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EXCEL - IDEA: XBRL DOCUMENT - HUMAN GENOME SCIENCES INC | Financial_Report.xls |
EX-32.1 - EXHIBIT 32.1 - HUMAN GENOME SCIENCES INC | c15446exv32w1.htm |
EX-31.1 - EXHIBIT 31.1 - HUMAN GENOME SCIENCES INC | c15446exv31w1.htm |
EX-31.2 - EXHIBIT 31.2 - HUMAN GENOME SCIENCES INC | c15446exv31w2.htm |
EX-32.2 - EXHIBIT 32.2 - HUMAN GENOME SCIENCES INC | c15446exv32w2.htm |
Table of Contents
FORM 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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 March 31, 2011
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 þ 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 þ | Accelerated filer o | 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 March 31, 2011 was
189,629,583.
TABLE OF CONTENTS
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Exhibit 31.1 | ||||||||
Exhibit 31.2 | ||||||||
Exhibit 32.1 | ||||||||
Exhibit 32.2 | ||||||||
EX-101 INSTANCE DOCUMENT | ||||||||
EX-101 SCHEMA DOCUMENT | ||||||||
EX-101 CALCULATION LINKBASE DOCUMENT | ||||||||
EX-101 LABELS LINKBASE DOCUMENT | ||||||||
EX-101 PRESENTATION LINKBASE DOCUMENT |
2
Table of Contents
PART I. FINANCIAL INFORMATION
HUMAN GENOME SCIENCES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
Three months ended March 31, | ||||||||
2011 | 2010 | |||||||
(in thousands, except share | ||||||||
and per share amounts) | ||||||||
Revenue: |
||||||||
Product sales |
$ | 14,110 | $ | 13,547 | ||||
Manufacturing and development services |
12,264 | 4,121 | ||||||
Research and development collaborative
agreements |
199 | 28,846 | ||||||
Total revenue |
26,573 | 46,514 | ||||||
Costs and expenses: |
||||||||
Cost of product sales |
9,999 | 7,568 | ||||||
Cost of manufacturing and development services |
11,599 | 912 | ||||||
Research and development expenses |
84,485 | 57,471 | ||||||
Selling, general and administrative expenses |
35,120 | 18,336 | ||||||
Commercial collaboration expenses |
3,086 | | ||||||
Facility-related exit credits |
(1,717 | ) | | |||||
Total costs and expenses |
142,572 | 84,287 | ||||||
Income (loss) from operations |
(115,999 | ) | (37,773 | ) | ||||
Investment income |
3,252 | 4,616 | ||||||
Interest expense |
(15,276 | ) | (14,666 | ) | ||||
Other expense |
(2,972 | ) | (54 | ) | ||||
Income (loss) before taxes |
(130,995 | ) | (47,877 | ) | ||||
Provision for income taxes |
| | ||||||
Net income (loss) |
$ | (130,995 | ) | $ | (47,877 | ) | ||
Basic and diluted net income (loss) per share |
$ | (0.69 | ) | $ | (0.26 | ) | ||
Weighted average shares outstanding, basic and
diluted |
189,076,628 | 186,140,744 | ||||||
The accompanying Notes to Consolidated Financial Statements are an integral part hereof.
3
Table of Contents
HUMAN GENOME SCIENCES, INC.
