Attached files
file | filename |
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EX-99.1 - EXHIBIT 99.1 - HUMAN GENOME SCIENCES INC | c07165exv99w1.htm |
EX-32.2 - EXHIBIT 32.2 - HUMAN GENOME SCIENCES INC | c07165exv32w2.htm |
EX-32.1 - EXHIBIT 32.1 - HUMAN GENOME SCIENCES INC | c07165exv32w1.htm |
EX-31.1 - EXHIBIT 31.1 - HUMAN GENOME SCIENCES INC | c07165exv31w1.htm |
EX-31.2 - EXHIBIT 31.2 - HUMAN GENOME SCIENCES INC | c07165exv31w2.htm |
EX-12.1 - EXHIBIT 12.1 - HUMAN GENOME SCIENCES INC | c07165exv12w1.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 September 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 September 30, 2010 was
188,740,399.
TABLE OF CONTENTS
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5 | ||||||||
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28 | ||||||||
29 | ||||||||
30 | ||||||||
50 | ||||||||
51 | ||||||||
Exhibit Volume | ||||||||
Exhibit 12.1 | ||||||||
Exhibit 31.1 | ||||||||
Exhibit 31.2 | ||||||||
Exhibit 32.1 | ||||||||
Exhibit 32.2 | ||||||||
Exhibit 99.1 |
2
Table of Contents
PART I. FINANCIAL INFORMATION
HUMAN GENOME SCIENCES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
Three months ended September 30, | Nine months ended September 30, | |||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
(in thousands, except share and per share amounts) | ||||||||||||||||
Revenue: |
||||||||||||||||
Product sales |
$ | 7,295 | $ | | $ | 33,963 | $ | 136,381 | ||||||||
Manufacturing and development services |
5,677 | 8,668 | 15,177 | 45,294 | ||||||||||||
Research and development collaborative agreements |
37,810 | 10,166 | 86,948 | 41,117 | ||||||||||||
Total revenue |
50,782 | 18,834 | 136,088 | 222,792 | ||||||||||||
Costs and expenses: |
||||||||||||||||
Cost of product sales |
8,434 | | 23,529 | 14,569 | ||||||||||||
Cost of manufacturing and development services |
3,338 | 7,331 | 7,364 | 17,239 | ||||||||||||
Research and development expenses |
42,471 | 34,794 | 151,331 | 131,379 | ||||||||||||
General and administrative expenses |
26,365 | 14,673 | 68,456 | 41,754 | ||||||||||||
Facility-related exit costs |
| | | 11,434 | ||||||||||||
Total costs and expenses |
80,608 | 56,798 | 250,680 | 216,375 | ||||||||||||
Income (loss) from operations |
(29,826 | ) | (37,964 | ) | (114,592 | ) | 6,417 | |||||||||
Investment income |
3,794 | 3,137 | 13,497 | 10,354 | ||||||||||||
Interest expense |
(14,949 | ) | (14,409 | ) | (44,409 | ) | (43,958 | ) | ||||||||
Gain on extinguishment of debt |
| | | 38,873 | ||||||||||||
Gain on sale of long-term equity investment |
| | | 5,259 | ||||||||||||
Charge for impaired investment |
| | | (1,250 | ) | |||||||||||
Other income (expense) |
122 | 233 | (95 | ) | (295 | ) | ||||||||||
Income (loss) before taxes |
(40,859 | ) | (49,003 | ) | (145,599 | ) | 15,400 | |||||||||
Provision for income taxes |
| | | | ||||||||||||
Net income (loss) |
$ | (40,859 | ) | $ | (49,003 | ) | $ | (145,599 | ) | $ | 15,400 | |||||
Basic net income (loss) per share |
$ | (0.22 | ) | $ | (0.32 | ) | $ | (0.78 | ) | $ | 0.11 | |||||
Diluted net income (loss) per share |
$ | (0.22 | ) | $ | (0.32 | ) | $ | (0.78 | ) | $ | 0.11 | |||||
Weighted average shares outstanding, basic |
188,420,580 | 154,513,251 | 187,418,995 | 142,104,996 | ||||||||||||
Weighted average shares outstanding, diluted |
188,420,580 | 154,513,251 | 187,418,995 | 145,537,847 | ||||||||||||
The accompanying Notes to Consolidated Financial Statements are an integral part hereof.
3
Table of Contents
HUMAN GENOME SCIENCES, INC.
CONSOLIDATED BALANCE SHEETS
September 30, | December 31, | |||||||
2010 | 2009 | |||||||
(in thousands) | ||||||||
Assets |
||||||||
Current assets: |
||||||||
Cash and cash equivalents |
$ | 230,359 | $ | 567,667 | ||||
Short-term investments |
328,628 | 151,528 | ||||||
Collaboration receivables |
11,610 | 10,356 | ||||||
Accounts receivable |
19,479 | 23,892 | ||||||
Inventory |
26,119 | 20,149 | ||||||
Prepaid expenses and other current assets |
4,728 | 7,176 | ||||||
Total current assets |
620,923 | 780,768 | ||||||
Marketable securities |
379,653 | 384,028 | ||||||
Property, plant and equipment (net of accumulated depreciation) |
254,836 | 263,123 | ||||||
Restricted investments |
79,480 | 88,437 | ||||||
Collaboration receivables, net of current portion |
29,301 | 6,920 | ||||||
Long-term equity investments |
3,071 | 3,016 | ||||||
Other assets |
3,361 | 4,338 | ||||||
TOTAL ASSETS |
$ | 1,370,625 | $ | 1,530,630 | ||||
Liabilities and Stockholders Equity |
||||||||
Current liabilities: |
||||||||
Accounts payable and accrued expenses |
$ | 42,863 | $ | 42,369 | ||||
Accrued payroll and related taxes |
23,635 | 30,997 | ||||||
Deferred revenues |
3,382 | 88,565 | ||||||
Accrued exit expenses |
2,245 | 2,227 | ||||||
Total current liabilities |
72,125 | 164,158 | ||||||
Convertible subordinated debt |
366,899 | 349,807 | ||||||
Lease financing |
250,076 | 248,628 | ||||||
Deferred rent |
9,961 | 8,665 | ||||||
Deferred revenues, net of current portion |
3,775 | 1,978 | ||||||
Accrued exit expenses, net of current portion |
1,032 | 1,979 | ||||||
Total liabilities |
703,868 | 775,215 | ||||||
Stockholders equity: |
||||||||
Preferred stock |
| | ||||||
Common stock |
1,887 | 1,853 | ||||||
Additional paid-in capital |
2,986,213 | 2,932,863 | ||||||
Accumulated other comprehensive income |
10,922 | 7,365 | ||||||
Accumulated deficit |
(2,332,265 | ) | (2,186,666 | ) | ||||
Total stockholders equity |
666,757 | 755,415 | ||||||
TOTAL LIABILITIES AND STOCKHOLDERS EQUITY |
$ | 1,370,625 | $ | 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
Nine months ended September 30, | ||||||||
2010 | 2009 | |||||||
(in thousands) | ||||||||
Cash flows from operating activities: |
||||||||
Net income (loss) |
$ | (145,599 | ) | $ | 15,400 | |||
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: |
||||||||
Stock-based compensation expense |
17,803 | 9,547 | ||||||
Depreciation and amortization |
15,975 | 16,092 | ||||||
Amortization of debt discount |
17,100 | 16,495 | ||||||
Charge for impaired investment |
| 1,250 | ||||||
Facility-related exit costs |
| 11,434 | ||||||
Accrued interest on short-term investments, marketable securities and restricted investments |
4,341 | 635 | ||||||
Gain on extinguishment of long-term debt |
| (38,873 | ) | |||||
Gain on sale of long-term equity investment |
| (5,259 | ) | |||||
Non-cash expenses and other |
1,226 | 1,109 | ||||||
Changes in operating assets and liabilities: |
||||||||
Collaboration receivables |
(23,635 | ) | 12,191 | |||||
Accounts receivable |
4,413 | (2,670 | ) | |||||
Inventory |
(5,970 | ) | (8,658 | ) | ||||
Prepaid expenses and other assets |
