ||||||||||||
Total |
$ | 1,071,071 | $ | 290,054 | $ | 781,017 | $ | | ||||||||
17
Table of Contents
HUMAN GENOME SCIENCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Quarter Ended June 30, 2010
(dollars in thousands, except per share data)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Quarter Ended June 30, 2010
(dollars in thousands, except per share data)
Note 9. Fair Value Measurements (continued)
The Company evaluates the types of securities in its investment portfolio to determine the proper
classification in the fair value hierarchy based on trading activity and the observability of
market inputs. The Companys Level 1 assets include cash, money market instruments and U.S.
Treasury securities. Level 2 assets include government-sponsored enterprise securities, commercial
paper, corporate bonds, asset-backed securities, and mortgage-backed securities. The Companys
privately-held equity investment is carried at cost and is not included in the table above, and is
reviewed for impairment at each reporting date.
The Company generally obtains a single quote or price per instrument from independent third parties
to help it determine the fair value of securities in Level 1 and Level 2 of the fair value
hierarchy. The Companys Level 1 cash and money market instruments are valued based on quoted
prices from third parties, and the Companys Level 1 U.S. Treasury securities are valued based on
broker quotes. The Companys Level 2 assets are valued using a multi-dimensional pricing model
that includes a variety of inputs including actual trade data, benchmark yield data, non-binding
broker/dealer quotes, issuer spread data, monthly payment information, collateral performance and
other reference information. These are all observable inputs. The Company reviews the values
generated by the multi-dimensional pricing model for reasonableness, which could include reviewing
other publicly available information.
The Company does not hold auction rate securities, loans held for sale, mortgage-backed securities
backed by sub-prime or Alt-A collateral or any other investments which require the Company to
determine fair value using a discounted cash flow approach. Therefore, the Company does not need
to adjust its analysis or change its assumptions specifically to factor illiquidity in the markets
into its fair values.
The fair value of the Companys receivables, other assets, accounts payable, accrued expenses and
other payables approximate their carrying amount due to the relatively short maturity of these
items. The fair value of the Companys convertible subordinated debt is based on quoted market
prices. The quoted market price of the Companys convertible subordinated debt was approximately
$664,000 (book value of $361,066) as of June 30, 2010. With respect to its lease financing, the
Company evaluated its incremental borrowing rate as of June 30, 2010, based on the current interest
rate environment and the Companys credit risk. The fair value of the BioMed lease financing was
approximately $263,000 (book value of $249,648) as of June 30, 2010 based on a discounted cash flow
analysis, and current rates for corporate debt having similar characteristics and companies with
similar creditworthiness.
18
Table of Contents
HUMAN GENOME SCIENCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Quarter Ended June 30, 2010
(dollars in thousands, except per share data)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Quarter Ended June 30, 2010
(dollars in thousands, except per share data)
Note 10. Earnings (Loss) Per Share
Basic net income (loss) per share is computed based on the weighted average number of common shares
outstanding during the period. Diluted net income (loss) per share is computed based on the
weighted average number of common shares outstanding and, if there is net income during the period,
the dilutive impact of common stock equivalents outstanding during the period. Common stock
equivalents can result from the assumed exercise of outstanding stock options, the vesting of
unvested restricted stock units and the assumed conversion of convertible subordinated debt.
Common stock equivalents from stock options and restricted stock units of 24,564,757 for both the
three and six months ended June 30, 2010, and common stock equivalents from stock options and
restricted stock units of 28,644,707 and 28,692,035 for the three and six months ended June 30,
2009, respectively, are excluded from the calculation of diluted income (loss) per share because
the effect is anti-dilutive. Common stock equivalents from shares underlying the Companys
convertible subordinated debt of 24,302,742 for both the three and six months ended June 30, 2010
and common stock equivalents from shares underlying the Companys convertible subordinated debt of
24,303,304 and 25,839,354 for the three and six months ended June 30, 2009, respectively, are
excluded from the calculation of diluted loss per share because the effect is anti-dilutive.
Basic and diluted net income (loss) per share were the same for the three months ended June 30,
2010 and June 30, 2009, as the effect of common stock equivalents would be anti-dilutive. Diluted
net income (loss) per share for the six months ended June 30, 2010 and 2009 was determined as
follows:
Six months ended June 30, | ||||||||
2010 | 2009 | |||||||
Numerator: |
||||||||
Net income (loss) |
$ | (104,741 | ) | $ | 64,402 | |||
Interest on convertible subordinated debt, if converted |
| | ||||||
Net income (loss) used for diluted net income (loss) per share |
$ | (104,741 | ) | $ | 64,402 | |||
Denominator: |
||||||||
Weighted average shares outstanding |
186,909,903 | 135,801,881 | ||||||
Effect of dilutive securities: |
||||||||
Convertible subordinated debt |
| | ||||||
Employee stock options and restricted stock units |
| 1,077,657 | ||||||
Weighted average shares used for diluted net income
(loss) per share |
186,909,903 | 136,879,538 | ||||||
Diluted net income (loss) per share |
$ | (0.56 | ) | $ | 0.47 | |||
19
Table of Contents
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Three and six months ended June 30, 2010 and 2009
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Three and six months ended June 30, 2010 and 2009
Overview
Human Genome Sciences, Inc. (HGS) is a commercially focused biopharmaceutical company with
three products in late-stage development: BENLYSTA® for systemic lupus erythematosus
(SLE), ZALBIN for chronic hepatitis C, and raxibacumab for inhalation anthrax.
In July and November 2009, we reported that BENLYSTA met its primary endpoints in two Phase 3
clinical trials in patients with systemic lupus. In April, 2010, we reported additional results of
the BLISS 76 trial. At week 76 in the BLISS-76 trial, BENLYSTA plus standard of care showed higher
response rates compared with placebo plus standard of care, but this secondary endpoint result did
not reach statistical significance. We and GlaxoSmithKline (GSK) submitted marketing applications
for BENLYSTA in the United States and Europe in June 2010.
In March 2009, we reported that ZALBIN successfully met its primary endpoint in the second of
two Phase 3 clinical trials in chronic hepatitis C. HGS submitted a Biologics License Application
(BLA) for ZALBIN in the United States in November 2009, and Novartis submitted a Marketing
Authorization Application (MAA) under the brand name JOULFERON® in Europe in December
2009. In April 2010 Novartis withdrew the MAA. The decision to withdraw the application was based
on feedback from European regulatory authorities in preliminary response to the MAA, indicating
that additional new data would be requested which could not reasonably be generated within the
timeframe allowed in the European Centralized Procedure. The feedback included whether the
therapeutic benefit offered by the product dosed every two weeks was sufficient relative to the
risk. In June 2010, we announced that we had received preliminary written feedback from the U.S.
Food and Drug Administration (FDA) regarding the BLA for ZALBIN. The FDA feedback was provided
via a Discipline Review letter, which is a standard vehicle for review disciplines (e.g., clinical)
to convey early thoughts on possible deficiencies of an application. The FDA expressed concerns
regarding the risk benefit assessment of ZALBIN dosed at 900-mcg every two weeks. Although the BLA
review is ongoing, we have concluded that licensure of this dosing regimen is unlikely. We expect
a final decision from the FDA on or before October 4, 2010. If, as expected, we are unable to
obtain marketing approval for ZALBIN at this dosing regimen, our expected revenues may decrease and
we may incur substantial research and development costs performing additional clinical trials.
In the first half of 2009 we achieved our first product sales and recognized $162.5 million in
product sales and manufacturing and development services revenue by delivering 20,001 doses of
raxibacumab to the U.S. Strategic National Stockpile (SNS). In July 2009, the U.S. Government
(USG) exercised its option to purchase 45,000 additional doses to be delivered over a three-year
period. We expect to receive a total of approximately $152.0 million from the second order,
including $44.4 million in revenue recognized from 2009 through June 2010. In May 2009, we
submitted a BLA to the FDA for raxibacumab for the treatment of inhalation anthrax. We received a
Complete Response Letter in November 2009, and we continue to work closely with the FDA to
determine the additional steps necessary to obtain approval.
In addition to these products in our internal pipeline, we have substantial financial rights
to two novel drugs that GSK has advanced to late-stage development. In December 2009, GSK
initiated the second Phase 3 clinical trial of darapladib, which was discovered by GSK based on our
technology, to evaluate whether darapladib can reduce the risk of adverse cardiovascular events
such as a heart attack or stroke. With more than 27,000 patients enrolled, the Phase 3 clinical
program for darapladib is among the largest ever conducted to evaluate the safety and efficacy of
any cardiovascular medication. In the first quarter of 2009, we received a $9.0 million milestone
payment related to GSKs initiation of a Phase 3 program to evaluate the safety and efficacy of
Syncria® (albiglutide) in the long-term treatment of type 2 diabetes mellitus. We
created Syncria using our proprietary albumin-fusion technology and licensed it to GSK in 2004.
Eight Phase 3 trials of Syncria are currently ongoing.
We also have several novel drugs in earlier stages of clinical development for the treatment
of cancer, led by our TRAIL receptor antibody mapatumumab and a small-molecule antagonist of IAP
(inhibitor of apoptosis) proteins.
20
Table of Contents
Overview (continued)
Strategic partnerships are an important driver of our commercial success. We have
co-development and commercialization agreements with prominent pharmaceutical companies for both of
our lead products GSK for BENLYSTA and Novartis for ZALBIN. Raxibacumab is being developed under
a contract with the Biomedical Advanced Research and Development Authority (BARDA) of the Office
of the Assistant Secretary for Preparedness and Response (ASPR), U.S. Department of Health and
Human Services (HHS). Our strategic partnerships with leading pharmaceutical and biotechnology
companies allow us to leverage our strengths and gain access to sales and marketing infrastructure,
as well as complementary technologies. Some of these partnerships provide us with licensing or
other fees, clinical development cost-sharing, milestone payments and rights to royalty payments as
products are developed and commercialized. In some cases, we are entitled to certain
commercialization, co-promotion, revenue-sharing and other product rights.
During 2006, we entered into a collaboration agreement with Novartis. Under this agreement,
Novartis will co-develop and co-commercialize ZALBIN and share development costs, sales and
marketing expenses and profits of any product that is commercialized in the U.S. Novartis will be
responsible for commercialization outside the U.S. and will pay us a royalty on these sales. We
received a $45.0 million up-front fee from Novartis upon the execution of the agreement. Including
this up-front fee, we are entitled to payments aggregating up to $507.5 million upon the successful
attainment of certain milestones. As of June 30, 2010, we have contractually earned and received
payments aggregating $207.5 million. We are recognizing these payments as revenue ratably over the
estimated remaining development period. In the second quarter of 2010, we revised our estimate of
the remaining development period (originally estimated to end in late 2010) to be in late 2014
based on the current estimated development timeline for the four-week dosing regimen.
Further adjustments to the estimated development period may occur in the future as additional data is collected and future development plans, if any, evolve.
In 2005, GSK exercised its option to co-develop and co-commercialize BENLYSTA. In accordance
with a co-development and co-commercialization agreement signed during 2006, we and GSK will share
Phase 3 and 4 development costs, and will share equally in sales and marketing expenses and profits
of any product that is commercialized. We received a $24.0 million payment during 2006 as partial
consideration for entering into this agreement with respect to BENLYSTA and are recognizing this
payment as revenue ratably over the development period, currently estimated to end in late 2010.
We expect that any significant revenue or income through at least 2010 may be limited to
raxibacumab revenue, payments under collaboration agreements (to the extent milestones are met),
cost reimbursements from GSK and Novartis, payments from the license of product rights, payments
under contract manufacturing agreements pursuant to which we manufacture product for customers,
investment income and other payments from other collaborators and licensees under existing or
future arrangements, to the extent that we enter into any future arrangements, and possibly initial
sales of BENLYSTA. We expect to continue to incur substantial expenses relating to our research and
development efforts and increased expenses relating to our commercialization efforts. As a result,
we expect to incur losses over at least the next two years unless we are able to realize additional
revenues under existing or any future agreements or from product sales. The timing and amounts of
such revenues, if any, cannot be predicted with certainty and will likely fluctuate sharply.
Results of operations for any period may be unrelated to the results of operations for any other
period. In addition, historical results should not be viewed as indicative of future operating
results.