CONSOLIDATED BALANCE SHEETS
March 31, | December 31, | |||||||
2011 | 2010 | |||||||
(in thousands) | ||||||||
Assets |
||||||||
Current assets: |
||||||||
Cash and cash equivalents |
$ | 47,960 | $ | 155,691 | ||||
Short-term investments |
249,747 | 282,016 | ||||||
Accounts receivable |
17,449 | 25,958 | ||||||
Collaboration receivables |
19,189 | 18,856 | ||||||
Inventory |
34,116 | 43,091 | ||||||
Prepaid expenses and other current assets |
8,715 | 5,569 | ||||||
Total current assets |
377,176 | 531,181 | ||||||
Marketable securities |
419,582 | 416,165 | ||||||
Property, plant and equipment (net of accumulated depreciation) |
250,399 | 253,122 | ||||||
Restricted investments |
79,700 | 79,510 | ||||||
Collaboration receivables, non-current |
27,602 | 29,225 | ||||||
Inventory, non-current |
38,034 | | ||||||
Other assets |
2,667 | 5,826 | ||||||
TOTAL ASSETS |
$ | 1,195,160 | $ | 1,315,029 | ||||
Liabilities and Stockholders Equity |
||||||||
Current liabilities: |
||||||||
Accounts payable and accrued expenses |
$ | 42,105 | $ | 41,798 | ||||
Accrued payroll and related taxes |
23,762 | 30,157 | ||||||
Convertible subordinated debt |
191,396 | 188,620 | ||||||
Collaboration payable |
16,082 | 12,984 | ||||||
Deferred revenues |
4,395 | 5,134 | ||||||
Accrued exit expenses |
| 1,238 | ||||||
Other current liabilities |
1,013 | 1,013 | ||||||
Total current liabilities |
278,753 | 280,944 | ||||||
Convertible subordinated debt, non-current |
187,555 | 184,231 | ||||||
Lease financing |
250,969 | 250,516 | ||||||
Other liabilities |
12,663 | 13,575 | ||||||
Total liabilities |
729,940 | 729,266 | ||||||
Stockholders equity: |
||||||||
Preferred stock |
| | ||||||
Common stock |
1,896 | 1,890 | ||||||
Additional paid-in capital |
3,008,501 | 2,996,645 | ||||||
Accumulated other comprehensive income |
5,715 | 7,125 | ||||||
Accumulated deficit |
(2,550,892 | ) | (2,419,897 | ) | ||||
Total stockholders equity |
465,220 | 585,763 | ||||||
TOTAL LIABILITIES AND STOCKHOLDERS EQUITY |
$ | 1,195,160 | $ | 1,315,029 | ||||
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
Three months ended March 31, | ||||||||
2011 | 2010 | |||||||
(in thousands) | ||||||||
Cash flows from operating activities: |
||||||||
Net income (loss) |
$ | (130,995 | ) | $ | (47,877 | ) | ||
Adjustments to reconcile net income (loss) to net cash used in
operating activities: |
||||||||
Stock-based compensation expense |
6,612 | 3,844 | ||||||
Depreciation and amortization |
5,353 | 5,260 | ||||||
Amortization of debt discount |
6,100 | 5,576 | ||||||
Charge for impaired investment |
2,909 | | ||||||
Facility-related exit credits |
(1,717 | ) | | |||||
Loss on sale of investments and marketable securities |
380 | 216 | ||||||
Accrued interest on short-term investments, marketable securities and
restricted investments |
221 | 163 | ||||||
Non-cash expenses and other |
621 | 443 | ||||||
Changes in operating assets and liabilities: |
||||||||
Accounts receivable |
8,509 | 5,622 | ||||||
Collaboration receivables |
1,290 | (8,035 | ) | |||||
Inventory |
(28,024 | ) | (76 | ) | ||||
Prepaid expenses and other assets |
(3,296 | ) | 2,080 | |||||
Accounts payable and accrued expenses |
282 | 2,793 | ||||||
Accrued payroll and related taxes |
(6,395 | ) | (15,032 | ) | ||||
Collaboration payable |
3,098 | | ||||||
Deferred revenues |
(739 | ) | (27,792 | ) | ||||
Accrued exit expenses |
4 | (378 | ) | |||||
Other liabilites |
(474 | ) | 433 | |||||
Net cash used in operating activities |
(136,261 | ) | (72,760 | ) | ||||
Cash flows from investing activities: |
||||||||
Purchase of short-term investments and marketable securities |
(114,896 | ) | (408,749 | ) | ||||
Proceeds from sale and maturities of short-term investments and
marketable securities |
141,869 | 221,806 | ||||||
Capital expenditures property, plant, and equipment |
(2,400 | ) | (1,783 | ) | ||||
Net cash provided by (used in) investing activities |
24,573 | (188,726 | ) | |||||
Cash flows from financing activities: |
||||||||
Purchase of restricted investments |
(29,217 | ) | (8,361 | ) | ||||
Proceeds from sale and maturities of restricted investments |
29,001 | 7,473 | ||||||
Proceeds from issuance of common stock |
5,214 | 22,299 | ||||||
Purchase of treasury stock |
(1,041 | ) | (1,025 | ) | ||||
Net cash provided by financing activities |
3,957 | 20,386 | ||||||
Net decrease in cash and cash equivalents |
(107,731 | ) | (241,100 | ) | ||||
Cash and cash equivalents beginning of period |
155,691 | 567,667 | ||||||
Cash and cash equivalents end of period |
$ | 47,960 | $ | 326,567 | ||||
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
Three months ended March 31, | ||||||||
2011 | 2010 | |||||||
(in thousands) | ||||||||
Cash paid during the period for: |
||||||||
Interest |
$ | 8,418 | $ | 8,282 | ||||
Income taxes |
$ | | $ | |
During the three months ended March 31, 2011 and 2010, lease financing increased with respect to
the Companys leases with BioMed Realty Trust, Inc. (BioMed) by $452 and $523, 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 from 2006 to
2015.