2,479 | 516 | ||||||
Accounts payable and accrued expenses |
379 | (17,419 | ) | |||||
Accrued payroll and related taxes |
(7,362 | ) | 1,528 | |||||
Deferred revenues |
(83,385 | ) | (29,185 | ) | ||||
Accrued exit expenses |
(1,146 | ) | (1,298 | ) | ||||
Deferred rent |
1,205 | 1,422 | ||||||
Net cash provided by (used in) operating activities |
(202,176 | ) | (15,743 | ) | ||||
Cash flows from investing activities: |
||||||||
Purchase of short-term investments and marketable securities |
(719,848 | ) | (250,056 | ) | ||||
Proceeds from sale and maturities of short-term investments and
marketable securities |
556,454 | 139,107 | ||||||
Capital expenditures property, plant, and equipment |
(6,318 | ) | (7,591 | ) | ||||
Proceeds from sale of long-term equity investment |
| 5,259 | ||||||
Release of restricted investments |
300 | 3,291 | ||||||
Net cash provided by (used in) investing activities |
(169,412 | ) | (109,990 | ) | ||||
Cash flows from financing activities: |
||||||||
Purchase of restricted investments |
(24,904 | ) | (25,503 | ) | ||||
Proceeds from sale and maturities of restricted investments |
23,719 | 23,533 | ||||||
Proceeds from issuance of common stock |
36,490 | 380,262 | ||||||
Purchase of treasury stock |
(1,025 | ) | (15 | ) | ||||
Extinguishment of long-term debt |
| (49,998 | ) | |||||
Net cash provided by (used in) financing activities |
34,280 | 328,279 | ||||||
Net increase (decrease) in cash and cash equivalents |
(337,308 | ) | 202,546 | |||||
Cash and cash equivalents beginning of period |
567,667 | 15,248 | ||||||
Cash and cash equivalents end of period |
$ | 230,359 | $ | 217,794 | ||||
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
Nine months ended September 30, | ||||||||
2010 | 2009 | |||||||
(in thousands) | ||||||||
Cash paid (received) during the period for: |
||||||||
Interest |
$ | 24,885 | $ | 25,416 | ||||
Income taxes |
$ | (1,948 | ) | $ | |
During the nine months ended September 30, 2010, the Company was able to reduce certain of its
lease-related collateral obligations and transferred restricted investments of $9,014 into
short-term investments.
During the nine months ended September 30, 2010 and 2009, lease financing increased with respect to
the Companys leases with BioMed Realty Trust, Inc. (BioMed) by $1,449 and $1,641, 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 nine months ended September 30, 2010 and 2009, the Company recorded non-cash accretion
of $217 and $862, 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 September 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 nine months ended September 30, 2010 and 2009, the Companys financial position
at September 30, 2010, and the cash flows for the nine months ended September 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 three and nine months ended September 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 September 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, the 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 September 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 nine months ended September 30, 2010 and 2009, total comprehensive income
(loss) amounted to:
Three months ended | Nine months ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
Net income (loss) |
$ | (40,859 | ) | $ | (49,003 | ) | $ | (145,599 | ) | $ | 15,400 | |||||
Net unrealized gains (losses): |
||||||||||||||||
Short-term investments and marketable securities |
3,002 | 2,544 | 4,080 | 11,149 | ||||||||||||
Long-term equity investment in VIA Pharmaceuticals |
| | (10 | ) | | |||||||||||
Restricted investments |
(196 | ) | 308 | (727 | ) | 1,595 | ||||||||||
Foreign currency translation |
33 | 2 | (25 | ) | 595 | |||||||||||
Subtotal |
2,839 | 2,854 | 3,318 | 13,339 | ||||||||||||
Reclassification adjustments for (gains) losses realized
in net income (loss) |
373 | 134 | 239 | (739 | ) | |||||||||||
Total comprehensive income (loss) |
$ | (37,647 | ) | $ | (46,015 | ) | $ | (142,042 | ) | $ | 28,000 | |||||
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 September 30, 2010
(dollars in thousands, except per share data)
Note 3. Investments
Available-for-sale investments, including accrued interest, at September 30, 2010 and December 31,
2009 were as follows:
September 30, 2010 | ||||||||||||||||
Gross | Gross | |||||||||||||||
Amortized | Unrealized | Unrealized | Fair | |||||||||||||
Cost | Gains | Losses | Value | |||||||||||||
Government-sponsored enterprise securities |
$ | 179,175 | $ | 1,374 | $ | (19 | ) | $ | 180,530 | |||||||
Corporate debt securities |
146,627 | 1,492 | (21 | ) | 148,098 | |||||||||||
Subtotal Short-term investments |
325,802 | 2,866 | (40 | ) | 328,628 | |||||||||||
Government-sponsored enterprise securities |
105,049 | 1,371 | (25 | ) | 106,395 | |||||||||||
Corporate debt securities |
267,742 | 5,593 | (77 | ) | 273,258 | |||||||||||
Subtotal Marketable securities |
372,791 | 6,964 | (102 | ) | 379,653 | |||||||||||
Restricted cash and cash equivalents |
9,117 | | | 9,117 | ||||||||||||
U.S. Treasury and agencies |
1,299 | 12 | | 1,311 | ||||||||||||
Government-sponsored enterprise securities |
20,761 | 298 | (1 | ) | 21,058 | |||||||||||
Corporate debt securities |
47,085 | 911 | (2 | ) | 47,994 | |||||||||||
Subtotal Restricted investments |
78,262 | 1,221 | (3 | ) | 79,480 | |||||||||||
Total |
$ | 776,855 | $ | 11,051 | $ | (145 | ) | $ | 787,761 | |||||||
December 31, 2009 | ||||||||||||||||
Gross | Gross | |||||||||||||||
Amortized | Unrealized | Unrealized | Fair | |||||||||||||
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 | ||||||||||||
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 September 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) lease serve as
collateral for a letter of credit which serves as the security deposit for the duration of the
lease, although the Company has the ability to reduce the restricted investments that are in the
form of securities by substituting a cash security deposit in the amount of $19,750 to be
maintained with the landlord. Presently, to secure the security deposit letter of credit, the
Company is required to maintain margin value of the collateral of at least $19,750.
The Companys restricted investments with respect to its large-scale manufacturing facility (LSM)
lease, as amended in 2010, will serve as collateral in favor of the landlord in lieu of providing
the landlord with either a cash deposit or a standby letter of credit. Under the LSM lease, the
Company is required to pledge to the landlord a minimum of $20,000 in marketable securities or
provide the landlord with a $19,750 cash security deposit.