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Critical Accounting Policies and the Use of Estimates
A critical accounting policy is one that is both important to the portrayal of our financial
condition and results of operations and that requires managements most difficult, subjective or
complex judgments. Such judgments are often the result of a need to make estimates about the
effect of matters that are inherently uncertain. The preparation of our financial statements in
conformity with accounting principles generally accepted in the United States requires management
to make estimates and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting period. Actual results could differ
materially from those estimates. Our accounting policies are described in more detail in Note B,
Summary of Significant Accounting Policies, to our consolidated financial statements included in
our 2009 Annual Report on Form 10-K.
Results of Operations
Revenues. Revenues were $38.8 million and $26.7 million for the three months ended June 30,
2010 and 2009, respectively. Revenues were $85.3 million and $204.0 million for the six months
ended June 30, 2010 and 2009, respectively. Revenues for the three months ended June 30, 2010
included $19.1 million recognized from Novartis related to straight-line recognition of up-front
license fees and milestones reached for ZALBIN as well as $13.1 million in raxibacumab product
sales. Revenues for the three months ended June 30, 2009 included $8.9 million recognized from the
Novartis agreement, as well as $8.6 million in raxibacumab product sales and $7.2 million from
contract manufacturing services. Revenues for the six months ended June 30, 2010 included $46.7
million recognized from the Novartis agreement as well as $26.7 million in raxibacumab product
sales. Revenue for the six months ended June 30, 2009 consisted primarily of $136.4 million in
raxibacumab product sales and $26.3 million related to raxibacumab development services, $17.7
million recognized from the Novartis agreement, $10.3 million from contract manufacturing services
and a $9.0 million milestone payment received from GSK related to Syncria.
Cost of sales. Cost of sales includes cost of product sales of $7.5 million and $6.4 million
for the three months ended June 30, 2010 and 2009, respectively. Cost of sales also includes cost
of manufacturing and development services of $3.1 million and $6.6 million for the three months
ended June 30, 2010 and 2009, respectively. Cost of product sales was $15.1 million and $14.6
million for the six months ended June 30, 2010 and 2009, respectively. Cost of manufacturing and
development services was $4.0 million and $9.9 million for the six months ended June 30, 2010 and
2009, respectively. Cost of product sales during the three and six months ended June 30, 2010
includes the cost of manufacturing raxibacumab and royalties whereas the cost of product sales
during the three and six months ended June 30, 2009 included only royalties, as the manufacturing
costs had been previously expensed. Our manufacturing and development services costs include costs
associated with contract manufacturing services and raxibacumab development services costs. The
decrease in manufacturing and development services costs is primarily due to reduced contract
manufacturing activities. After approval of a product, inventoriable costs are capitalized into
inventory and will be expensed as the inventory is sold.
Expenses. Research and development net expenses were $51.4 million for the three months ended
June 30, 2010 compared to $42.9 million for the three months ended June 30, 2009. Research and
development net expenses were $108.9 million for the six months ended June 30, 2010 compared to
$96.6 million for the six months ended June 30, 2009. Our research and development expenses for
the three months ended June 30, 2010 and 2009 include $19.0 and $8.7 million, respectively, of
costs reimbursed or reimbursable by GSK and Novartis. Our research and development expenses for
the six months ended June 30, 2010 and 2009 include $34.7 million and $21.3 million, respectively,
of costs reimbursed or reimbursable by GSK and Novartis.
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Results of Operations (continued)
We track our research and development expenditures by type of cost incurred research,
pharmaceutical sciences, manufacturing and clinical development.
Our research costs increased to $6.2 million for the three months ended June 30, 2010 from
$4.5 million for the three months ended June 30, 2009. Our research costs increased to $11.0
million for the six months ended June 30, 2010 from $9.6 million for the six months ended June 30,
2009. The increase during the three months ended June 30, 2010 is primarily due to increased
activity related to HGS1029 and new target development. The increase for the six months ended June
30, 2010 is primarily due to increased HGS1029 activity. Our research costs for the three months
ended June 30, 2010 and 2009 are net of $0.6 million and $0.8 million, respectively, of cost
reimbursement from GSK and Novartis under cost sharing provisions in our collaboration agreements.
Our research costs for the six months ended June 30, 2010 and 2009 are net of $1.6 million and $1.4
million, respectively, of cost reimbursement from GSK and Novartis under cost sharing provisions in
our collaboration agreements.
Our pharmaceutical sciences costs, where we focus on improving formulation, process
development and production methods, decreased to $6.4 million for the three months ended June 30,
2010 from $8.2 million for the three months ended June 30, 2009. Pharmaceutical sciences costs
decreased to $13.0 million for the six months ended June 30, 2010 from $16.2 million for the six
months ended June 30, 2009. This decrease is primarily due to decreased activity related to
contract manufacturing services and ZALBIN. Pharmaceutical sciences costs for the three months
ended June 30, 2010 and 2009 include $0.2 and $0.7 million, respectively, of net costs incurred by
GSK and Novartis. Pharmaceutical sciences costs for the six months ended June 30, 2010, and 2009
include $0.4 and $0.5 million, respectively, of net costs incurred by GSK and Novartis.
Our manufacturing costs increased to $22.6 million for the three months ended June 30, 2010
from $11.6 million for the three months ended June 30, 2009. Our manufacturing costs increased to
$52.4 million for the six months ended June 30, 2010 from $31.3 million for the six months ended
June 30, 2009. This increase is primarily due to increased BENLYSTA production partially offset by
decreased ZALBIN activity and capitalization of raxibacumab manufacturing costs in 2010. Our
manufacturing costs for the three months ended June 30, 2010 and 2009 are net of $13.4 million and
$0.4 million, respectively, of anticipated cost reimbursement from GSK and Novartis under the
commercial cost sharing provisions in our collaboration agreements. Our manufacturing costs for
the six months ended June 30, 2010 and 2009 are net of $22.0 million and $0.6 million,
respectively, of anticipated cost reimbursement from GSK and Novartis under the commercial cost
sharing provisions in our collaboration agreements. Our manufacturing costs are expected to
increase as we produce BENLYSTA commercial product in anticipation of launch. These costs are
expensed as incurred until regulatory approval of the product is obtained.
Our clinical development costs decreased to $16.2 million for the three months ended June 30,
2010 from $18.6 million for the three months ended June 30, 2009. Our clinical development costs
decreased to $32.5 million for the six months ended June 30, 2010 from $39.5 million for the six
months ended June 30, 2009. The decrease is primarily due to the completion of our first BENLYSTA
Phase 3 clinical trial in 2009, completion of our second Phase 3 BENLYSTA clinical trial in March
2010 and decreased raxibacumab development activities. Our clinical development expenses for the
three months ended June 30, 2010 and 2009 are net of $5.2 million and $8.2 million, respectively,
of cost reimbursement from GSK and Novartis under cost sharing provisions in our collaboration
agreements. Our clinical development expenses for the six months ended June 30, 2010 and 2009 are
net of $11.5 million and $19.7 million, respectively, of cost reimbursement from GSK and Novartis
under cost sharing provisions in our collaboration agreements.
General and administrative expenses increased to $23.8 million for the three months ended June
30, 2010 from $12.8 million for the three months ended June 30, 2009. General and administrative
expenses increased to $42.1 million for the six months ended June 30, 2010 from $27.1 million for
the six months ended June 30, 2009. This increase is primarily due to increased commercial
readiness activities, including additional personnel and market research.
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Results of Operations (continued)
Facility-related exit costs of $11.4 million for the three and six months ended June 30, 2009
related to a change in the facts and circumstances underlying our accrual for subleased space. The
charge of $11.4 million was the result of the subtenant vacating the space during the six months
ended June 30, 2009.
Investment income increased to $5.1 million for the three months ended June 30, 2010 from $2.9
million for the three months ended June 30, 2009. Investment income increased to $9.7 million for
the six months ended June 30, 2010 from $7.2 million for the six months ended June 30, 2009. The
increase in investment income for the three and six months ended June 30, 2010 was primarily due to
higher average investment balances partially offset by lower yields on our portfolio.
Interest expense increased to $14.8 million for the three months ended June 30, 2010 compared
to $13.8 million for the three months ended June 30, 2009. Interest expense was $29.5 million for
both the six month periods ended June 30, 2010 and 2009. Interest expense includes non-cash
interest expense related to amortization of debt discount of $5.7 million and $4.8 million for the
three months ended June 30, 2010 and 2009, respectively, and non-cash interest expense related to
amortization of debt discount of $11.3 million and $11.2 million for the six months ended June 30,
2010 and 2009, respectively, as a result of the adoption of Financial Accounting Standards Board
Accounting Standards Codification Topic 470 which requires that the liability and equity components
of convertible debt instruments that may be settled in cash upon conversion (including partial cash
settlement) be separately accounted for in a manner that reflects an issuers non-convertible debt
borrowing rate. The increase in interest expense for the three months ended June 30, 2010 is
primarily due to amortization of debt discount.
The gain on extinguishment of debt of $38.9 million for the six months ended June 30, 2009
relates to the repurchase of convertible subordinated debt due in 2011 and 2012 with a face value
of approximately $106.2 million for an aggregate cost of approximately $50.0 million plus accrued
interest. The gain on extinguishment of debt is net of write-offs of related debt discount of
$16.4 million and deferred financing charges of $0.9 million.
Our gain on sale of long-term equity investment during the six months ended June 30, 2009 of
$5.3 million relates to the remaining amount due on the 2008 sale of our investment in CoGenesys.
The charge for impaired investment of $1.3 million for the three and six months ended June 30,
2009 was due to an other-than-temporary impairment on a corporate bond investment. We sold the
investment in July 2009.
Net Income (Loss). We recorded a net loss of $56.9 million, or $0.30 per basic and diluted
share, for the three months ended June 30, 2010 compared to net loss of $65.4 million, or $0.48 per
basic share and diluted share, for the three months ended June 30, 2009. We recorded a net loss of
$104.7 million, or $0.56 per basic and diluted share, for the six months ended June 30, 2010
compared to net income of $64.4 million, or $0.47 per basic share and diluted share, for the six
months ended June 30, 2009. The decreased net loss for the three months ended June 30, 2010 is
primarily due to higher raxibacumab product sales and increased revenue recognized from the
Novartis agreement for the three months ended June 30, 2010 versus 2009. The change from net
income for the six months ended June 30, 2009 to net loss for the six months ended June 30, 2010 is
primarily due to lower product sales and manufacturing and development services revenue in 2010
versus 2009 and the gain on extinguishment of debt in the first quarter of 2009.
Liquidity and Capital Resources
We had working capital of $591.6 million and $616.6 million at June 30, 2010 and December 31,
2009, respectively. The decrease in our working capital for the six months ended June 30, 2010 is
primarily due to the use of working capital to fund our operations, partially offset by the
reclassification of deferred revenue from current to non-current liabilities due to the extension
of the estimated development period for ZALBIN.
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Liquidity and Capital Resources (continued)
We expect to continue to incur substantial expenses relating to our research and development
efforts, as we focus on clinical trials and manufacturing required for the development of our
active product candidates. We will also incur costs related to our pre-commercial launch
activities. In the event our working capital needs exceed our available working capital, we can
utilize our non-current marketable securities, which are classified as available-for-sale. In
2009, the USG agreed to purchase 45,000 additional doses of raxibacumab for the SNS, to be
delivered over a three-year period, which began in 2009. We expect to receive a total of
approximately $152.0 million from this order as deliveries are completed, of which a cumulative
total of $44.4 million has been recognized as revenue through the second quarter of 2010. We may
also receive payments under collaboration agreements, to the extent milestones are met, which would
further improve our working capital position. We continue to evaluate our working capital position
on an ongoing basis.
To minimize our exposure to credit risk, we invest in securities with strong credit ratings
and have established guidelines relative to diversification and maturity with the objectives of
maintaining safety of principal and liquidity. We do not invest in derivative financial instruments
or auction rate securities, and we generally hold our investments in debt securities until
maturity.