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 March 31, 2011
(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 or HGS) 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 months ended March 31, 2011 and 2010, the Companys financial position
at March 31, 2011, and the cash flows for the three months ended March 31, 2011 and 2010. 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 2010 Annual Report on Form 10-K.
The results of operations for the three months ended March 31, 2011 are not necessarily indicative
of future financial results.
Accounts receivable. Trade accounts receivable are recorded net of allowances for prompt payment
discounts and doubtful accounts.
Non-current inventory. Inventory that is not expected to be sold until more than twelve months
from the balance sheet date is classified as non-current.
Product sales. Product sales consist of U.S. sales of BENLYSTA® and raxibacumab.
Revenue from product sales is recognized when persuasive evidence of an arrangement exists, title
to product and associated risk of loss have passed to the customer, the price is fixed or
determinable, collection from the customer is reasonably assured, all performance obligations have
been met, and returns can be reasonably estimated. Product sales are recorded net of accruals for
estimated rebates, chargebacks, discounts and other deductions (collectively, sales deductions)
and returns. Amounts accrued for sales deductions and returns are adjusted when trends,
significant events, or actual results indicate that adjustment is appropriate. With the exception
of allowances for prompt payment, allowances for sales deductions and returns are included in
accounts payable and accrued expenses in the accompanying consolidated balance sheets.
Specific considerations for BENLYSTA sold in the U.S. are as follows:
| With respect to BENLYSTA, the Company has determined that it qualifies as the principal
based on various elements of its agreement with GlaxoSmithKline (GSK), including
responsibility for manufacturing product for sale in the U.S., inventory risk and primary
responsibility over changes to the product, including product specifications. The Company
has an agreement with GSK whereby GSK provides distribution services. |
| BENLYSTA is distributed in the Unites States using specialty distributors and
wholesalers. Under this model, exclusive distributors purchase and take physical delivery
of product, and then sell to physicians or their clinics. At this time, the Company does
not recognize revenue upon product delivery to specialty distributors, even though the
distributor is invoiced upon product shipment. Instead, the Company records deferred
revenue at gross invoice sales price. The Company currently recognizes the revenue when
physicians or their clinics purchase product from the specialty distributors. Wholesalers supply product to all other healthcare providers (e.g.
hospitals, pharmacies), however they do not take physical delivery of product. All
wholesaler orders are drop-shipped directly from GSK to the healthcare providers. For
wholesaler purchases, the Company currently recognizes revenue upon delivery to the
healthcare provider. |
7
Table of Contents
HUMAN GENOME SCIENCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Quarter Ended March 31, 2011
(dollars in thousands, except per share data)
Note 1. Summary of Significant Accounting Policies (continued)
| Rebates: Allowances for rebates include mandated discounts under the Medicaid Drug
Rebate Program. Rebates are amounts owed after the final dispensing of the product to a
benefit plan participant and are based upon contractual agreements or legal requirements
with public sector (e.g. Medicaid) benefit providers. The allowance for rebates is based
on statutory discount rates and expected utilization. The Companys estimates for expected
utilization for rebates are based in part on third party market research data. Rebates are
generally invoiced and paid quarterly in arrears so that the accrual balance consists of
an estimate of the amount expected to be incurred for the current quarters activity, plus
an accrual balance for prior quarters unpaid rebates. |
| Chargebacks: Chargebacks are discounts that occur when contracted customers purchase
directly from an intermediary distributor or wholesaler. Contracted customers, which
currently consist primarily of Public Health Service institutions and Federal government
entities purchasing via the Federal Supply Schedule, generally
purchase the product at a discounted price. The distributor or wholesaler, in turn, charges back the difference
between the price initially paid by the distributor or wholesaler and the discounted price
paid to the distributor or wholesaler by the customer. The allowance for
distributor/wholesaler chargebacks is based on expected sales to contracted customers. |
| Distributor / Wholesaler Deductions: U.S. specialty distributors and wholesalers are
offered various consideration including allowances, service fees and prompt payment
discounts. |
| Co-pay assistance. Patients who have commercial insurance and meet certain
eligibility requirements may receive co-pay assistance. The Company accrues a liability
for co-pay assistance based on assumptions regarding average co-pay amounts and
participation in the program. |
| Product returns. BENLYSTA customers are not offered a general right of return.