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 $79,480 and $88,437 as of September 30, 2010 and December
31, 2009, respectively.
10
Table of Contents
HUMAN GENOME SCIENCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Quarter Ended September 30, 2010
(dollars in thousands, except per share data)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Quarter Ended September 30, 2010
(dollars in thousands, except per share data)
Note 3. Investments (continued)
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:
September 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 |
$ | 74,416 | $ | (19 | ) | $ | | $ | | $ | 74,416 | $ | (19 | ) | ||||||||||
Corporate debt securities |
39,314 | (21 | ) | | | 39,314 | (21 | ) | ||||||||||||||||
Subtotal Short-term investments |
113,730 | (40 | ) | | | 113,730 | (40 | ) | ||||||||||||||||
Government-sponsored enterprise securities |
96,285 | (25 | ) | | | 96,285 | (25 | ) | ||||||||||||||||
Corporate debt securities |
14,023 | (73 | ) | 899 | (4 | ) | 14,922 | (77 | ) | |||||||||||||||
Subtotal Marketable securities |
110,308 | (98 | ) | 899 | (4 | ) | 111,207 | (102 | ) | |||||||||||||||
Government-sponsored enterprise securities |
1,942 | (1 | ) | | | 1,942 | (1 | ) | ||||||||||||||||
Corporate debt securities |
1,889 | (2 | ) | | | 1,889 | (2 | ) | ||||||||||||||||
Subtotal Restricted investments |
3,831 | (3 | ) | | | 3,831 | (3 | ) | ||||||||||||||||
Total |
$ | 227,869 | $ | (141 | ) | $ | 899 | $ | (4 | ) | $ | 228,768 | $ | (145 | ) | |||||||||
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 | ) | |||||||||
11
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HUMAN GENOME SCIENCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Quarter Ended September 30, 2010
(dollars in thousands, except per share data)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Quarter Ended September 30, 2010
(dollars in thousands, except per share data)
Note 3. Investments (continued)
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 303 available-for-sale U.S Treasury obligations, government-sponsored enterprise
securities and corporate debt securities at September 30, 2010. Of these 303 securities, 30 had
unrealized losses at September 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 nine months ended September 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.
Other Information
The following table summarizes maturities of the Companys short-term investments, marketable
securities and restricted investments at September 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 |
$ | 325,802 | $ | 328,628 | $ | | $ | | $ | 39,260 | $ | 39,687 | ||||||||||||
Due in year two through year three |
| | 270,866 | 274,962 | 34,724 | 35,357 | ||||||||||||||||||
Due in year four through year five |
| | 84,578 | 87,015 | 3,847 | 3,997 | ||||||||||||||||||
Due after five years |
| | 17,347 | 17,676 | 431 | 439 | ||||||||||||||||||
Total |
$ | 325,802 | $ | 328,628 | $ | 372,791 | $ | 379,653 | $ | 78,262 | $ | 79,480 | ||||||||||||
The Companys short-term investments include mortgage-backed securities with an aggregate cost
of $73,264 and an aggregate fair value of $74,416 at September 30, 2010. The Companys marketable
securities include mortgage-backed securities with an aggregate cost of $84,639 and an aggregate
fair value of $85,970 at September 30, 2010. The Companys restricted investments include
mortgage-backed securities with an aggregate cost of $5,799 and an aggregate fair value of $5,907
at September 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.
12
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HUMAN GENOME SCIENCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Quarter Ended September 30, 2010
(dollars in thousands, except per share data)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Quarter Ended September 30, 2010
(dollars in thousands, except per share data)
Note 3. Investments (continued)
Realized gains and losses on securities sold before maturity, which are included in the Companys
investment income for the three and nine months ended September 30, 2010 and 2009, and their
respective net proceeds were as follows:
Three
months ended September 30, |
Nine
months ended September 30, |
|||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
Proceeds on sale of investments prior to maturity |
$ | 111,421 | $ | 167,150 | $ | 582,015 | $ | 329,730 | ||||||||
Realized gains |
140 | 41 | 1,618 | 1,718 | ||||||||||||
Realized losses |
(512 | ) | (175 | ) | (1,379 | ) | (979 | ) |
The cost of the securities sold is based on the specific identification method.
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 September 30, 2010 and 2009. The Company
recognized revenue of $3,100 and $3,703 for the nine months ended September 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. 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. In September 2010, the Company and Novartis decided to end further
development of ZALBIN in anticipation of a Complete Response Letter to be received from the FDA in
early October. In October 2010 the Company received the FDAs Complete Response Letter.
13
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HUMAN GENOME SCIENCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Quarter Ended September 30, 2010
(dollars in thousands, except per share data)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Quarter Ended September 30, 2010
(dollars in thousands, except per share data)
Note 4. Collaborations and U.S. Government Agreement (continued)
Under the agreement, Novartis had paid the Company $207,500, including a non-refundable up-front
license fee and payments upon the successful attainment of certain milestones. The Company was
recognizing these payments as revenue ratably over the estimated remaining development period.
Based on the decision to end further development of ZALBIN, the Company recognized all remaining
deferred revenue related to these payments in September 2010. The Company recognized revenue of
$36,133 and $8,852 for the three months ended September 30, 2010 and 2009, respectively. The
Company recognized revenue of $82,806 and $26,556 for the nine months ended September 30, 2010 and
2009, respectively.
Collaboration reimbursements
Research and development expenses for the three months ended September 30, 2010 and 2009 are net of
$15,292 and $7,444, respectively, of costs reimbursed or reimbursable by GSK and Novartis.
Research and development expenses for the nine months ended September 30, 2010 and 2009 are net of
$49,997 and $28,698, 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. Although the Company and Novartis decided to end development of ZALBIN in
September 2010, there will be certain additional research and development costs incurred by both
parties in the near future as activities are concluded.
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 nine months ended September 30, 2010 the Company earned and recognized $7,295 and $33,963,
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 nine months ended September 30,
2009. The Company recognized $136,381 in product revenue and $26,050 in manufacturing and
development services revenue for the nine months ended September 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 $584 related to the Aegera agreement
during the three months ended September 30, 2010 and 2009, respectively, and $1,748 and $1,751
during the nine months ended September 30, 2010 and 2009 respectively.
14
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HUMAN GENOME SCIENCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Quarter Ended September 30, 2010
(dollars in thousands, except per share data)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Quarter Ended September 30, 2010
(dollars in thousands, except per share data)
Note 5. Other Financial Information
Collaboration Receivables
Collaboration receivables of $11,610 includes $6,057 in unbilled receivables from GSK in connection
with the Companys cost-sharing agreements, primarily related to net cost reimbursements due for
the three months ended September 30, 2010. Collaboration receivables also include $4,476 in
unbilled receivables from GSK related to costs incurred to produce pre-launch commercial products.
Non-current collaboration receivables of $29,301 as of September 30, 2010 relate to amounts due to
the Company by GSK for manufacturing costs incurred to produce pre-launch commercial product.