The amounts of expenditures that will be needed to carry out our business plan are subject to
numerous uncertainties, which may adversely affect our liquidity and capital resources. We
completed our fourth Phase 3 trial and have several ongoing Phase 1 and Phase 2 trials and expect
to initiate additional trials in the future. Completion of these trials may extend several years
or more, but the length of time generally varies considerably according to the type, complexity,
novelty and intended use of the drug candidate. We estimate that the completion periods for our
Phase 1, Phase 2, and Phase 3 trials could span one year, one to two years and two to four years,
respectively. Some trials may take considerably longer to complete. The duration and cost of our
clinical trials are a function of numerous factors such as the number of patients to be enrolled in
the trial, the amount of time it takes to enroll them, the length of time they must be treated and
observed, and the number of clinical sites and countries for the trial.
Our clinical development expenses are dependent on the clinical phase of our drug candidates.
Our expenses increase as our drug candidates move to later phases of clinical development. The
status of our clinical projects is as follows:
Clinical Trial Status as of June 30, (2) | ||||||
Product Candidate (1) | Indication | 2010 | 2009 | |||
ZALBIN |
Hepatitis C | Phase 3 (3) | Phase 3 | |||
BENLYSTA |
Systemic Lupus Erythematosus | Phase 3 (4) | Phase 3 | |||
BENLYSTA |
Rheumatoid Arthritis | (5) | Phase 2 (5) | |||
Raxibacumab |
Anthrax | (6) | (6) | |||
HGS1029 |
Cancer | Phase 1(7) | Phase 1(7) | |||
HGS-ETR1 |
Cancer | Phase 2 | Phase 2 | |||
HGS-ETR2 |
Cancer | (8) | Phase 1 |
(1) | Includes only those candidates for which an Investigational New Drug Application (IND) has
been filed with the FDA. |
|
(2) | Clinical Trial Status defined as when patients are being dosed. |
|
(3) | Phase 3 results reported; BLA filed in 2009, MAA filed in 2009 and withdrawn in 2010. Phase 2
four-week dosing study under analysis. |
|
(4) | Results from two Phase 3 clinical trials reported; MAA and BLA filed in June 2010. |
|
(5) | Initial Phase 2 trial completed; treatment IND ongoing. |
|
(6) | BLA filed in 2009; Complete Response Letter received from FDA; additional work ongoing. |
|
(7) | IND filed in December 2007 with respect to HGS1029 (formerly AEG40826). |
|
(8) | Ongoing Phase 1 trial by National Institutes of Health; further development not anticipated. |
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Liquidity and Capital Resources (continued)
We identify our drug candidates by conducting numerous preclinical studies. We may conduct
multiple clinical trials to cover a variety of indications for each drug candidate. Based upon the
results from our trials, we may elect to discontinue clinical trials for certain indications or
certain drugs in order to concentrate our resources on more promising drug candidates.
We are advancing a number of drug candidates, including antibodies, an albumin fusion protein
and a small molecule, in part to diversify the risks associated with our research and development
spending. In addition, our manufacturing plants have been designed to enable multi-product
manufacturing capability.
We must receive regulatory clearance to advance each of our products into and through each
phase of clinical testing. Moreover, we must receive regulatory approval to launch any of our
products commercially. In order to receive such approval, the appropriate regulatory agency must
conclude that our clinical data establish safety and efficacy and that our products and the
manufacturing facilities meet all applicable regulatory requirements. We cannot be certain that we
will establish sufficient safety and efficacy data to receive regulatory approval for any of our
drugs or that our drugs and the manufacturing facilities will meet all applicable regulatory
requirements.
Part of our business plan includes collaborating with others. For example, we entered into a
collaboration agreement in 2006 with Novartis to co-develop and co-commercialize ZALBIN. Under
this agreement, we will co-commercialize ZALBIN in the United States, and will share U.S.
commercialization costs and U.S. profits equally. Novartis will be responsible for
commercialization outside the U.S. and will pay us a royalty on those sales. We and Novartis share
clinical development costs. Including a non-refundable up-front license fee, we are entitled to
payments aggregating approximately $507.5 million upon successful attainment of certain milestones.
As of June 30, 2010, we have contractually earned and received milestones aggregating $207.5
million. In 2006, we entered into a collaboration agreement with GSK with respect to BENLYSTA and
received a payment of $24.0 million. We and GSK share Phase 3 and 4 development costs, and will
share sales and marketing expenses and profits of any product that is commercialized in accordance
with the collaboration agreement. During the six months ended June 30, 2010, we recorded
approximately $34.7 million due from GSK and Novartis with respect to our cost sharing agreements
as a reduction of research and development expenses. We are recognizing the up-front fees and
milestones received from GSK and Novartis as revenue ratably over the estimated remaining
development periods.
We have collaborators who have sole responsibility for product development. For example, GSK
is developing other products under separate agreements as part of our overall relationship with
them. We have no control over the progress of GSKs development plans. We cannot forecast with
any degree of certainty whether any of our current or future collaborations will affect our drug
development.
Because of the uncertainties discussed above, the costs to advance our research and
development projects are difficult to estimate and may vary significantly. We expect that our
existing funds, payments received under the raxibacumab contract and other agreements and
investment income will be sufficient to fund our operations for at least the next twelve months.
Our future capital requirements and the adequacy of our available funds will depend on many
factors, primarily including the scope and costs of our clinical development programs, the scope
and costs of our manufacturing and process development activities, the magnitude of our discovery
and preclinical development programs and the level of our pre-commercial launch activities. There
can be no assurance that any additional financing required in the future will be available on
acceptable terms, if at all.
Depending upon market and interest rate conditions, we are exploring, and, from time to time,
may take actions to strengthen further our financial position. We may undertake financings and may
repurchase or restructure some or all of our outstanding convertible debt instruments in the future
depending upon market and other conditions. During 2009 we repurchased approximately $106.2
million of our convertible subordinated debt due in 2011 and
2012 at a cost of approximately $50.0 million plus accrued interest. In August and December
2009 we completed public offerings of our common stock, resulting in net cash proceeds of
approximately $812.9 million.
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Liquidity and Capital Resources (continued)
We have certain contractual obligations that may have a material future effect on our
financial condition, results of operations, liquidity, capital expenditures or capital resources.
Our operating leases, along with our unconditional purchase obligations, are not recorded on our
balance sheets. Debt associated with the sale and accompanying leaseback of our LSM facility to
BioMed in 2006 is recorded on our balance sheet as of June 30, 2010 and December 31, 2009. We have
an option to purchase the Traville facility in 2016 for $303.0 million.
Our unrestricted and restricted funds may be invested in U.S. Treasury securities, government
agency obligations, high grade corporate debt securities and various money market instruments rated
A- or better. Such investments reflect our policy regarding the investment of liquid assets,
which is to seek a reasonable rate of return consistent with an emphasis on safety, liquidity and
preservation of capital.
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Off-Balance Sheet Arrangements
During 1997 and 1999, we entered into two long-term leases with the Maryland Economic
Development Corporation (MEDCO) expiring January 1, 2019 for a small-scale manufacturing facility
aggregating 127,000 square feet and built to our specifications. We have accounted for these
leases as operating leases. The facility was financed primarily through a combination of bonds
issued by MEDCO (MEDCO Bonds) and loans issued to MEDCO by certain State of Maryland agencies.
We have no equity interest in MEDCO.
Rent is based upon MEDCOs debt service obligations and annual base rent under the leases is
currently approximately $2.6 million. The MEDCO Bonds are secured by letters of credit issued for
the account of MEDCO which were renewed in December 2009. We are required to have restricted
investments of approximately $34.3 million which serve as security for the MEDCO letters of credit
reimbursement obligation. Upon default or early lease termination, the MEDCO Bond indenture
trustee can draw upon the letters of credit to pay the MEDCO Bonds as they are tendered. In such
an event, we could lose part or all of our restricted investments and could record a charge to
earnings for a corresponding amount. Alternatively, we have an option through the end of the lease
term to purchase this facility for an aggregate amount that declines from approximately $37.0
million in 2010 to approximately $21.0 million in 2019.
Safe Harbor Statement Under the Private Securities Litigation Reform Act of 1995
Certain statements contained in Managements Discussion and Analysis of Financial Condition
and Results of Operations are forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as
amended. The forward-looking statements are based on our current intent, belief and expectations.
These statements are not guarantees of future performance and are subject to certain risks and
uncertainties that are difficult to predict. Actual results may differ materially from these
forward-looking statements because of our unproven business model, our dependence on new
technologies, the uncertainty and timing of clinical trials and regulatory approvals, our ability
to develop and commercialize products, our dependence on collaborators for services and revenue,
our substantial indebtedness and lease obligations, our changing requirements and costs associated
with facilities, intense competition, the uncertainty of patent and intellectual property
protection, our dependence on key management and key suppliers, the uncertainty of regulation of
products, the impact of future alliances or transactions and other risks described in this filing
and our other filings with the Securities and Exchange Commission. Existing and prospective
investors are cautioned not to place undue reliance on these forward-looking statements, which
speak only as of todays date. We undertake no obligation to update or revise the information
contained in this announcement whether as a result of new information, future events or
circumstances or otherwise.
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Item 3. Quantitative and Qualitative Disclosures About Market Risk
We do not currently have operations of a material nature that are subject to risks of foreign
currency fluctuations. We do not use derivative financial instruments in our operations or
investment portfolio. Our investment portfolio may be comprised of low-risk U.S. Treasuries,
government-sponsored enterprise securities, high-grade debt having at least an A- rating at time
of purchase and various money market instruments. The short-term nature of these securities, which
currently have an average term of approximately 14 months, decreases the risk of a material loss
caused by a market change related to interest rates.
We believe that a hypothetical 100 basis point adverse move (increase) in interest rates along
the entire interest rate yield curve would adversely affect the fair value of our cash, cash
equivalents, short-term investments, marketable securities and restricted investments by
approximately $12.5 million, or approximately 1.2% of their aggregate fair value of approximately
$1.1 billion, at June 30, 2010. For these reasons, and because these securities are generally held
to maturity, we believe we do not have significant exposure to market risks associated with changes
in interest rates related to our debt securities held as of June 30, 2010. We believe that any
interest rate change related to our investment securities held as of June 30, 2010 is not material
to our consolidated financial statements. As of June 30, 2010, the yield on comparable one-year
investments was approximately 0.3%, as compared to our current portfolio yield of approximately
1.7%. However, given the short-term nature of these securities, a general decline in interest rates
may adversely affect the interest earned from our portfolio as securities mature and may be
replaced with securities having a lower interest rate.
To minimize our exposure to credit risk, we invest in securities with strong credit ratings
and have established guidelines relative to diversification and maturity with the objectives of
maintaining safety of principal and liquidity. We do not invest in derivative financial
instruments, auction rate securities, loans held for sale or mortgage-backed securities backed by
sub-prime or Alt-A collateral, and we generally hold our investments in debt securities until
maturity. However, adverse changes in the credit markets relating to credit risks would adversely
affect the fair value of our cash, cash equivalents, short-term investments, marketable securities
and restricted investments.
The facility leases we entered into during 2006 require us to maintain minimum levels of
restricted investments of approximately $46.0 million, or $39.5 million if in the form of cash, as
collateral for these facilities. Together with the requirement to maintain approximately $34.3
million in restricted investments with respect to our small-scale manufacturing facility leases,
our overall level of restricted investments is currently required to be approximately $80.3
million. Although the market value for these investments may rise or fall as a result of changes
in interest rates, we will be required to maintain this level of restricted investments in either a
rising or declining interest rate environment.
Our convertible subordinated notes bear interest at fixed rates. As a result, our interest
expense on these notes is not affected by changes in interest rates.
Our wholly-owned subsidiary, Human Genome Sciences Europe GmbH (HGS Europe) assists in our
clinical trials and clinical research collaborations in European countries. Although HGS Europes
activities are denominated primarily in euros, we believe the foreign currency fluctuation risks to
be immaterial to our operations as a whole. Our wholly-owned subsidiary, Human Genome Sciences
Pacific Pty Ltd. (HGS Pacific) sponsors some of our clinical trials in the Asia/Pacific region.
We currently do not anticipate HGS Pacific to have any operational activity and therefore we do not
believe we will have any foreign currency fluctuation risks with respect to HGS Pacific.