However, the Company will accept product that is damaged or defective when shipped
directly from GSK or for expired product up to 12 months subsequent to its expiration
date. Product returned is generally not resalable as the products must be
temperature-controlled throughout the supply chain and such control is difficult to
confirm. In developing estimates for sales returns, the Company considers inventory
levels in the distribution channel, shelf life of the product and expected demand based on
market data. |
The Company is not the principal with respect to BENLYSTA sold in the rest of world (ROW).
Therefore, the Company will not record product sales with respect to this activity.
Cost of product sales. The Company capitalizes inventories produced in preparation for product
launches when the related product candidates are considered likely to receive regulatory approval
and it is probable that the related costs will be recoverable through the commercialization of the
product. Prior to capitalization, the cost of manufacturing drug product is recognized as research
and development expense in the period that the cost is incurred. Therefore, manufacturing costs
incurred prior to capitalization are not included in cost of product sales when revenue is
recognized from the sale of that drug product.
8
Table of Contents
HUMAN GENOME SCIENCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Quarter Ended March 31, 2011
(dollars in thousands, except per share data)
Note 1. Summary of Significant Accounting Policies (continued)
Prior
to receiving a follow-on order for raxibacumab from the United States
Government (USG) in July 2009, the Company did not
capitalize inventory costs related to this product. Although authorization to ship to the U.S.
Strategic National Stockpile (SNS) was received in January 2009, there continued to be uncertainty around
future product orders. Beginning in July 2009, the cost of manufacturing raxibacumab is recognized
as a cost of product sales (capitalized and then expensed when revenue is recognized), rather than
research and development expenses in the period that the cost is incurred.
Prior to the BENLSYTA Advisory
Committee meeting in November 2010, the Company did not capitalize inventory costs related to this
product. Following the positive outcome of the Advisory Committee, the cost of manufacturing
BENLYSTA is recognized as a cost of product sales (capitalized and then expensed as revenue is
recognized), rather than research and development expenses in the period that the cost is incurred.
Cost of product sales also includes royalties paid or payable to third parties based on the sales
levels of certain products and distribution services costs.
Commercial collaboration expenses
Commercial collaboration expenses include GSKs share of the collaboration profit with respect to
BENLYSTA in the United States. At this time, it also includes HGS share of the ROW collaboration
expense incurred by GSK. In the period when ROW results become profitable, the Company will begin
to reflect such results as commercial collaboration income. Commercial collaboration
expenses/income does not include any research and development expenses shared with GSK.
Reclassifications
Within the December 31, 2010 consolidated balance sheet, long-term equity investments of $3,241
have been reclassified and are included in Other assets, and a lease
termination liability that
had been classified in Accrued exit expenses has been reclassified to Other current liabilities.
Also within the December 31, 2010 consolidated balance sheet, deferred rent of $10,358, deferred
revenue, non-current of $2,517 and accrued exit expenses, non-current of $700 have been
reclassified and are included in Other liabilities. All of these reclassifications have been made
to conform to current year presentation.
Recent accounting pronouncements
In October 2009, the Financial Accounting Standards Board (FASB) issued new revenue recognition
standards for arrangements with multiple deliverables. The new standards permit entities to
initially use managements best estimate of selling price to value individual deliverables when
those deliverables do not have objective and reliable evidence of fair value. Additionally, these
new standards modify the manner in which the transaction consideration is allocated across the
separately identified deliverables. These new standards were effective for the Company as of
January 1, 2011 and have been implemented on a prospective basis. The adoption of these standards
did not have a material effect on the Companys consolidated results of operations, financial
position or liquidity.