Non-current collaboration receivables of $6,920 as of December 31, 2009 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:
September 30, 2010 | December 31, 2009 | |||||||
Raw materials |
$ | 9,518 | $ | 4,293 | ||||
Work-in-process |
11,701 | 9,512 | ||||||
Finished goods |
4,900 | 6,344 | ||||||
$ | 26,119 | $ | 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 would 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.
15
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HUMAN GENOME SCIENCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Quarter Ended September 30, 2010
(dollars in thousands, except per share data)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Quarter Ended September 30, 2010
(dollars in thousands, except per share data)
Note 7. Facility-Related Exit Costs (continued)
The following table summarizes the activity related to the liability for exit charges for the nine
months ended September 30, 2010, all of which is facilities-related:
Balance as of January 1, 2010 |
$ | 4,206 | ||
Accretion recorded |
217 | |||
Subtotal |
4,423 | |||
Cash items |
(1,146 | ) | ||
Balance as of September 30, 2010 |
3,277 | |||
Less current portion |
(2,245 | ) | ||
$ | 1,032 | |||
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 nine months ended September 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 $6,984 and $3,226
during the three months ended September 30, 2010 and 2009, respectively. The Company recorded
stock-based compensation expense pursuant to these plans of $17,803 and $9,547 during the nine
months ended September 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 581,845 and 3,386,605 shares of common stock in
conjunction with stock option exercises during the three and nine months ended September 30, 2010,
respectively. The Company granted 589,675 stock options with a weighted-average grant date fair
value of $15.07 per share under the Incentive Plan during the three months ended September 30,
2010. The Company granted 4,751,736 stock options with a weighted-average grant date fair value of
$17.59 per share under the Incentive Plan during the nine months ended September 30, 2010.
During the three months ended September 30, 2010, the Company did not award any restricted stock
units (RSUs). During the nine months ended September 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 subsequently retired.
At September 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 4,668,624 as of September 30,
2010.
16
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HUMAN GENOME SCIENCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Quarter Ended September 30, 2010
(dollars in thousands, except per share data)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Quarter Ended September 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 Measurements as of | ||||||||||||||||
Fair Value | September 30, 2010 Using Fair | |||||||||||||||
as of | Value Hierarchy | |||||||||||||||
Description | September 30, 2010 | Level 1 | Level 2 | Level 3 | ||||||||||||
Cash and cash equivalents |
$ | 230,359 | $ | 230,359 | $ | | $ | | ||||||||
Short-term investments |
328,628 | | 328,628 | | ||||||||||||
Marketable securities |
379,653 | | 379,653 | | ||||||||||||
Restricted investments |
79,480 | 10,428 | 69,052 | | ||||||||||||
Total |
$ | 1,018,120 | $ | 240,787 | $ | 777,333 | $ | | ||||||||
17
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HUMAN GENOME SCIENCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Quarter Ended September 30, 2010
(dollars in thousands, except per share data)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Quarter Ended September 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
$759,000 (book value of $366,899) as of September 30, 2010. With respect to its lease financing,
the Company evaluated its incremental borrowing rate as of September 30, 2010, based on the current
interest rate environment and the Companys credit risk. The fair value of the BioMed lease
financing was approximately $267,000 (book value of $250,076) as of September 30, 2010 based on a
discounted cash flow analysis, and current rates for corporate debt having similar characteristics
and companies with similar creditworthiness.
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HUMAN GENOME SCIENCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Quarter Ended September 30, 2010
(dollars in thousands, except per share data)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Quarter Ended September 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 24,482,687 for both the
three and nine months ended September 30, 2010, and common stock equivalents from stock options and
restricted stock units of 5,828,370 and 21,070,813 for the three and nine months ended September
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 nine months ended September 30,
2010 and common stock equivalents from shares underlying the Companys convertible subordinated
debt of 24,303,304 and 25,327,337 for the three and nine months ended September 30, 2009,
respectively, are excluded from the calculation of diluted net income (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 September
30, 2010 and September 30, 2009, as the effect of common stock equivalents would be anti-dilutive.
Diluted net income (loss) per share for the nine months ended September 30, 2010 and 2009 was
determined as follows:
Nine months ended September 30, | ||||||||
2010 | 2009 | |||||||
Numerator: |
||||||||
Net income (loss) |
$ | (145,599 | ) | $ | 15,400 | |||
Interest on convertible subordinated debt, if converted |
| | ||||||
Net income (loss) used for diluted net income (loss) per share |
$ | (145,599 | ) | $ | 15,400 | |||
Denominator: |
||||||||
Weighted average shares outstanding |
187,418,995 | 142,104,996 | ||||||
Effect of dilutive securities: |
||||||||
Convertible subordinated debt |
| | ||||||
Employee stock options and restricted stock units |
| 3,432,851 | ||||||
Weighted average shares used for diluted net income
(loss) per share |
187,418,995 | 145,537,847 | ||||||
Diluted net income (loss) per share |
$ | (0.78 | ) | $ | 0.11 | |||
19
Table of Contents
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Three and nine months ended September 30, 2010 and 2009
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Three and nine months ended September 30, 2010 and 2009
Overview
Human Genome Sciences, Inc. (HGS) is a commercially focused biopharmaceutical company with
two products in late-stage development: BENLYSTA® for systemic lupus erythematosus
(SLE) 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. The U.S. Food and Drug Administration
(FDA) granted a priority review designation to BENLYSTA and assigned a Prescription Drug User Fee
Act (PDUFA) target date of December 9, 2010. The FDA Advisory Committee meeting to discuss
BENLYSTA is scheduled for November 16, 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 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. In September 2010, we and Novartis decided to end
further development of ZALBIN in anticipation of a Complete Response Letter to be received from the
FDA in early October. In October 2010 we received the FDAs Complete Response Letter.
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 $51.7 million in revenue recognized from 2009 through September 30, 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 the products we have been developing, 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 a
co-development and commercialization agreement with GSK for BENLYSTA. 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. We received a $45.0
million up-front fee from Novartis upon the execution of the agreement. Including this up-front
fee, we have received payments aggregating $207.5 million. We were recognizing these payments as
revenue ratably over the estimated remaining development period. In June 2010, we announced that we
had received preliminary written feedback from the FDA regarding the BLA we filed in November 2009
for ZALBIN. The FDA expressed concerns regarding the risk-benefit assessment of ZALBIN dosed at
900-mcg every two weeks. In September 2010, we and Novartis decided to end further development of
ZALBIN. Based on this decision, we recognized all remaining deferred revenue related to these
payments in September 2010.
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, 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 year 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.
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.
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Results of Operations
Revenues. Revenues were $50.8 million and $18.8 million for the three months ended September
30, 2010 and 2009, respectively. Revenues were $136.1 million and $222.8 million for the nine
months ended September 30, 2010 and 2009, respectively. Revenues for the three months ended
September 30, 2010 included $36.1 million recognized from Novartis primarily relating to
recognition of all remaining unrecognized up-front license fees and milestones due to the decision
to end further development of ZALBIN, as well as $7.3 million in raxibacumab product sales and $5.1
million from contract manufacturing services. Revenues for the three months ended September 30,
2009 included $8.9 million recognized from the Novartis agreement as well as $8.7 million from
contract manufacturing services and $1.0 million recognized from the GSK collaboration agreement.