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Item 4. Controls and Procedures
Disclosure Controls and Procedures
Our management, including our principal executive and principal financial officers, has
evaluated the effectiveness of our disclosure controls and procedures as of June 30, 2010. Our
disclosure controls and procedures are designed to provide reasonable assurance that the
information required to be disclosed in this Quarterly Report on Form 10-Q has been appropriately
recorded, processed, summarized and reported within the time periods specified in the Securities
and Exchange Commissions rules and forms, and that such information is accumulated and
communicated to our management, including our principal executive and principal financial officers,
to allow timely decisions regarding required disclosure. Based on that evaluation, our principal
executive and principal financial officers have concluded that our disclosure controls and
procedures are effective at the reasonable assurance level.
Changes in Internal Control
Our management, including our principal executive and principal financial officers, has
evaluated any changes in our internal control over financial reporting that occurred during the
quarterly period ended June 30, 2010, and has concluded that there was no change that occurred
during the quarterly period ended June 30, 2010 that has materially affected, or is reasonably
likely to materially affect, our internal control over financial reporting.
Item 5. Other Information
On July 20, 2010, the Companys Board of Directors approved a form of indemnification
agreement (the Indemnification Agreement) and authorized the Company to enter into such
Indemnification Agreement with each of its directors and senior officers, as well as other key
employees and key agents. The Indemnification Agreement is intended to supplement the
indemnification provided in the Companys Bylaws. The Indemnification Agreement provides, subject
to certain exceptions, that the Company will indemnify the individual against certain liabilities
in connection with a claim arising by reason of the fact that the individual is or was a director,
officer, employee or agent of the Company. The Indemnification Agreement also provides for the
advancement of expenses in connection with the defense of such claims. In addition, the Company
will be required to maintain directors and officers liability insurance on the terms described in
the Indemnification Agreement. The Indemnification Agreement is attached to this report as Exhibit
10.1 and is incorporated herein by reference. The foregoing description of the material terms of
the Indemnification Agreement is qualified in its entirety by reference to the exhibit.
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PART II. OTHER INFORMATION
Item 1A. Risk Factors
There are a number of risk factors that could cause our actual results to
differ materially from those that are indicated by forward-looking statements. Those factors
include, without limitation, those listed below and elsewhere herein.
RISKS RELATED TO OUR BUSINESS
If we are unable to commercialize our Phase 3 and earlier development molecules, we may not be able
to recover our investment in our product development, manufacturing and marketing efforts.
We have invested significant time and resources to isolate and study genes and determine their
functions. We now devote most of our resources to developing proteins, antibodies and small
molecules for the treatment of human disease. We are also devoting substantial resources to our own
manufacturing capabilities, to support clinical testing, to supply raxibacumab to the U.S.
Strategic National Stockpile (SNS) and for potential commercialization of our other products. We
expect to devote substantial resources to establish and maintain a marketing capability for any of
our products that are approved by the U.S. Food and Drug Administration (FDA). We have made and
are continuing to make substantial expenditures in advance of commercializing any products. Before
we can commercialize a product, we must rigorously test the product in the laboratory and complete
extensive human studies. We cannot assure you that the tests and studies will yield products
approved for marketing by the FDA in the United States or similar regulatory authorities in other
countries, or that any such products will be profitable. We will incur substantial additional costs
to continue these activities. If we are not successful in commercializing our Phase 3 and earlier
development molecules, we may be unable to recover the large investment we have made in research,
development, manufacturing and marketing efforts.
If we are unable to obtain marketing approval for BENLYSTA®, our results of operations
and business will be materially and adversely affected.
In July 2009, we reported the results from the first of our two Phase 3 clinical trials for
BENLYSTA. In that trial BENLYSTA met its primary efficacy endpoint. In November 2009, we reported
the 52-week results from the second of our two Phase 3 clinical trials for BENLYSTA. In that trial,
BENLYSTA at a dose of 10 mg/kg also met its primary efficacy endpoint. Although the primary
efficacy endpoint of the BLISS-76 trial was assessed after 52 weeks, we continued to collect
additional data from this trial for an additional 24 weeks. In April 2010, we reported the results
of the BLISS 76 trial for these additional weeks. At week 76 in the BLISS-76 trial, BENLYSTA plus
standard of care showed higher response rates compared with placebo plus standard of care, but this
difference was not statistically significant. We do not know what, if any, effect these 76-week
results may have on our ability to obtain regulatory approval for BENLYSTA. We filed a Biologics
License Application (BLA) for BENLYSTA in the United States in June 2010. Despite our
determination that the results from the two BENLYSTA trials were positive, the FDA or similar
regulatory authorities may determine that the results from the two trials do not support marketing
approval or are insufficient to obtain marketing approval. In addition, our partner GlaxoSmithKline
(GSK) may determine that the results of these trials do not warrant further development or
commercialization and may terminate its collaboration agreement. If we are unable to obtain
marketing approval for BENLYSTA or if marketing approval is delayed or if our partner terminates
its collaboration agreement, our results of operations and business will be materially adversely
affected.
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Although we have filed a BLA for ZALBINTM, it is unlikely that we will receive
regulatory approval from the FDA for this BLA and, at this time, we do not know if further
development of ZALBIN is feasible or warranted.
In March 2009, we reported the results from the second of our two Phase 3 clinical trials for
ZALBIN. In that trial, as well as the trial we reported on in December 2008, ZALBIN met its primary
efficacy endpoint. In November 2009, we filed a BLA with the FDA for ZALBIN and, in December 2009,
our collaboration partner Novartis filed a Marketing Authorization Application (MAA) under the
brand name JOULFERON® with the European Medicines
Agency. In April 2010, Novartis withdrew the MAA. The decision to withdraw the application
was based on feedback from European regulatory authorities in preliminary response to the MAA,
indicating that additional new data would be requested which could not reasonably be generated
within the timeframe allowed in the European Centralized Procedure. The feedback included whether
the therapeutic benefit offered by the product dosed every two weeks was sufficient relative to the
risk. In June 2010, we announced that we had received preliminary written feedback from the FDA
regarding the BLA for ZALBIN. The FDA feedback was provided via a Discipline Review letter, which
is a standard vehicle for review disciplines (e.g., clinical) to convey early thoughts on possible
deficiencies of an application. The FDA expressed concerns regarding the risk benefit assessment
of ZALBIN dosed at 900-mcg every two weeks. Although the BLA review is ongoing, we have concluded
that licensure of this dosing regimen is unlikely. We expect a final decision from the FDA on or
before October 4, 2010. If, as expected, we are unable to obtain marketing approval for ZALBIN
dosed every two weeks, our expected revenues may decrease and we may incur substantial research and
development costs performing additional clinical trials.
At this time, we do not know if further development of ZALBIN is feasible or warranted. In
March 2010, we announced interim results of a clinical trial of ZALBIN dosed every four weeks in
patients with genotypes 2 and 3 Hepatitis C. We and our collaboration partner Novartis are
continuing to review the data from our ZALBIN clinical trials, including the final results from the
clinical trial for ZALBIN dosed every four weeks. We or our collaboration partner Novartis may
determine that the results of these trials do not warrant further development or commercialization
and one or both of us may terminate our collaboration agreement. If we conclude that further
development of ZALBIN is warranted, such development is likely to be costly, and marketing approval
for ZALBIN is unlikely to be obtained, if ever, for at least three to four years. Termination of
further development of ZALBIN or of our collaboration agreement with Novartis may adversely affect
our results of operations and business.
We may be unable to successfully establish commercial manufacturing capability and may be unable to
obtain required quantities of our product candidates for commercial use.
We have not yet manufactured any products approved for commercial use and, except for
raxibacumab, have limited experience in manufacturing materials suitable for commercial use. We
have only limited experience manufacturing in a large-scale manufacturing facility built to
increase our capacity for protein and antibody drug production. The FDA must inspect and license
our facilities to determine compliance with current good manufacturing practices (cGMP)
requirements for commercial production. We may not be able to successfully establish sufficient
manufacturing capabilities or manufacture our products economically or in compliance with cGMPs and
other regulatory requirements. For example, we believe that we have sufficient manufacturing
capacity to launch BENLYSTA, if it is approved by the FDA, and to supply commercial quantities of
BENLYSTA to approximately 45,000 to 55,000 patients per year. In June
2010, we entered into a manufacturing agreement with Lonza Sales AG (Lonza) pursuant to which
Lonza will manufacture additional commercial quantities of BENLYSTA. However, this additional
manufacturing capacity may not be available for 18 months or longer, if ever, due, in part, to the
time required to obtain regulatory approvals for the manufacture of BENLYSTA in Lonzas facility.
If Lonzas facility fails to obtain regulatory approval in a timely manner or at all, we may not be
able to build or procure additional capacity in the required timeframe to meet demand, and our
revenues may be limited from BENLYSTA if we are unable to do so
successfully. If the demand for BENLYSTA exceeds our capacity to
supply BENLYSTA to patients, our revenues from BENLYSTA also may be
limited.
Currently each of our late-stage products, BENLYSTA, ZALBIN and raxibacumab, is produced at a
single manufacturing site. BENLYSTA is produced at our large-scale manufacturing facility in
Rockville, Maryland and ZALBIN and raxibacumab are produced in separate parts of our small-scale
manufacturing facility, which is also in Rockville, Maryland. Each of these facilities is the sole
source for these products. We cannot guarantee that one or more of these manufacturing plants will
not encounter problems, including but not limited to loss of power, equipment failure or viral or
microbial contamination, which could impact our ability to deliver adequate supply of one or more
of these products to the market.
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While we have expanded our manufacturing capabilities, we have previously contracted and
expect to contract with third-party manufacturers or develop products with collaboration partners
and use the collaboration partners manufacturing capabilities. If we use others to manufacture our
products, we will depend on those parties to comply
with cGMPs, and other regulatory requirements and to deliver materials on a timely basis.
These parties may not perform adequately, or comparability between the licensed product and that
produced at the third-party may not be established successfully. Any failures by these third
parties may delay our development of products or the submission of these products for regulatory
approval.
Because we currently have only a limited marketing capability and in light of various factors, we
may be unable to price or sell any of our products effectively.
We do not have any marketed products, although we have sold raxibacumab to the
U.S. Government. If we receive approval for products that can be marketed, we intend to market the
products either independently or together with collaborators or strategic partners. GSK, Novartis
and others have co-commercialization rights with respect to certain of our products. If we decide
to market any products, either independently or together with partners, we will incur significant
additional expenditures and commit significant additional management resources to establish a sales
force. For any products that we market together with partners, we will rely, in whole or in part,
on the marketing capabilities of those parties. We may also contract with third parties to market
certain of our products. Ultimately, we and our partners may not be successful in marketing our
products. In addition, the prices for our products may be impacted by various factors, including
economic analyses of the burden of the applicable disease, the perceived value of the product and
third party reimbursement policies. We can provide no assurance as to the price at which we may be
able to sell any of our products, or that we will be able to price any of our products at a level
that is consistent with other similar products.
If we are unable to expand label usage of BENLYSTA, we may not recognize the full value of the
product candidate and there may be adverse effects on our expected financial and operating results.
BENLYSTA is a human monoclonal antibody that recognizes and inhibits the biological activity
of B-lymphocyte stimulator, or BLyS, and is being developed as a potential treatment for systemic
lupus erythematosus (SLE). If the FDA or other regulatory agencies approve BENLYSTA for the
treatment of SLE, we intend to seek expansion of the approved uses, or labeled uses, of BENLYSTA in
the U.S. and elsewhere. However, we may be unable to obtain approval for such label expansion in
full or in part. If we are not able to obtain approval for expansion of the labeled uses for
BENLYSTA, or if we are otherwise unable to fulfill our marketing, sales and distribution plans for
BENLYSTA, sales of BENLYSTA may be limited. We may conduct new clinical trials for additional
approved uses of BENLYSTA. There can be no guarantee that these trials will be successful or that
the FDA or other regulatory agencies will approve expansion of the labeled uses for BENLYSTA.
Because our product development efforts depend on new technologies, we cannot be certain that our
efforts will be successful.
Our work depends on new technologies and on the marketability and profitability of innovative
products. Commercialization involves risks of failure inherent in the development of products based
on innovative technologies and the risks associated with drug development generally. These risks
include the possibility that:
| these technologies or any or all of the Phase 3 and earlier development
molecules based on these technologies will be ineffective or toxic, or otherwise
fail to receive necessary regulatory clearances; |
| the products, even if safe and effective, will be difficult to manufacture
on a large scale or uneconomical to market; |
| proprietary rights of third parties will prevent us or our collaborators
from exploiting technologies or marketing products; and |
| third parties will market superior or equivalent products. |
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Because we are a late-stage development company, we cannot be certain that we can develop our
business or achieve profitability.