In January 2010, the 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 the Company beginning January 1,
2010, and had no material impact on the Companys financial statements. Additionally, disclosures
of the gross purchases, sales, issuances and settlements activity in Level 3 fair value
measurements are required beginning January 1, 2011. The additional provisions of ASU 2010-06 did
not have any effect on the Companys consolidated results of operations, financial position or
liquidity.
9
Table of Contents
HUMAN GENOME SCIENCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Quarter Ended March 31, 2011
(dollars in thousands, except per share data)
Note 1. Summary of Significant Accounting Policies (continued)
In April 2010, the FASB issued ASU 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 was
effective for the Company on January 1, 2011. The adoption of ASU 2010-17 did not have a material
effect on the Companys consolidated results of operations, financial position or liquidity.
In December 2010, the FASB issued ASU 2010-27, Fees Paid to the Federal Government by
Pharmaceutical Manufacturers (ASU 2010-27), which specifies that the liability for the new fee
mandated by the Patient Protection and Affordable Care Act of 2010, as amended by the Health Care
and Education Reconciliation Act, should be estimated and recorded in full upon the first
qualifying sale with a corresponding deferred cost that is amortized to expense using a
straight-line method of allocation unless another method better allocates the fee over the calendar
year that it is payable. This ASU is effective for the Company beginning January 1, 2011. The
adoption of ASU 2010-27 did not have a material effect on the Companys consolidated results of
operations, financial position or liquidity.
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 months ended March 31, 2011 and 2010, total comprehensive income (loss) amounted
to:
Three months ended March 31, | ||||||||
2011 | 2010 | |||||||
Net loss |
$ | (130,995 | ) | $ | (47,877 | ) | ||
Net unrealized gains (losses): |
||||||||
Short-term investments and marketable securities |
(1,475 | ) | 1,206 | |||||
Restricted investments |
(206 | ) | (11 | ) | ||||
Foreign currency translation |
(106 | ) | (29 | ) | ||||
Subtotal |
(1,787 | ) | 1,166 | |||||
Reclassification adjustments for losses realized in net loss |
377 | 102 | ||||||
Total comprehensive loss |
$ | (132,405 | ) | $ | (46,609 | ) | ||
During the three months ended March 31, 2011, the Company recorded an impairment charge of $2,909
relating to its investment in Aegera Therapeutics, Inc. (Aegera). This impairment charge is
included in the net loss of $130,995. See Note 4, Collaborations and Other Agreements, for
additional information.
The effect of income taxes on items in other comprehensive income is $0 for all periods presented.
10
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HUMAN GENOME SCIENCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Quarter Ended March 31, 2011
(dollars in thousands, except per share data)
Note 3. Investments
Available-for-sale investments, including accrued interest, at March 31, 2011 and December 31, 2010
were as follows:
March 31, 2011 | ||||||||||||||||
Gross | Gross | |||||||||||||||
Amortized | Unrealized | Unrealized | Fair | |||||||||||||
Cost | Gains | Losses | Value | |||||||||||||
Corporate debt securities |
$ | 169,425 | $ | 1,780 | $ | (12 | ) | $ | 171,193 | |||||||
Residential mortgage-backed securities |
43,976 | 503 | (31 | ) | 44,448 | |||||||||||
Government-sponsored enterprise
securities |
27,208 | 4 | | 27,212 | ||||||||||||
Asset-backed securities |
6,894 | 1 | (1 | ) | 6,894 | |||||||||||
Subtotal Short-term investments |
247,503 | 2,288 | (44 | ) | 249,747 | |||||||||||
Corporate debt securities |
248,738 | 3,201 | (951 | ) | 250,988 | |||||||||||
Residential mortgage-backed securities |