Revenues for the nine months ended September 30, 2010 included $82.8 million recognized from the
Novartis agreement as well as $34.0 million in raxibacumab product sales. Revenue for the nine
months ended September 30, 2009 consisted primarily of $136.4 million in raxibacumab product sales
and $26.1 million related to raxibacumab development services, $26.6 million recognized from the
Novartis agreement, $19.2 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 $8.4 million for the three
months ended September 30, 2010. Cost of sales also includes cost of manufacturing and development
services of $3.3 million and $7.3 million for the three months ended September 30, 2010 and 2009,
respectively. Cost of product sales was $23.5 million and $14.6 million for the nine months ended
September 30, 2010 and 2009, respectively. Cost of manufacturing and development services was $7.4
million and $17.2 million for the nine months ended September 30, 2010 and 2009, respectively.
Cost of product sales during the three and nine months ended September 30, 2010 includes the cost
of manufacturing raxibacumab and royalties whereas the cost of product sales during the three and
nine months ended September 30, 2009 included only royalties, as the manufacturing costs had been
previously expensed. Cost of product sales for the three and nine months ended September 30, 2010
also includes amounts expensed related to rejected or terminated production batches. 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 then will be expensed as the
inventory is sold.
Expenses. Research and development net expenses were $42.5 million for the three months ended
September 30, 2010 compared to $34.8 million for the three months ended September 30, 2009.
Research and development net expenses were $151.3 million for the nine months ended September 30,
2010 compared to $131.4 million for the nine months ended September 30, 2009. Our research and
development expenses for the three months ended September 30, 2010 and 2009 are net of $15.3
million and $7.4 million, respectively, of costs reimbursed or reimbursable by GSK and Novartis.
Our research and development expenses for the nine months ended September 30, 2010 and 2009 are net
of $50.0 million and $28.7 million, respectively, of costs reimbursed or reimbursable by GSK and
Novartis.
We track our research and development expenditures by type of cost incurred research,
pharmaceutical sciences, manufacturing and clinical development.
Our research costs increased to $5.8 million for the three months ended September 30, 2010
from $4.3 million for the three months ended September 30, 2009. Our research costs increased to
$16.8 million for the nine months ended September 30, 2010 from $13.8 million for the nine months
ended September 30, 2009. The increase during the three months ended September 30, 2010 is
primarily due to increased activity related to HGS1029 and new target development. The increase
for the nine months ended September 30, 2010 is primarily due to increased HGS1029 activity. Our
research costs for the three months ended September 30, 2010 and 2009 are net of $0.6 million and
$1.0 million, respectively, of cost reimbursement from GSK and Novartis under cost sharing
provisions in our
collaboration agreements. Our research costs for the nine months ended September 30, 2010 and
2009 are net of $2.2 million and $2.4 million, respectively, of cost reimbursement from GSK and
Novartis under cost sharing provisions in our collaboration agreements.
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Results of Operations (continued)
Our pharmaceutical sciences costs, where we focus on improving formulation, process
development and production methods, increased to $7.6 million for the three months ended September
30, 2010 from $6.9 million for the three months ended September 30, 2009. This increase is
primarily due to ZALBIN-related termination costs incurred due to the decision to end further
development of ZALBIN. Pharmaceutical sciences costs decreased to $20.6 million for the nine
months ended September 30, 2010 from $23.1 million for the nine months ended September 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 September 30, 2010 include $0.6
million of net costs incurred by GSK and Novartis. Pharmaceutical sciences costs for the three
months ended September 30, 2009 are net of $0.7 million of cost reimbursement from GSK and Novartis
under cost sharing provision in our collaboration agreements. Pharmaceutical sciences costs for
the nine months ended September 30, 2010 include $0.9 million of net costs incurred by GSK and
Novartis. Pharmaceutical sciences costs for the nine months ended September 30, 2009 are net of
$0.2 million of cost reimbursement from GSK and Novartis under cost sharing provisions in our
collaboration agreements.
Our manufacturing costs increased to $15.8 million for the three months ended September 30,
2010 from $9.9 million for the three months ended September 30, 2009. Our manufacturing costs
increased to $66.3 million for the nine months ended September 30, 2010 from $41.2 million for the
nine months ended September 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 September 30, 2010
and 2009 are net of $11.3 million and $1.0 million, respectively, of anticipated cost reimbursement
from GSK and Novartis under cost sharing provisions in our collaboration agreements. Our
manufacturing costs for the nine months ended September 30, 2010 and 2009 are net of $35.2 million
and $1.7 million, respectively, of anticipated cost reimbursement from GSK and Novartis under 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 $13.3 million for the three months ended September
30, 2010 from $13.7 million for the three months ended September 30, 2009. Our clinical
development costs decreased to $47.7 million for the nine months ended September 30, 2010 from
$53.3 million for the nine months ended September 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 September 30, 2010 and 2009 are net of
$3.9 million and $4.7 million, respectively, of cost reimbursement from GSK and Novartis under cost
sharing provisions in our collaboration agreements. Our clinical development expenses for the nine
months ended September 30, 2010 and 2009 are net of $13.5 million and $24.4 million, respectively,
of cost reimbursement from GSK and Novartis under cost sharing provisions in our collaboration
agreements.
General and administrative expenses increased to $26.4 million for the three months ended
September 30, 2010 from $14.7 million for the three months ended September 30, 2009. General and
administrative expenses increased to $68.5 million for the nine months ended September 30, 2010
from $41.8 million for the nine months ended September 30, 2009. This increase is primarily due to
increased commercial readiness activities, including additional personnel and market research.
Facility-related exit costs of $11.4 million for the three and nine months ended September 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 nine
months ended September 30, 2009.
Investment income increased to $3.8 million for the three months ended September 30, 2010 from
$3.1 million for the three months ended September 30, 2009. Investment income increased to $13.5
million for the nine months ended September 30, 2010 from $10.4 million for the nine months ended
September 30, 2009. The increase in investment income for the three and nine months ended
September 30, 2010 was primarily due to higher average investment balances partially offset by
lower yields on our portfolio.
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Results of Operations (continued)
Interest expense increased to $14.9 million for the three months ended September 30, 2010
compared to $14.4 million for the three months ended September 30, 2009. Interest expense
increased to $44.4 million for the nine month ended September 30, 2010 from $44.0 million for the
nine months ended September 30, 2009. Interest expense includes non-cash interest expense related
to amortization of debt discount of $5.8 million and $5.3 million for the three months ended
September 30, 2010 and 2009, respectively, and non-cash interest expense related to amortization of
debt discount of $17.1 million and $16.5 million for the nine months ended September 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 gain on extinguishment of debt of $38.9 million for the nine months ended September 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 nine months ended September 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 nine months ended September 30,
2009 was due to an other-than-temporary impairment on a corporate bond investment. We subsequently
sold the investment.
Net Income (Loss). We recorded a net loss of $40.9 million, or $0.22 per basic and diluted
share, for the three months ended September 30, 2010 compared to a net loss of $49.0 million, or
$0.32 per basic share and diluted share, for the three months ended September 30, 2009. We
recorded a net loss of $145.6 million, or $0.78 per basic and diluted share, for the nine months
ended September 30, 2010 compared to net income of $15.4 million, or $0.11 per basic and diluted
share, for the nine months ended September 30, 2009. The decreased net loss for the three months
ended September 30, 2010 is primarily due to higher raxibacumab product sales and increased revenue
recognized from the Novartis agreement for the three months ended September 30, 2010 versus 2009,
partially offset by higher expenses from increased commercial readiness activities. The change
from net income for the nine months ended September 30, 2009 to net loss for the nine months ended
September 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, partially offset by increased revenue recognized from the Novartis agreement.