We expect to continue to incur losses and we cannot assure you that we will ever become
profitable on a sustainable basis. A number of our products are in late-stage development; however,
it could be one or more years, if ever, before we are likely to receive continuing revenue from
product sales or substantial royalty payments. We will continue to incur substantial expenses
relating to research, development and manufacturing efforts and human studies. Depending on the
stage of development, our products may require significant further research, development, testing
and regulatory approvals. We may not be able to develop products that will be commercially
successful or that will generate revenue in excess of the cost of development.
We are continually evaluating our business strategy, and may modify this strategy in light of
developments in our business and other factors.
We continue to evaluate our business strategy and, as a result, may modify this strategy in
the future. In this regard, we may, from time to time, focus our product development efforts on
different products or may delay or halt the development of various products. In addition, as a
result of changes in our strategy, we may also change or refocus our existing drug discovery,
development, commercialization and manufacturing activities. This could require changes in our
facilities and personnel and the restructuring of various financial arrangements. However, we
cannot assure you that changes will occur or that any changes that we implement will be successful.
Several years ago, we sharpened our focus on our most promising drug candidates. We reduced
the number of drugs in early development and focused our resources on the drugs that address the
greatest unmet medical needs with substantial growth potential. In 2006, we spun off our CoGenesys
division (CoGenesys) as an independent company, in a transaction that was treated as a sale for
accounting purposes. In 2008, CoGenesys was acquired by Teva Pharmaceuticals Industries, Ltd.
(Teva) and became a wholly-owned subsidiary of Teva called Teva Biopharmaceuticals USA, Inc.
(Teva Bio).
Our ability to discover and develop new products will depend on our internal research
capabilities and our ability to acquire products. Our internal research capability was reduced when
we completed the spin-off of CoGenesys. Although we continue to conduct research and development
activities on products and expect to increase our activities in the future, our limited resources
for new products may not be sufficient to discover and develop new drug candidates.
PRODUCT DEVELOPMENT RISKS
Because we have limited experience in developing and commercializing products, we may be
unsuccessful in our efforts to do so.
Although we are conducting human studies with respect to a number of products, we have limited
experience with these activities and may not be successful in developing or commercializing these
or other products. Our ability to develop and commercialize products based on proteins, antibodies
and small molecules will depend on our ability to:
| successfully complete laboratory testing and human studies; |
| obtain and maintain necessary intellectual property rights to our products; |
| obtain and maintain necessary regulatory approvals related to the efficacy
and safety of our products; |
| maintain production facilities meeting all regulatory requirements or enter
into arrangements with third parties to manufacture our products on our behalf; and |
| deploy sales and marketing resources effectively or enter into arrangements
with third parties to provide these functions. |
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Because clinical trials for our products are expensive and protracted and their outcome is
uncertain, we must invest substantial amounts of time and money that may not yield viable products.
Conducting clinical trials is a lengthy, time-consuming and expensive process. Before
obtaining regulatory approvals for the commercial sale of any product, we must demonstrate through
laboratory, animal and human studies that the product is both effective and safe for use in humans.
We will incur substantial additional expense for and devote a significant amount of time to
conducting ongoing trials and initiating new trials.
Before a drug may be marketed in the United States, a drug must be subject to rigorous
preclinical testing. The results of this testing must be submitted to the FDA as part of an
Investigational New Drug Application (IND), which is reviewed by the FDA before clinical testing
in humans can begin. The results of preclinical studies do not predict clinical success. A number
of potential drugs have shown promising results in early testing but subsequently failed to obtain
necessary regulatory approvals. Data obtained from tests are susceptible to varying
interpretations, which may delay, limit or prevent regulatory approval. Regulatory authorities may
refuse or delay approval as a result of many other factors, including changes in regulatory policy
during the period of product development.
Completion of clinical trials may take many years. The time required varies substantially
according to the type, complexity, novelty and intended use of the product candidate. The progress
of clinical trials is monitored by both the FDA and independent data monitoring committees, which
may require the modification, suspension or termination of a trial if it is determined to present
excessive risks to patients. Our rate of commencement and completion of clinical trials may be
delayed by many factors, including:
| our inability to manufacture sufficient quantities of materials for use in
clinical trials; |
| variability in the number and types of patients available for each study; |
| difficulty in maintaining contact with patients after treatment, resulting
in incomplete data; |
| unforeseen safety issues or side effects; |
| poor or unanticipated effectiveness of products during the clinical trials;
or |
| government or regulatory delays. |
To date, data obtained from our clinical trials may not be sufficient to support an
application for regulatory approval without further studies. Studies conducted by us or by third
parties on our behalf may not demonstrate sufficient effectiveness and safety to obtain the
requisite regulatory approvals for these or any other potential products. For example, we have
submitted BLAs to the FDA for raxibacumab, ZALBIN and BENLYSTA, but the studies we have conducted
to date may not be sufficient to obtain FDA approval. In November 2009, we received a Complete
Response Letter from the FDA related to our BLA for raxibacumab. In this letter, the FDA determined
that it cannot approve the BLA in its present form and requested additional studies and data that
would be needed prior to the FDA making a decision as to whether or not to approve the raxibacumab
BLA. We may not be able to complete the requested studies or to generate the required data in a
timely manner, if at all. If the FDA requires that we complete the additional studies and generate
the additional data requested in the Complete Response Letter, we may be required to withdraw our
existing BLA and resubmit our BLA after completion of such studies. This will start a new review
cycle. Even if we could complete such studies and generate such data, the studies and data may not
be sufficient for FDA approval. In addition, based on the results of a human study for a particular
product candidate, regulatory authorities may not permit us to undertake any additional clinical
trials for that product candidate. The clinical trial process may also be accompanied by
substantial delay and expense and there can be no assurance that the data generated in these
studies will ultimately be sufficient for marketing approval by the FDA. In February 2010, the FDA
accepted our ZALBIN BLA filing with a PDUFA action date of October 4, 2010. In April 2010, our
collaboration partner Novartis withdrew a MAA for JOULFERON (ZALBIN in the U.S.), previously filed
with the European Medicines Agency. The decision to withdraw the application was based on feedback
from European regulatory authorities in preliminary response to the MAA, indicating that additional
new data would be requested which could not reasonably be generated within the timeframe allowed in
the European Centralized Procedure. The feedback included whether the therapeutic benefit offered by the product dosed
every two weeks was sufficient relative to the risk. In June 2010, we announced that we had
received preliminary written feedback from the FDA regarding the BLA for ZALBIN. The FDA feedback
was provided via a Discipline Review letter, which is a standard vehicle for review disciplines
(e.g., clinical) to convey early thoughts on possible deficiencies of an application. The FDA
expressed concerns regarding the risk benefit assessment of ZALBIN dosed at 900-mcg every two
weeks. Although the BLA review is ongoing, we have concluded that licensure of this dosing regimen
is unlikely. We expect a final decision from the FDA on or before October 4, 2010.
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The development program for BENLYSTA involved two large-scale, multi-center Phase 3 clinical
trials and was more expensive than our Phase 1 and Phase 2 clinical trials. In July 2009, we
reported the results from the first of our two Phase 3 clinical trials for BENLYSTA. In that trial,
BENLYSTA met its primary efficacy endpoint. In November, 2009, we reported the 52 week data from
the second Phase 3 clinical trial for BENLYSTA. In that trial, BENLYSTA at a dose of 10 mg/kg also
met its primary efficacy endpoint. Although the primary efficacy endpoint of the BLISS-76 study was
assessed after 52 weeks, we continued to collect additional data from this trial for an additional
24 weeks. In April 2010, we reported the results of the BLISS 76 trial for these additional weeks.
At week 76 in the BLISS-76 trial, BENLYSTA plus standard of care showed higher response rates
compared with placebo plus standard of care, but this difference was not statistically significant.
We do not know what, if any effect, these 76-week results may have on our ability to obtain
regulatory approval for BENLYSTA. We filed a BLA in the United States in June 2010. We may not
be able to obtain FDA or other regulatory approval of BENLYSTA. Even if FDA or other regulatory
approval is obtained, it may include limitations on the indicated uses for which BENLYSTA may be
marketed.
We face risks in connection with our raxibacumab product in addition to risks generally associated
with drug development.
The development of raxibacumab, a human monoclonal antibody developed for use in the treatment
of anthrax disease, presents risks beyond those associated with the development of our other
products. Numerous other companies and governmental agencies are known to be developing biodefense
pharmaceuticals and related products to combat anthrax disease. These competitors may have
financial or other resources greater than ours, and may have easier or preferred access to the
likely distribution channels for biodefense products. In addition, since the primary purchaser of
biodefense products is the U.S. Government and its agencies, the success of raxibacumab will depend
on government spending policies and pricing restrictions. The funding of government biodefense
programs is dependent, in part, on budgetary constraints, political considerations and military
developments. In the case of the U.S. Government, executive or legislative action could attempt to
impose production and pricing requirements on us. We have entered into a two-phase contract to
supply raxibacumab to the U.S. Government, which may be terminated by the U.S. Government at any
time. Under the first phase of the contract, we supplied ten grams of raxibacumab to the HHS for
comparative in vitro and in vivo testing. Under the second phase of the contract, the U.S.
Government ordered 20,001 doses of raxibacumab for the U.S. SNS for use in the treatment of anthrax
disease. We completed delivery of these doses and the U.S. Government accepted our deliveries. In
July 2009, the U.S. Government agreed to purchase 45,000 additional doses. We, therefore, have
future deliveries to make and ongoing obligations under the contract, including the obligation to
seek FDA approval. We will continue to face risks related to the requirements of the contract. If
we are unable to meet our obligations associated with this contract, the U.S. Government will not
be required to make future payments related to that order. Although we have received U.S.
Government approval for two orders of raxibacumab, we cannot assure you we will receive additional
orders. In November 2009, we received a Complete Response Letter from the FDA related to our BLA
for raxibacumab. In this letter, the FDA determined that it cannot approve our BLA for raxibacumab
in its present form and requested additional studies and data that would be needed prior to the FDA
making a decision as to whether or not to approve the raxibacumab BLA. We may not be able to
complete the requested studies or to generate the required data in a timely manner, if at all.
Furthermore, we may be required to withdraw our existing BLA and resubmit our BLA after completion
of such studies. This will start a new review cycle. Even if we could complete such studies and
generate such data, the studies and data may not be sufficient for FDA approval. Although the
government has accepted shipment of raxibacumab subsequent to the receipt of the FDAs Complete
Response Letter, we cannot assure you that the government will continue to accept future shipments
or place additional orders.
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Because neither we nor any of our collaboration partners have received marketing approval for any
product candidate resulting from our research and development efforts, and because we may never be able to
obtain any such approval, it is possible that we may not be able to generate any product revenue
other than with respect to raxibacumab.
Although we have submitted BLAs for three of our products (raxibacumab, ZALBIN and BENLYSTA),
we cannot assure you that any of these products will receive marketing approval. It is possible
that we will not receive FDA marketing approval for any of our products. All products being
developed by our collaboration partners will also require additional research and development,
preclinical studies and extensive clinical trials and regulatory approval prior to any commercial
sales. In some cases, the length of time that it takes for our collaboration partners to achieve
various regulatory approval milestones may affect the payments that we are eligible to receive
under our collaboration agreements. We and our collaboration partners may need to successfully
address a number of technical challenges in order to complete development of our products.
Moreover, these products may not be effective in treating any disease or may prove to have
undesirable or unintended side effects, toxicities or other characteristics that may preclude
obtaining regulatory approval or prevent or limit commercial use.
RISK FROM COLLABORATION RELATIONSHIPS AND STRATEGIC ACQUISITIONS
Our plan to use collaborations to leverage our capabilities and to grow in part through the
strategic acquisition of other companies and technologies may not be successful if we are unable to
integrate our partners capabilities or the acquired companies with our operations or if our
partners capabilities do not meet our expectations.