Liquidity and Capital Resources
We had working capital of $548.8 million and $616.6 million at September 30, 2010 and December
31, 2009, respectively. The decrease in our working capital for the nine months ended September
30, 2010 is primarily due to the use of working capital to fund our operations.
We expect to continue to incur substantial expenses relating to our research and development
efforts, as we focus on new target development and the ongoing 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 $51.7 million
has been recognized as revenue through the third 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.
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Liquidity and Capital Resources (continued)
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 September 30, (2) | ||||||||
Product Candidate (1) | Indication | 2010 | 2009 | |||||
BENLYSTA
|
Systemic Lupus Erythematosus | Phase 3 (3) | Phase 3 | |||||
BENLYSTA
|
Rheumatoid Arthritis | (4) | Phase 2 (4) | |||||
ZALBIN
|
Hepatitis C | (5) | Phase 3 | |||||
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) | Results from two Phase 3 clinical trials reported; MAA and BLA filed in June 2010; BLA PDUFA
target date of December 9, 2010. |
|
(4) | Phase 2 trial completed; treatment IND ongoing. |
|
(5) | Further development discontinued. |
|
(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. |
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 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.
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Liquidity and Capital Resources (continued)
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, 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. We also entered into a collaboration agreement with Novartis in 2006. During the nine
months ended September 30, 2010, we recorded approximately $50.0 million due from GSK and Novartis
with respect to our cost sharing agreements as a reduction of research and development expenses. We
recognize the up-front fees and milestones received from GSK and Novartis as revenue ratably over
the estimated remaining development periods. Based on the decision in September 2010 to end
further development of ZALBIN, all remaining deferred revenue related to the payments received from
Novartis was recognized. Furthermore, we do not anticipate receiving any of the remaining $300.0
million in milestone payments from Novartis with respect to ZALBIN, but do not believe this will
have a significant impact on our overall liquidity.
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 explore, 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.
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 September 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 $36.0
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 11 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 $9.6 million, or approximately 0.9% of their aggregate fair value of approximately
$1.0 billion, at September 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 September 30, 2010. We believe
that any interest rate change related to our investment securities held as of September 30, 2010 is
not material to our consolidated financial statements. As of September 30, 2010, the yield on
comparable one-year investments was approximately 0.2%, 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.
Our facility leases for Traville and LSM require us to maintain minimum levels of restricted
investments of approximately $39.8 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 $74.1 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 September 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 September 30, 2010, and has concluded that there was no change that occurred
during the quarterly period ended September 30, 2010 that has materially affected, or is reasonably
likely to materially affect, our internal control over financial reporting.
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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 in addition to the other information in this Quarterly Report on
Form 10-Q. You should carefully consider these risk factors in evaluating our business because
these risk factors may have a significant impact on our business, financial condition and results
of operations. The risks described below are not the only risks we may face. Additional risks and
uncertainties not presently apparent to us, or risks that we currently consider immaterial, could also
negatively affect our business, financial condition and results and operations.
RISKS RELATED TO OUR BUSINESS
Our near-term prospects are highly dependent on BENLYSTA®, our lead product candidate.
If we fail to obtain FDA and/or EMEA approval for BENLYSTA or fail to successfully
commercialize BENLYSTA, our results of operations and business will be materially and
adversely affected and our stock price would likely decline.
Our most advanced product candidate is BENLYSTA. 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 for which the U.S. Food and Drug Administration (FDA) has
assigned a Prescription Drug User Fee Act (PDUFA) target date of December 9, 2010. Also in June
2010, our collaboration partner GlaxoSmithKline (GSK) submitted a Marketing Authorization
Application (MAA) for BENLYSTA with the European Medicines Agency (EMEA).
Despite our determination that the results from the two BENLYSTA trials were positive, FDA and
EMEA approval of BENLYSTA depends, among other things, on regulatory authorities finding our
manufacturing protocol and controls, composition of the product and the data from our completed
Phase 3 clinical trials sufficient to support approval. We cannot offer any assurances or predict
with any certainty that the FDA or EMEA will grant marketing approval for BENLYSTA. The FDA or
EMEA may determine that our data, manufacturing staff, methods, facilities or raw materials are
insufficient to warrant approval or that the results from our clinical trials do not support
approval. Regulatory approvals, even if obtained, may be limited to
specific indications or subject to other qualifications. Furthermore, even if we receive FDA or EMEA approval, we might not be successful in
commercializing BENLYSTA. In addition, our collaboration partner GSK may determine that BENLYSTA
does not warrant further
development or commercialization and may terminate its collaboration agreement. Should any of
these events occur, our business, financial condition and results of operations would be materially
adversely affected and the price of our common stock would likely decline.
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If
we are unable to commercialize the molecules we develop, we may not be able
to recover our investment in our research, product development, manufacturing and marketing efforts.
We have invested significant time and resources to isolate and study genes and determine their
functions. We devote substantial 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 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 the molecules we develop, we may be unable
to recover the large investment we have made in research, development, manufacturing and marketing
efforts.
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 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 for the first two or three years
following launch. 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 and raxibacumab, is produced at a single
manufacturing site. BENLYSTA is produced at our large-scale manufacturing facility in Rockville,
Maryland and raxibacumab is produced in 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. In
addition, the filling, finishing and packaging for both BENLYSTA and
raxibacumab are solely performed by a single
third party manufacturer. We cannot guarantee that such third party manufacturer will not
encounter problems that may impact our ability to deliver our products to patients or customers.
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.
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In addition, the FDA and other regulatory authorities will inspect on a regular basis our
manufacturing facilities and our current and future third-party manufacturers facilities for
compliance with cGMPs. If the regulatory agencies were to require one of our manufacturing
facilities or our third-party manufacturers facilities to cease or limit production, our business
could be adversely affected, in part because regulatory approval to manufacture a drug is generally
site-specific. Delay and cost in obtaining regulatory approval to manufacture at a different
facility also could have a material adverse effect on our business, financial condition and results
of operations. In addition, if we or our third-party manufacturers fail to comply with applicable
continuing regulatory requirements, our business could be seriously harmed because a regulatory
agency may: issue warning letters; suspend or withdraw our regulatory approval for approved or
in-market products; seize or detain products or recommend a product recall; refuse to approve
pending applications or supplements to approved applications filed by us; suspend any of our
ongoing clinical trials; impose restrictions or obligations on our operations, including costly new
manufacturing requirements; close our facilities or those of our contract manufacturers; or impose
civil or criminal penalties. Under certain circumstances, regulatory agencies also have the
authority to revoke previously granted drug approvals. If we or our third-party manufacturers were
deemed to be deficient regarding regulatory compliance in any significant way, it could have a
material adverse effect on our business, financial condition and results of operations.
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 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. In building a sales force in anticipation of the approval and commercial launch of
BENLYSTA, we may be unable to retain an adequate number of qualified sales representatives and may
encounter difficulties in retaining third parties to provide sales, marketing or distribution
resources. Ultimately, we and our partners may not be successful in marketing our products.
In addition, 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. The prices for our products may be
affected by various factors that could adversely affect our sales and
profit margins,
including economic analyses of the burden of the applicable disease, the perceived value of the
product and third party reimbursement policies.
Changes in the health care system or reimbursement policies may result in a decline in our
potential sales and a reduction in our expected revenue from our potential products.
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. This legislation, including implementing rules
and regulations, could have a material adverse effect on our business, financial
condition and profitability. Moreover, we cannot predict whether 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. Our ability to successfully
commercialize our products and product candidates and the demand for our products depend, in part,
on the extent to which reimbursement is available from such third-party payors.
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Uncertainty exists about the reimbursement status of newly approved biopharmaceutical
products. Any reimbursement granted may not be maintained, or limits on reimbursement available
from third parties may reduce the demand for, or negatively affect the price and profitability of,
those products, which would likely have a material adverse effect on our business, financial condition and
results of operations.
Healthcare providers and third-party payors use coding systems to identify diagnoses,
procedures, services, and treatments. Proper coding is an integral component to receiving
appropriate reimbursement for the administration of BENLYSTA and related services. Most payors
recognize the Healthcare Common Procedure Coding System (HCPCS) Level II national codes to
identify and report drugs and the American Medical Association Current Procedural Terminology, or
CPT, codes to report professional services (including drug administration). As a new drug, BENLYSTA
has not been assigned a permanent, unique HCPCS code and there is a lack of clarity as to the
appropriate CPT Code that should be used for its administration. We intend to apply for a permanent
HCPCS code and obtain guidance from The Centers for Medicare & Medicaid Services (CMS) regarding
CPT Code usage. Until a permanent HCPCS code is assigned for BENLYSTA, physicians may bill using an
unclassified (miscellaneous) code. Use of miscellaneous codes typically causes claims processing
delays and may lead to lower payments to physicians or other providers.
Under Medicare Part B, reimbursement for BENLYSTA is currently computed based on the
manufacturers Average Sales Price (ASP). The Patient Protection and Affordable Care Act
(PPACA) made changes to the statutory definition of ASP and CMS is in the process of interpreting
and implementing those changes, which could result in lower payments for physician-administered
drugs. If government and other third-party payors do not provide adequate coverage and
reimbursement levels for BENLYSTA, its market acceptance may be adversely affected.
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.
If our products are approved and marketed, we may also face risks to our profitability and
financial condition from generic drug or biosimilar manufacturers.
The United States has recently enacted legislation establishing a regulatory pathway for
follow-on biologics, also known as biosimilars, 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 BENLYSTA and raxibacumab which might affect the
profitability or commercial viability of our products. An accelerated route to market for generic
versions of small molecule drugs was established in the United States with the passage of the
Hatch-Waxman Amendments in 1984, which also provides five years of exclusivity for small molecule
drugs with additional exclusivity under certain circumstances. The passage of the Biologics Price
Competition and Innovation Act (BPCIA) in March 2010 established a similar pathway for FDA
approval of follow-on biologics that provides twelve years of exclusivity for reference biologics
and an additional six month exclusivity period if certain pediatric studies are conducted. In
Europe, the European Medicines Agency has issued guidelines for approving products through an
abbreviated pathway under which more than ten biosimilars have been approved. European legislation
provides ten years of exclusivity for reference drugs, including biologics, and an additional one
year exclusivity
period for obtaining marketing approval for certain additional indications. If a generic or
biosimilar version of one of our potential products were approved,
it could have a negative effect on sales and gross profits of the potential product and our
financial condition.
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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. |
Because we are currently 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. Even if regulatory approval is
obtained for the commercial sale of a product, it
could take considerable time following approval, 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 have increased our activities, our limited resources for new products
may not be sufficient to discover and develop new drug
candidates.
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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. |
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. |
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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,
ZALBINTM 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 we do not complete the additional studies and generate
the additional data within the time required by the FDA, 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 can 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. For example, ZALBIN has
been in development for many years. We and our collaboration partner Novartis recently decided to
end further development of ZALBIN in anticipation of a Complete Response Letter from the FDA, in
which we expected the FDA to conclude that our existing ZALBIN data would not support approval of
our BLA.
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. In June 2010, we filed a BLA in the United States and our
collaboration partner GSK submitted a Marketing Authorization Application with the European
Medicines Agency. The FDA has assigned a PDUFA target date of December 9, 2010. We may not be
able to obtain FDA, EMEA or other regulatory approval of BENLYSTA. Even if FDA, EMEA 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, they may have easier or preferred access to the
likely distribution channels for biodefense products or they may
develop products judged to have greater efficacy for biodefense. 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.
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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.
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 active BLAs for two of our product candidates (raxibacumab and BENLYSTA), we
cannot assure you that 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 may not be successful if we are unable
to integrate our partners capabilities 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. 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. In addition, our
partners, among other things, may prove difficult to work with, less skilled than we originally
expected or unable to satisfy their financial commitments to us. Past collaborative successes are
no assurance of potential future success.
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Our efforts to acquire other biotechnology companies or in-license and develop additional product
candidates may not be successful, which could have a material adverse effect on our business,
financial condition and results of operations.
Our long-term strategy includes the acquisition of other biotechnology companies or in-license
of additional
product candidates to complement and supplement our existing product pipeline. We are actively
seeking to acquire such companies and to in-license additional product candidates that have
demonstrated positive pre-clinical and/or clinical data. We have certain criteria that we are
looking for in any acquisition or in-license and we may not be successful in identifying,
effectively evaluating, acquiring or in-licensing, and developing additional product candidates, or
on acceptable terms. In addition, product in-licensing involves inherent risks, including
uncertainties due to matters that may affect the successful development or commercialization of the
in-licensed product as well as the possibility of contractual disagreements with regard to terms
such as patent rights, license scope or termination rights. Competition for attractive product
opportunities is intense and may require us to devote substantial resources, both managerial and
financial, to an opportunity that may not result in a successfully developed, or commercialized,
product. Moreover, the cost of acquiring other companies
or in-licensing product candidates could be substantial and in order
to acquire companies or new products we may need to
raise additional financing, which may dilute existing stockholders. If we are unsuccessful in our efforts to acquire other companies or
in-license and develop additional product candidates, it could have a material adverse effect on
the growth of our business.
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 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. We may be unsuccessful in
developing or
commercializing HGS-ETR1.
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 our 2006 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.
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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.
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.
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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 June 2010 we filed a BLA with the FDA for BENLYSTA. The FDA granted a priority review
designation to BENLYSTA and assigned a PDUFA target date of December 9, 2010. Even with the grant
of priority review, 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.
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 rigorous, costly and uncertain. In June 2010, our
collaboration partner GSK submitted an MAA for BENLYSTA with the European Medicines Agency.
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.
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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 the United States and 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 such proceedings in the future.