As part of our strategy, we intend to continue to evaluate strategic partnership opportunities
and consider acquiring complementary technologies and businesses. In order for our future
collaboration efforts to be successful, we must first identify partners whose capabilities
complement and integrate well with ours. Technologies to which we gain access may prove ineffective
or unsafe. Our current agreements that grant us access to such technology may expire and may not be
renewable or could be terminated if we or our partners do not meet our obligations. These
agreements are subject to differing interpretations and we and our partners may not agree on the
appropriate interpretation of specific requirements. Our partners may prove difficult to work with
or less skilled than we originally expected. In addition, any past collaborative successes are no
indication of potential future success.
In order to achieve the anticipated benefits of an acquisition, we must integrate the acquired
companys business, technology and employees in an efficient and effective manner. The successful
combination of companies in a rapidly changing biotechnology industry may be more difficult to
accomplish than in other industries. The combination of two companies requires, among other things,
integration of the companies respective technologies and research and development efforts. We
cannot assure you that this integration will be accomplished smoothly or successfully. The
difficulties of integration may be increased by any need to coordinate geographically separated
organizations and address possible differences in corporate cultures and management philosophies.
The integration of certain operations will require the dedication of management resources which may
temporarily distract attention from the day-to-day operations of the combined companies. The
business of the combined companies may also be disrupted by employee retention uncertainty and lack
of focus during integration. The inability of management to integrate successfully the operations
of the two companies, in particular, the integration and retention of key personnel, or the
inability to integrate successfully two technology platforms, could have a material adverse effect
on our business, results of operations and financial condition.
We reacquired rights to HGS-ETR1 from GSK, as well as all GSK rights to other TRAIL Receptor
antibodies. We may be unsuccessful in developing and commercializing products from these antibodies
without a collaborative partner.
As part of our September 1996 agreement with GSK, we granted a 50/50 co-development and
co-commercialization option to GSK for certain human therapeutic products that successfully
completed Phase 2a clinical trials. In August 2005, we announced that GSK had exercised its option
to develop and commercialize HGS-ETR1 (mapatumumab) jointly with us. In April 2008, we announced
that we had reacquired all rights to our TRAIL receptor antibodies (including rights to HGS-ETR1
and HGS-ETR2) from GSK, in return for a reduction in royalties due to us if Syncria®, a GSK product
for which we would be owed royalties, is commercialized. We also announced
that our agreement with the pharmaceutical division of Kirin Brewery Company, Ltd. for joint
development of antibodies to TRAIL receptor 2 had been terminated. Takeda Pharmaceutical Company,
Ltd. has the right to develop HGS-ETR1 in Japan. As a result of these actions, we have assumed full
responsibility for the development and commercialization of products based on these antibodies,
except for HGS-ETR1 in Japan. We have ongoing development programs related to HGS-ETR1
(mapatumumab), but do not anticipate further development of HGS-ETR2.
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Our ability to receive revenues from the assets licensed in connection with our CoGenesys
transaction will depend on Teva Bios ability to develop and commercialize those assets.
We will depend on Teva Bio to develop and commercialize the assets licensed as part of the
spin-off of CoGenesys. If Teva Bio is not successful in its efforts, we will not receive any
revenue from the development of these assets. In addition, our relationship with Teva Bio will be
subject to the risks and uncertainties inherent in our other collaborations.
Because we currently depend on our collaboration partners for substantial revenue, we may not
become profitable on a sustainable basis if we cannot increase the revenue from our collaboration
partners or other sources.
We have received substantial revenue from payments made under collaboration agreements with
GSK and Novartis, and to a lesser extent, other agreements. The research term of our initial GSK
collaboration agreement and many of our other collaboration agreements expired in 2001. None of the
research terms of these collaboration agreements was renewed and we may not be able to enter into
additional collaboration agreements. While our partners under our initial GSK collaboration
agreement have informed us that they have been pursuing research programs involving different genes
for the creation of small molecule, protein and antibody drugs, we cannot assure you that any of
these programs will be continued or will result in any approved drugs.
Under our present collaboration agreements, we are entitled to certain development and
commercialization payments based on our development of the applicable product or certain milestone
and royalty payments based on our partners development of the applicable product. We may not
receive payments under these agreements if we or our collaborators fail to:
| develop marketable products; |
| obtain regulatory approvals for products; or |
| successfully market products. |
Further, circumstances could arise under which one or more of our collaboration partners may
allege that we breached our agreement with them and, accordingly, seek to terminate our
relationship with them. Our collaboration partners may also terminate these agreements without
cause or if competent scientific evidence or safety risks do not justify moving the applicable
product forward. If any one of these agreements terminates, this could adversely affect our ability
to commercialize our products and harm our business.
If one of our collaborators pursues a product that competes with our products, there could be a
conflict of interest and we may not receive milestone or royalty payments.
Each of our collaborators is developing a variety of products, some with other partners. Our
collaborators may pursue existing or alternative technologies to develop drugs targeted at the same
diseases instead of using our licensed technology to develop products in collaboration with us. Our
collaborators may also develop products that are similar to or compete with products they are
developing in collaboration with us. If our collaborators pursue these other products instead of
our products, we may not receive milestone or royalty payments. For example, GSK has been
developing for the treatment of insomnia an orexin inhibitor based on our technology and to which
we are entitled to milestones, royalties and co-promotion rights. In July 2008, GSK announced a
collaboration with Actelion Ltd. to co-develop and co-commercialize a different orexin inhibitor.
While GSK has stated publicly that it intends to continue work on the inhibitor derived from our technology, there can be no assurance that
it will continue to do so or that such work will lead to a commercial product.
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REGULATORY RISKS
Because we are subject to extensive changing government regulatory requirements, we may be unable
to obtain government approval of our products in a timely manner.
Regulations in the United States and other countries have a significant impact on our
research, product development and manufacturing activities and will be a significant factor in the
marketing of our products. All of our products require regulatory approval prior to
commercialization. In particular, our products are subject to rigorous preclinical and clinical
testing and other premarket approval requirements by the FDA and similar regulatory authorities in
other regions, such as Europe and Asia. Various statutes and regulations also govern or influence
the manufacturing, safety, labeling, storage, record keeping and marketing of our products. The
lengthy process of seeking these approvals, and the subsequent compliance with applicable statutes
and regulations, require the expenditure of substantial resources. Any failure by us to obtain, or
any delay in obtaining, regulatory approvals could materially adversely affect our ability to
commercialize our products in a timely manner, or at all.
Marketing Approvals. Before a product can be marketed in the United States, the results of
the preclinical and clinical testing must be submitted to the FDA for approval. This submission
will be either a new drug application or a biologics license application, depending on the type of
drug. In responding to a new drug application or a BLA, the FDA may grant marketing approval,
request additional information or deny the application if it determines that the application does
not provide an adequate basis for approval. We cannot assure you that any approval required by the
FDA will be obtained on a timely basis, or at all. For example, in November 2009, we received a
Complete Response Letter from the FDA related to our BLA for raxibacumab. In this letter, the FDA
determined that it cannot approve our BLA in its present form and requested additional studies and
data that would be needed prior to the FDA making a decision as to whether or not to approve the
raxibacumab BLA. We may not be able to complete the requested studies or to generate the required
data in a timely manner if at all. Furthermore, we may be required to resubmit our BLA after
completion of such studies. This will start a new review cycle. Even if we could complete such
studies and generate such data, the studies and data may not be sufficient for FDA approval. In
addition, based on the results of a human study for a particular product candidate, regulatory
authorities may not permit us to undertake any additional clinical trials for that product
candidate.
In November 2009, we filed a BLA with the FDA for ZALBIN. In February 2010, the FDA accepted
our ZALBIN BLA filing with a PDUFA action date of October 4, 2010. In June 2010, we announced that
we had received preliminary written feedback from the FDA regarding the BLA for ZALBIN. The FDA
feedback was provided via a Discipline Review letter, which is a standard vehicle for review
disciplines (e.g., clinical) to convey early thoughts on possible deficiencies of an application.
The FDA expressed concerns regarding the risk benefit assessment of ZALBIN dosed at 900-mcg every
two weeks. Although the BLA review is ongoing, we have concluded that licensure of this dosing
regimen is unlikely. We expect a final decision from the FDA on or before October 4, 2010
In June 2010 we filed a BLA with the FDA for BENLYSTA and requested priority review of that
application. The FDA may not grant priority review of our BENLYSTA BLA. Even if priority review is
granted, the FDA may not act on our BLA in a timely manner. The FDA may determine that our BLA is
insufficient to support marketing approval or may deny our BLA, either of which would materially
adversely affect our results of operations and business.
The FDA may condition marketing approval on the conduct of specific post-marketing studies to
further evaluate safety and efficacy. Rigorous and extensive FDA regulation of pharmaceutical
products continues after approval, particularly with respect to compliance with cGMPs, reporting of
adverse effects, advertising, promotion and marketing. Discovery of previously unknown problems or
failure to comply with the applicable regulatory requirements may result in restrictions on the
marketing of a product or withdrawal of the product from the market as well as possible civil or
criminal sanctions, any of which could materially adversely affect our business.
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Foreign Regulation. We must obtain regulatory approval by governmental agencies in other
countries prior to commercialization of our products in those countries. Foreign regulatory systems
may be just as rigorous, costly and uncertain as in the United States. In December 2009, our
collaboration partner Novartis filed a MAA for JOULFERON (ZALBIN in the U.S.) with the European
Medicines Agency. In April 2010, Novartis withdrew the MAA. The decision to withdraw the
application was based on feedback from European regulatory authorities in preliminary response to
the MAA, indicating that additional new data would be requested which could not reasonably be
generated within the timeframe allowed in the European Centralized Procedure. The feedback
included whether the therapeutic benefit offered by the product dosed every two weeks was
sufficient relative to the risk.
Because we are subject to environmental, health and safety laws, we may be unable to conduct our
business in the most advantageous manner.
We are subject to various laws and regulations relating to safe working conditions, laboratory
and manufacturing practices, the experimental use of animals, emissions and wastewater discharges,
and the use and disposal of hazardous or potentially hazardous substances used in connection with
our research, including radioactive compounds and infectious disease agents. We also cannot
accurately predict the extent of regulations that might result from any future legislative or
administrative action. Any of these laws or regulations could cause us to incur additional expense
or restrict our operations.
INTELLECTUAL PROPERTY RISKS
If our patent applications do not result in issued patents or if patent laws or the interpretation
of patent laws change, our competitors may be able to obtain rights to and commercialize our
discoveries.
Our pending patent applications, including those covering full-length genes and their
corresponding proteins, may not result in the issuance of any patents. Our applications may not be
sufficient to meet the statutory requirements for patentability in all cases or may be subject to
challenge, if they do issue. Important legal issues remain to be resolved as to the extent and
scope of available patent protection for biotechnology products and processes in the United States
and other important markets outside the United States, such as Europe and Japan. For example, a
recent U.S. district court decision involving Myriad Genetics expressed concerns regarding the
patentability of isolated human genes and gene-based diagnostic methods. In addition, the United
States Congress is considering significant changes to U.S. intellectual property laws which could
affect the extent and scope of existing protections for biotechnology products and processes.
Foreign markets may not provide the same level of patent protection as provided under the U.S.
patent system. We expect that litigation or administrative proceedings will likely be necessary to
determine the validity and scope of certain of our and others proprietary rights. We are currently
involved in a number of litigation and administrative proceedings relating to the scope of
protection of our patents and those of others in both the United States and in the rest of the
world.
We have been involved in a number of interference proceedings brought by the United States
Patent and Trademark Office (PTO) and may be involved in additional interference proceedings in
the future. These proceedings determine the priority of inventions and, thus, the right to a patent
for technology in the U.S.
We are also involved in proceedings in connection with foreign patent filings, including
opposition and revocation proceedings and may be involved in other opposition proceedings in the
future. For example, we are involved in European opposition proceedings against an issued patent of
Biogen Idec. In this opposition, the European Patent Office (EPO) found the claims of Biogen
Idecs patent to be valid. The claims relate to a method of treating autoimmune diseases using an
antibody to BLyS (such as BENLYSTA). We and GSK have entered into a definitive license agreement
with Biogen Idec that provides for an exclusive license to this European patent. This patent is
still under appeal in Europe. We also have been involved in an opposition proceeding brought by Eli
Lilly and Company with respect to our European patent related to BLyS compositions, including
antibodies. In 2008, the Opposition Division of the EPO held our patent invalid. We appealed this
decision, and in October 2009, a Technical Board of Appeal of the EPO reversed the Opposition
Division decision and held that our European patent is valid. In addition, Eli Lilly instituted a
revocation proceeding against our United Kingdom patent that corresponds to our BLyS European
patent; in this proceeding the United Kingdom trial court found the patent invalid. We
appealed this decision and the UK Court of Appeal upheld the lower court ruling that our
United Kingdom patent was invalid. Recently, the UK Supreme Court granted HGS permission to appeal
this decision.