For example, we are involved in European opposition proceedings regarding an issued patent of
Biogen Idec that HGS and GSK have licensed. In this opposition, the European Patent Office (EPO)
found Biogen Idecs claims to a method of treating autoimmune diseases using an antibody to BLyS
(such as BENLYSTA), to be valid. Merck Serono SA has appealed this decision to an EPO Technical
Board of Appeal; a hearing is expected in late 2011. We are also involved in a revocation
proceeding brought by Eli Lilly and Company with respect to our United Kingdom (UK) patent
related to BLyS compositions, including antibodies. Although an EPO Technical Board of Appeal held
that the corresponding European patent was valid, the UK Court of Appeal disagreed and upheld a
lower UK courts ruling that the UK patent was invalid. The UK Supreme Court granted HGS permission
to appeal this decision; the appeal is expected to be heard in July 2011.
In addition, Genentech, Inc. opposed our European patent related to products based on TRAIL
Receptor 1 (such as HGS-ETR1). On October 5, 2010, the Opposition Division of the EPO upheld our
patent.
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.
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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.
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, 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.
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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 September 30, 2010, we had convertible subordinated debt of $366.9 million
($403.8 million on a face value basis) and a long-term lease financing for our large-scale
manufacturing facility of $250.1 million on our balance sheet. During the nine months ended
September 30, 2010 we made cash interest payments on our convertible subordinated debt of
$6.9 million. During the nine months ended September 30, 2010 we made cash payments on
our long-term lease financing of $18.3 million. In addition, we have operating leases,
primarily our long-term operating lease for our headquarters, for which we made cash payments of
$15.7 million during the nine months ended September 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. |
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 September 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.
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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. |
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.
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We have only a limited amount of insurance that protects us only from certain 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. Potential risks and liabilities may not
be covered by our insurance policies, insurers may dispute coverage, or the amount of insurance may
not be enough to cover claims and liabilities. We may be unable to maintain existing insurance,
obtain new coverage, or increase limits in the future, and may be unable to do so on favorable
terms. Any significant uninsured liability may require us to pay substantial amounts, which would
adversely affect our cash position and results of operations.
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, affect our
reputation and, if successful, materially and adversely harm our business and financial condition.
We face an inherent risk of product liability claims in the event that the use of our products
caused, or is alleged to have caused, adverse side effects (including
death) or drug interactions. It may be that we will not understand
these risks until the drug has been administered to patients
for some time. We may be subject to product liability claims that can be costly to defend and may
result in large judgments or settlements against us. Any insurance we obtain may not provide
adequate coverage against any such asserted claims and we may therefore be exposed to significant
litigation costs and liabilities, which could exceed our total assets and our ability to pay. In
addition, negative publicity associated with any claims, regardless of their merit, may decrease
the future demand for our products.
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 materially adversely impact our business, operating results and 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.
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 also expect to face
increasing competition from universities and other non-profit research organizations. These
institutions carry out a significant amount of research and development in the field of biologic
technologies, and they are increasingly aware of the commercial value of their findings. As a
result, they are demanding greater patent and other proprietary rights, as well as licensing and
future royalty revenues.
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Our competitors may develop and market products that are less expensive, more effective, safer,
easier to administer or reach the market sooner, which may diminish or eliminate the commercial
success of any products we may commercialize.
The development and commercialization of new biopharmaceutical products is highly competitive
and subject to rapid technological advances. We will face competition with respect to all products
we may develop or commercialize in the future from pharmaceutical and biotechnology companies
worldwide. Many of our competitors have significantly greater research and development, financial,
sales and marketing, manufacturing, regulatory and other resources than we do. As a result, our
competitors may succeed in developing their products before we do and obtaining approvals from the
FDA or other regulatory agencies for their products more rapidly than we do. They may be able to
devote greater resources to the development, manufacture, marketing and sale of their products,
initiate or withstand substantial price competition or otherwise more successfully market their
products. These competing products or technologies might render our technology or product
candidates under development noncompetitive, uneconomical or obsolete.
Key
factors affecting the success of any approved product include its efficacy, safety
profile, drug interactions, method and frequency of administration, pricing, reimbursement and level of
promotional activity relative to those of competing products. Competing products may provide
greater therapeutic convenience or clinical or other benefits for a specific indication than our
products, or may offer comparable performance at a lower cost. The introduction of more
efficacious, safer, cheaper, or more convenient alternatives to our products could reduce our
revenues and the value of our product development efforts.
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. For example, a number of pharmaceutical and biotechnology companies are currently
developing products targeting the same types of indications that we are targeting with BENLYSTA,
and some of these competitors products have entered clinical trials.
If we successfully develop products but those products do not achieve and maintain market
acceptance, our business will not be successful. Any reduction in demand for our products as a
result of a competing product could lead to a decrease in prices, fewer customer
orders, reduced revenues, reduced margins, reduced levels of profitability, and loss of market
share for our products. These competitive pressures could adversely affect our business and operating results.
If any product candidate for which we receive regulatory approval does 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 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; |
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| 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.
Our success is dependent on our continued ability to attract and retain key personnel. If we lose
or are unable to attract key management or other personnel, it could have a material adverse effect
on our business, financial condition and results of operations.
Much of our progress to date has resulted from the particular scientific, technical and
management skills of personnel available to us. Competition for qualified employees is intense
among pharmaceutical and biotechnology companies. The loss of key employees, or an inability to
attract, retain and motivate additional highly skilled employees could materially adversely affect
the implementation of our business strategy, delay the commercialization of our products or prevent
us from becoming profitable.
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.
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Because we depend on third parties to conduct many of our clinical trials, we may encounter delays
in or lose some control over our efforts to develop products.
We are dependent on third-party research organizations to enroll qualified patients and
conduct, supervise and monitor many of our clinical trials. Our reliance on these service providers
for clinical development activities reduces our control over these
activities. At the same time, our reliance on
these service providers does not relieve us of our regulatory responsibilities, including
ensuring that our clinical trials are conducted in accordance with good clinical
practice regulations and the plan and protocols contained in the relevant regulatory
application. In addition, these organizations may not complete activities on schedule, or may not
conduct our preclinical studies or clinical trials in accordance with regulatory requirements or
our trial design. If we are unable to obtain any necessary services on acceptable terms or if these
service providers do not successfully carry out their contractual duties or meet expected
deadlines, our efforts to obtain regulatory approvals for, and to commercialize, our product
candidates may be delayed or prevented.
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 $17.96 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; |
| 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.
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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 September
30, 2010, we had 188,740,399 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; 24,278,082 shares of our common stock are issuable upon the exercise of options
outstanding as of September 30, 2010, having a weighted-average exercise
price of $15.41 per share, including 4,751,736 stock options granted during the nine months
ended September 30, 2010 with a weighted-average grant date fair value of $17.59 per share; and
204,605 shares of our common stock are issuable upon the vesting of restricted stock unit awards
outstanding as of September 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. |
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Item 6. Exhibits
3.1 | * | Amended and Restated By-laws (Filed as Exhibit 3 to the Registrants Form
8-K filed October 6, 2010) |
||
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. |
|||
99.1 | Human Genome Sciences, Inc. Employee Stock Purchase Plan (as amended and
restated effective as of January 1, 2011) |
* | Incorporated by reference. |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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: October 27, 2010
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EXHIBIT INDEX
Exhibit Page Number | ||||
3.1 | * | Amended and Restated By-laws (Filed as Exhibit 3 to the Registrants Form 8-K
filed October 6, 2010) |
||
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. |
|||
99.1 | Human Genome Sciences, Inc. Employee Stock Purchase Plan (as amended and
restated effective as of January 1, 2011) |
* Incorporated by reference.