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In addition, Genentech, Inc. has opposed our European patent related to products based on
TRAIL Receptor 1 (such as HGS-ETR1). We are awaiting a formal written decision from the EPO.
We cannot assure you that we will be successful in any of these proceedings. Moreover, any
such litigation or proceeding may result in a significant commitment of resources in the future and
could force us to do one or more of the following: cease selling or using any of our products that
incorporate the challenged intellectual property, which would adversely affect our revenue; obtain
a license from the holder of the intellectual property right alleged to have been infringed, which
license may not be available on reasonable terms, if at all; and redesign our products to avoid
infringing the intellectual property rights of third parties, which may be time-consuming or
impossible to do. In addition, such litigation or proceeding may allow others to use our
discoveries or develop or commercialize our products. Changes in, or different interpretations of,
patent laws in the United States and other countries may result in patent laws that allow others to
use our discoveries or develop and commercialize our products or prevent us from using or
commercializing our discoveries and products. We cannot assure you that the patents we obtain or
the unpatented technology we hold will afford us significant commercial protection.
If others file patent applications or obtain patents similar to ours, then the United States Patent
and Trademark Office may deny our patent applications, or others may restrict the use of our
discoveries.
We are aware that others, including universities and companies working in the biotechnology
and pharmaceutical fields, have filed patent applications and have been granted patents in the
United States and in other countries that cover subject matter potentially useful or necessary to
our business. Some of these patents and patent applications claim only specific products or methods
of making products, while others claim more general processes or techniques useful in the discovery
and manufacture of a variety of products. The risk of third parties obtaining additional patents
and filing patent applications will continue to increase as the biotechnology industry expands. We
cannot predict the ultimate scope and validity of existing patents and patents that may be granted
to third parties, nor can we predict the extent to which we may wish or be required to obtain
licenses to such patents, or the availability and cost of acquiring such licenses. To the extent
that licenses are required, the owners of the patents could bring legal actions against us to claim
damages or to stop our manufacturing and marketing of the affected products. We believe that there
will continue to be significant litigation in our industry regarding patent and other intellectual
property rights. If we become involved in litigation, it could consume a substantial portion of our
resources.
Because issued patents may not fully protect our discoveries, our competitors may be able to
commercialize products similar to those covered by our issued patents.
Issued patents may not provide commercially meaningful protection against competitors and may
not provide us with competitive advantages. Other parties may challenge our patents or design
around our issued patents or develop products providing effects similar to our products. In
addition, others may discover uses for genes, proteins or antibodies other than those uses covered
in our patents, and these other uses may be separately patentable. The holder of a patent covering
the use of a gene, protein or antibody for which we have a patent claim could exclude us from
selling a product for a use covered by its patent.
We rely on our collaboration partners to seek patent protection for the products they develop based
on our research.
A significant portion of our future revenue may be derived from royalty payments from our
collaboration partners. These partners face the same patent protection issues that we and other
biotechnology or pharmaceutical companies face. As a result, we cannot assure you that any product
developed by our collaboration partners will be patentable, and therefore, revenue from any such
product may be limited, which would reduce the amount of any royalty payments. We also rely on our
collaboration partners to effectively prosecute their patent applications. Their failure to obtain
or protect necessary patents could also result in a loss of royalty revenue to us.
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If we are unable to protect our trade secrets, others may be able to use our secrets to compete
more effectively.
We may not be able to meaningfully protect our trade secrets. We rely on trade secret
protection to protect our confidential and proprietary information. We believe we have acquired or
developed proprietary procedures and materials for the production of proteins and antibodies. We
have not sought patent protection for these procedures. While we have entered into confidentiality
agreements with employees and collaborators, we may not be able to prevent their disclosure of
these data or materials. Others may independently develop substantially equivalent information and
processes.
Other parties may seek to cancel or revoke our trademarks and/or restrict the use of our
trademarks.
Our trademarks, including BENLYSTA and ZALBIN, are important to us and are generally covered
by trademark applications or registrations in the United States and in other countries. Trademark
protection varies in accordance with local law, and continues in some countries for as long as the
mark is used and in other countries for as long as the mark is registered. Trademark registrations
are generally for fixed but renewable terms.
Our trademark applications may not be sufficient to meet the statutory requirements for
registration in all cases or may be subject to challenge, if they are registered. Other parties
may seek to cancel or revoke our trademarks and/or restrict the use of our trademarks through
litigation or administrative proceedings in both the United States and in the rest of the world.
We cannot assure you that we will be successful in any such proceedings. Moreover, any such
litigation or proceeding may require us to modify our trademarks or rebrand our products to avoid
infringing the trademark rights of third parties, which may be time-consuming and could adversely
affect our revenue.
FINANCIAL AND MARKET RISKS
Because of our substantial indebtedness and lease obligations, we may be unable to adjust our
strategy to meet changing conditions in the future.
As of June 30, 2010, we had convertible subordinated debt of $361.1 million ($403.8 million on
a face value basis) and a long-term lease financing for our large-scale manufacturing facility of
$249.6 million on our balance sheet. During the six months ended June 30, 2010 we made cash
interest payments on our convertible subordinated debt of $4.5 million. During the six months
ended June 30, 2010 we made cash payments on our long-term lease financing of $12.2 million. In
addition, we have operating leases, primarily our long-term operating lease for our headquarters,
for which we made cash payments of $10.4 million during the six months ended June 30, 2010. Our
substantial debt and long-term lease obligations will have several important consequences for our
future operations. For instance:
| payments of interest on, and principal of, our indebtedness and our long-term
lease obligations will be substantial and may exceed then current income and
available cash; |
| we may be unable to obtain additional future financing for continued clinical
trials, capital expenditures, acquisitions or general corporate purposes; |
| we may be unable to withstand changing competitive pressures, economic
conditions and governmental regulations; and |
| we may be unable to make acquisitions or otherwise take advantage of
significant business opportunities that may arise. |
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We may not have adequate resources available to repay our Convertible Subordinated Notes due 2011
(2011 Notes) and our Convertible Subordinated Notes due 2012 (2012 Notes) at maturity.
As of June 30, 2010, we had $403.8 million in face value of convertible subordinated debt
outstanding, with $197.1 million and $206.7 million due in 2011 and 2012, respectively. Those notes are
convertible into our common stock at conversion prices of approximately $15.55 and $17.78 per
share, respectively. If our stock price does not exceed the applicable conversion price of those
notes, upon maturity, we may need to pay the note holders in cash or restructure some or all of the
debt. Our recent stock price has been above the conversion price and we currently have sufficient
unrestricted cash should note holders seek cash payment upon maturity. However, since it may be
one or more years, if ever, before we are likely to generate significant positive cash flow from
operations, we may not have enough cash, cash equivalents, short-term investments and marketable
securities available to repay our debt upon maturity.
To become a successful biopharmaceutical company, we may need additional funding in the future. If
we do not obtain this funding on acceptable terms, we may not be able to generate sufficient
revenue to repay our convertible debt, to launch and market successfully our products and to
continue our biopharmaceutical discovery and development efforts.
We continue to expend substantial funds on our research and development programs and human
studies on current and future drug candidates. We expect to expend significant funds to support
pre-launch and commercial marketing activities and acquire additional manufacturing capacity. We
may need additional financing to fund our operating expenses, including pre-commercial launch
activities, manufacturing activities, marketing activities, research and development and capital
requirements. In addition, even if our products are successful, if our stock price does not exceed
the applicable conversion price when our remaining convertible debt matures, we may need to pay the
note holders in cash or restructure some or all of the debt. If we are unable to restructure the
debt, we may not have enough cash, cash equivalents, short-term investments and marketable
securities available to repay the remaining debt. We may not be able to obtain additional financing
on acceptable terms either to fund operating expenses or to repay the convertible debt. If we raise
additional funds by issuing equity securities, equity-linked securities or debt securities, the new
equity securities may dilute the interests of our existing stockholders and the new debt securities
may contain restrictive financial covenants. For example, in 2009, we completed public offerings
resulting in a total of 44,522,250 newly issued shares of common stock.
Our need for additional funding will depend on many factors, including, without limitation:
| the amount of revenue or cost sharing, if any, that we are able to obtain
from our collaborations, any approved products, and the time and costs required to
achieve those revenues; |
| the timing, scope and results of preclinical studies and clinical trials; |
| the size and complexity of our development programs; |
| the time and costs involved in obtaining regulatory approvals; |
| the timing and costs of increasing our manufacturing capacity; |
| the costs of launching our products; |
| the costs of commercializing our products, including marketing, promotional
and sales costs; |
| the commercial success of our products; |
| our stock price; |
| our ability to establish and maintain collaboration partnerships; |
| competing technological and market developments; |
| the costs involved in filing, prosecuting and enforcing patent claims; and |
| scientific progress in our research and development programs. |
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If we are unable to raise additional funds, we may, among other things:
| delay, scale back or eliminate some or all of our research and development
programs; |
| delay, scale back or eliminate some or all of our commercialization
activities; |
| lose rights under existing licenses; |
| relinquish more of, or all of, our rights to product candidates on less
favorable terms than we would otherwise seek; and |
| be unable to operate as a going concern. |
Our short-term investments, marketable securities and restricted investments are subject to certain
risks which could materially adversely affect our overall financial position.
We invest our cash in accordance with an established internal policy and customarily in
instruments which historically have been highly liquid and carried relatively low risk. However,
the capital and credit markets have experienced extreme volatility and disruption. Over the past
two years, the volatility and disruption reached unprecedented levels. We maintain a significant
portfolio of investments in short-term investments, marketable debt securities and restricted
investments, which are recorded at fair value. Certain of these transactions expose us to credit
risk in the event of default by the issuer. To minimize our exposure to credit risk, we invest in
securities with strong credit ratings and have established guidelines relative to diversification
and maturity with the objective of maintaining safety of principal and liquidity. We do not invest
in derivative financial instruments or auction rate securities, and we generally hold our
investments in debt securities until maturity. In recent years, certain financial instruments,
including some of the securities in which we invest, have sustained downgrades in credit ratings
and some high quality short-term investment securities have suffered illiquidity or events of
default. Deterioration in the credit market may have an adverse effect on the fair value of our
investment portfolio. Should any of our short-term investments, marketable securities or restricted
investments lose significant value or have their liquidity impaired, it could materially and
adversely affect our overall financial position by imperiling our ability to fund our operations
and forcing us to seek additional financing sooner than we would otherwise. Such financing may not
be available on commercially attractive terms or at all.
Our insurance policies are expensive and protect us only from some business risks, which could
leave us exposed to significant, uninsured liabilities.
We do not carry insurance for all categories of risk that our business may encounter. We
currently maintain general liability, property, auto, workers compensation, product liability,
fiduciary and directors and officers insurance policies. We do not know, however, if we will be
able to maintain existing insurance with adequate levels of coverage. For example, the premiums for
our directors and officers insurance policy have increased in the past and may increase in the
future, and this type of insurance may not be available on acceptable terms or at all in the
future. Any significant uninsured liability may require us to pay substantial amounts, which would
adversely affect our cash position and results of operations.
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We may be subject to product liability or other litigation, which could result in an inefficient
allocation of our critical resources, delay the implementation of our business strategy and, if
successful, materially and adversely harm our business and financial condition as a result of the
costs of liabilities that may be imposed thereby.
Our business exposes us to the risk of product liability claims. If any of our product
candidates harm people, or are alleged to be harmful, we may be subject to costly and damaging
product liability claims brought against us by clinical trial participants, consumers, health care
providers, corporate partners or others. We have product liability insurance covering our ongoing
clinical trials and raxibacumab, but do not have insurance for any of our other
commercial activities. If we are unable to obtain insurance at an acceptable cost or otherwise
protect against potential product liability claims, we may be exposed to significant litigation
costs and liabilities, which may materially and adversely affect our business and financial
position. If we are sued for injuries allegedly caused by any of our product candidates, our
litigation costs and liability could exceed our total assets and our ability to pay. In addition,
we may from time to time become involved in various lawsuits and legal proceedings which arise in
the ordinary course of our business. Any litigation to which we are subject could require
significant involvement of our senior management and may divert managements attention from our
business and operations. Litigation costs or an adverse result in any litigation that may arise
from time to time may adversely impact our operating results or financial condition.
OTHER RISKS RELATED TO OUR BUSINESS
Many of our competitors have substantially greater capabilities and resources and may be able to
develop and commercialize products before we do or develop generic drugs that are similar to our
products.
We face intense competition from a wide range of pharmaceutical and biotechnology companies,
as well as academic and research institutions and government agencies.
Principal competitive factors in our industry include:
| the quality and breadth of an organizations technology; |
| the skill of an organizations employees and ability to recruit and retain
skilled employees; |
| an organizations intellectual property portfolio; |
| the range of capabilities, from target identification and validation to drug
discovery and development to manufacturing and marketing; and |
| the availability of substantial capital resources to fund discovery,
development and commercialization activities. |
Many large pharmaceutical and biotechnology companies have significantly larger intellectual
property estates than we do, more substantial capital resources than we have, and greater
capabilities and experience than we do in preclinical and clinical development, sales, marketing,
manufacturing and regulatory affairs.
We are aware of existing products and products in research or development by our competitors
that address the diseases we are targeting. Any of these products may compete with our product
candidates. Our competitors may succeed in developing their products before we do, obtaining
approvals from the FDA or other regulatory agencies for their products more rapidly than we do, or
developing products that are more effective than our products. These products or technologies might
render our technology or drugs under development obsolete or noncompetitive. In addition, our
albumin fusion protein product, ZALBIN, is designed to be a longer-acting version of existing
products. The existing products in many cases have an established market that may make the
introduction of ZALBIN more difficult.
If our products are approved and marketed, we may also face risks from generic drug
manufacturers. The United States has recently enacted legislation establishing a regulatory pathway
for follow-on biologics, and similar regulatory and legislative activity in other countries may
make it easier for generic drug manufacturers to manufacture and sell biological drugs similar or
identical to ZALBIN, BENLYSTA and raxibacumab which might affect the profitability or commercial
viability of our products.
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If any of our product candidates for which we receive regulatory approval do not achieve broad
market acceptance (including as a result of failing to differentiate our products from competitor
products or as a result of failing to obtain reimbursement rates for our products that are
competitive from the healthcare providers perspective), the revenues we generate from their sales
will be limited and our business may not be profitable.
Our success will depend in substantial part on the extent to which our products for which we
obtain marketing approval from the FDA and comparable foreign regulatory authorities are accepted
by the medical community and reimbursed by third-party payors, including government payors. The
degree of market acceptance will depend upon a number of factors, including, among other things:
| our products perceived advantages over existing treatment methods (including
relative convenience and ease of administration and prevalence and severity of any
adverse events, including any unexpected adverse events of which we become aware
after marketing approval); |
| claims or other information (including limitations or warnings) in our
products approved labeling; |
| reimbursement and coverage policies of government and other third-party
payors; |
| pricing and cost-effectiveness; |
| in the United States, the ability of group purchasing organizations, or GPOs
(including distributors and other network providers), to sell our products to their
constituencies; |
| the establishment and demonstration in the medical community of the safety
and efficacy of our products and our ability to provide acceptable evidence of
safety and efficacy; |
| availability of alternative treatments; and |
| the prevalence of off-label substitution of biologically equivalent products. |
We cannot predict whether physicians, patients, healthcare insurers or maintenance
organizations, or the medical community in general, will accept or utilize any of our products. If
our products are approved but do not achieve an adequate level of acceptance by these parties, we
may not generate sufficient revenues from these products to become or remain profitable. In
addition, our efforts to educate the medical community and third-party payors regarding the
benefits of our products may require significant resources and may never be successful.
If the health care system or reimbursement policies change, the prices of our potential products
may be lower than expected and our potential sales may decline.
The levels of revenues and profitability of biopharmaceutical companies like ours may be
affected by the continuing efforts of government and third-party payors to contain or reduce the
costs of health care through various means. For example, in certain foreign markets, pricing or
profitability of therapeutic and other pharmaceutical products is subject to governmental control.
In the United States, there have been, and we expect that there will continue to be, a number of
federal and state proposals to implement similar governmental control. In addition, the United
States has recently enacted legislation establishing a regulatory pathway for follow-on biologics,
which could affect the prices and sales of our products in the future. Recently enacted United
States legislation also instituted significant changes to the United States healthcare system. The
enactment of such legislation could have a material adverse effect on our business, financial
condition and profitability and we cannot predict whether any additional legislative or regulatory
proposals may be adopted in the future. In addition, in the United States and elsewhere, sales of
therapeutic and other pharmaceutical products depend in part on the availability of reimbursement
to the consumer from third-party payors, such as government and private insurance plans.
Third-party payors are increasingly challenging the prices charged for medical products and
services. We cannot assure you that any of our products will be considered cost effective or that
reimbursement to the consumer will be available or will be sufficient to allow us to sell our
products on a competitive and profitable basis.
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If we lose or are unable to attract key management or other personnel, we may experience delays in
product development.
We depend on our senior executive officers as well as other key personnel. If any key employee
decides to terminate his or her employment with us, this termination could delay the
commercialization of our products or prevent us from becoming profitable. Competition for qualified
employees is intense among pharmaceutical and biotechnology companies, and the loss of qualified
employees, or an inability to attract, retain and motivate additional highly skilled employees
required for the expansion of our activities, could hinder our ability to complete human studies
successfully and develop marketable products. The reduction in scope of some programs in March 2009
included decreasing headcount. This reduction in headcount may adversely affect our ability to
attract, retain and motivate current and new employees.
We may be unable to fulfill the terms of our contract manufacturing agreements with our customers
for manufacturing process development and supply of selected biopharmaceutical products.
We have entered into agreements with customers pursuant to which we have agreed to perform
manufacturing process development and provide clinical and commercial supplies of certain
biopharmaceutical products, and may enter into similar agreements with other potential customers in
the future. We may not be able to successfully manufacture products
under these agreements. Even if successful, we may not be able to
enter into additional agreements with other customers. We have
not yet manufactured any products approved for commercial use and, except for raxibacumab, have
limited experience in manufacturing materials suitable for commercial use. We have limited
experience manufacturing in a large-scale manufacturing facility built to increase our capacity for
protein and antibody drug production. The FDA must inspect and license our facilities to determine
compliance with cGMP requirements for commercial production. Any current or future customers may decide to
discontinue the products contemplated under these agreements, and therefore we may not receive
revenue from these agreements.
Because we depend on third parties to conduct many of our human studies, we may encounter delays in
or lose some control over our efforts to develop products.
We are dependent on third-party research organizations to conduct most of our human studies.
We have engaged contract research organizations to manage our global Phase 3 clinical studies. If
we are unable to obtain any necessary services on acceptable terms, we may not complete our product
development efforts in a timely manner. If we rely on third parties for the management of these
human studies, we may lose some control over these activities and become too dependent upon these
parties. These third parties may not complete the activities on schedule.
RISKS RELATED TO OWNERSHIP OF OUR COMMON STOCK
Because our stock price has been and will likely continue to be highly volatile, the market price
of our common stock may be lower or more volatile than you expected.
Our stock price, like the stock prices of many other biotechnology companies, has been highly
volatile. During the preceding twelve months, the closing price of our common stock has been as low
as $2.39 per share and as high as $33.30 per share. The market price of our common stock could
fluctuate widely because of:
| future announcements about our company or our competitors, including the
results of testing, clinical trials, technological innovations or new commercial
products; |
| negative regulatory actions with respect to our potential products or
regulatory approvals with respect to our competitors products; |
| changes in government regulations; |
| developments in our relationships with our collaboration partners; |
| developments affecting our collaboration partners; |
| announcements relating to health care reform and reimbursement levels for new
drugs; |
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| our failure to acquire or maintain proprietary rights to the gene sequences
we discover or the products we develop; |
| litigation; and |
| public concern as to the safety of our products. |
The stock market has experienced price and volume fluctuations that have particularly affected
the market price for many emerging and biotechnology companies. These fluctuations have often been
unrelated to the operating performance of these companies. These broad market fluctuations may
cause the market price of our common stock to be lower or more volatile than you expected.
The issuance and sale of shares underlying our outstanding convertible debt securities and options,
as well as the sale of additional equity or equity-linked securities may materially and adversely
affect the price of our common stock.
Sales of substantial amounts of shares of our common stock or securities convertible into or
exchangeable for our common stock in the public market, or the perception that those sales may
occur, could cause the market price of our common stock to decline. We have used and may continue
to use our common stock or securities convertible into or exchangeable for our common stock to
acquire technology, product rights or businesses, or for other purposes. Our authorized capital
stock consists of 400,000,000 shares of common stock, par value $0.01 per share. As of June 30,
2010, we had 188,156,651 shares of common stock outstanding, including an aggregate of 44,522,250
shares issued in public offerings in 2009. In addition, an aggregate of approximately 24,302,742
shares of our common stock are issuable upon conversion of our outstanding 2011 Notes and
outstanding 2012 Notes at an applicable conversion price of $15.55 and $17.78 per share,
respectively; 24,357,894 shares of our common stock are issuable upon the exercise of options
outstanding as of June 30, 2010, having a weighted-average exercise price of $15.05 per share,
including 4,178,061 stock options granted during the six months ended June 30, 2010 with a
weighted-average grant date fair value of $17.95 per share; and 205,279 shares of our common stock
are issuable upon the vesting of restricted stock unit awards outstanding as of June 30, 2010. If
we issue additional equity securities, including in exchange for our outstanding convertible debt,
the price of our common stock may be materially and adversely affected and the holdings of our
existing stockholders would be diluted. The issuance and sale of shares issuable upon conversion of
our outstanding convertible debt securities and options or the sale of additional equity or
equity-linked securities could materially and adversely affect the price of our common stock.
Our certificate of incorporation and bylaws could discourage acquisition proposals, delay a change
in control or prevent transactions that are in your best interests.
Provisions of our certificate of incorporation and bylaws, as well as Section 203 of the
Delaware General Corporation Law, may discourage, delay or prevent a change in control of our
company that you as a stockholder may consider favorable and may be in your best interest. Our
certificate of incorporation and bylaws contain provisions that:
| authorize the issuance of up to 20,000,000 shares of blank check preferred
stock that could be issued by our board of directors to increase the number of
outstanding shares and discourage a takeover attempt; |
| limit who may call special meetings of stockholders; and |
| establish advance notice requirements for nomination of candidates for
election to the board of directors or for proposing matters that can be acted upon
by stockholders at stockholders meetings. |
48
Table of Contents
Item 6. Exhibits
10.1 | Form of Indemnification Agreement with Directors, Senior Officers, Other
Key Employees and Key Agents |
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12.1 | Ratio of Earnings to Fixed Charges. |
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31.1 | Rule 13a-14(a) Certification of Principal Executive Officer. |
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31.2 | Rule 13a-14(a) Certification of Principal Financial Officer. |
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32.1 | Section 1350 Certification of Principal Executive Officer. |
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32.2 | Section 1350 Certification of Principal Financial Officer. |
49
Table of Contents
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
HUMAN GENOME SCIENCES, INC. |
||||
BY: | /s/ H. Thomas Watkins | |||
H. Thomas Watkins | ||||
President and Chief Executive Officer (Principal Executive Officer) |
||||
BY: | /s/ David P. Southwell | |||
David P. Southwell | ||||
Chief Financial Officer and Executive Vice President (Principal Financial Officer and Principal Accounting Officer) |
Dated: July 22, 2010
50
Table of Contents
EXHIBIT INDEX
Exhibit Page Number
10.1 | Form of Indemnification Agreement with Directors, Senior Officers, Other Key Employees and Key Agents |
|||
12.1 | Ratio of Earnings to Fixed Charges. |
|||
31.1 | Rule 13a-14(a) Certification of Principal Executive Officer. |
|||
31.2 | Rule 13a-14(a) Certification of Principal Financial Officer. |
|||
32.1 | Section 1350 Certification of Principal Executive Officer. |
|||
32.2 | Section 1350 Certification of Principal Financial Officer. |