73,880 | 845 | (52 | ) | 74,673 | |||||||||||
Government-sponsored enterprise
securities |
20,304 | | (136 | ) | 20,168 | |||||||||||
Asset-backed securities |
73,692 | 67 | (6 | ) | 73,753 | |||||||||||
Subtotal Marketable securities |
416,614 | 4,113 | (1,145 | ) | 419,582 | |||||||||||
U.S. Treasury and agencies |
1,299 | 8 | | 1,307 | ||||||||||||
Restricted cash and cash equivalents |
12,556 | | | 12,556 | ||||||||||||
Corporate debt securities |
48,398 | 529 | (35 | ) | 48,892 | |||||||||||
Residential mortgage-backed securities |
5,300 | 81 | (3 | ) | 5,378 | |||||||||||
Government-sponsored enterprise
securities |
7,543 | 28 | (11 | ) | 7,560 | |||||||||||
Asset-backed securities |
4,006 | 2 | (1 | ) | 4,007 | |||||||||||
Subtotal Restricted investments |
79,102 | 648 | (50 | ) | 79,700 | |||||||||||
Total |
$ | 743,219 | $ | 7,049 | $ | (1,239 | ) | $ | 749,029 | |||||||
11
Table of Contents
HUMAN GENOME SCIENCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Quarter Ended March 31, 2011
(dollars in thousands, except per share data)
Note 3. Investments (continued)
December 31, 2010 | ||||||||||||||||
Gross | Gross | |||||||||||||||
Amortized | Unrealized | Unrealized | Fair | |||||||||||||
Cost | Gains | Losses | Value | |||||||||||||
Corporate debt securities |
$ | 125,708 | $ | 1,655 | $ | (19 | ) | $ | 127,344 | |||||||
Residential mortgage-backed securities |
53,944 | 787 | (13 | ) | 54,718 | |||||||||||
Government-sponsored enterprise securities |
86,905 | 61 | | 86,966 | ||||||||||||
Asset-backed securities |
12,983 | 5 | | 12,988 | ||||||||||||
Subtotal Short-term investments |
279,540 | 2,508 | (32 | ) | 282,016 | |||||||||||
Corporate debt securities |
248,500 | 3,611 | (881 | ) | 251,230 | |||||||||||
Residential mortgage-backed securities |
79,605 | 1,161 | (20 | ) | 80,746 | |||||||||||
Government-sponsored enterprise securities |
25,402 | 3 | (120 | ) | 25,285 | |||||||||||
Asset-backed securities |
58,822 | 84 | (2 | ) | 58,904 | |||||||||||
Subtotal Marketable securities |
412,329 | 4,859 | (1,023 | ) | 416,165 | |||||||||||
U.S. Treasury and agencies |
1,302 | 10 | | 1,312 | ||||||||||||
Restricted cash and cash equivalents |
7,455 | | | 7,455 | ||||||||||||
Corporate debt securities |
45,931 | 620 | (29 | ) | 46,522 | |||||||||||
Residential mortgage-backed securities |
6,368 | 128 | 6,496 | |||||||||||||
Government-sponsored enterprise securities |
13,237 | 72 | (6 | ) | 13,303 | |||||||||||
Asset-backed securities |
4,412 | 10 | | 4,422 | ||||||||||||
Subtotal Restricted investments |
78,705 | 840 | (35 | ) | 79,510 | |||||||||||
Total |
$ | 770,574 | $ | 8,207 | $ | (1,090 | ) | $ | 777,691 | |||||||
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, 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. As of March 31, 2011 and December 31,
2010, the Company has pledged marketable securities.
12
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HUMAN GENOME SCIENCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Quarter Ended March 31, 2011
(dollars in thousands, except per share data)
Note 3. Investments (continued)
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 $79,700 and $79,510 as of March 31, 2011 and December 31,
2010, respectively.
Short-term investments, Marketable securities and Restricted investments unrealized losses
The Companys gross unrealized losses and fair value of investments with unrealized losses were as
follows:
March 31, 2011 | ||||||||||||||||||||||||
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 | |||||||||||||||||||
Corporate debt securities |
$ | 27,276 | $ | (12 | ) | $ | | $ | | $ | 27,276 | $ | (12 | ) | ||||||||||
Residential mortgage-backed securities |
44,448 | (31 | ) | | | 44,448 | (31 | ) | ||||||||||||||||
Asset-backed securities |
1,696 | (1 | ) | | | 1,696 | (1 | ) | ||||||||||||||||
Subtotal Short-term investments |
73,420 | (44 | ) | | | 73,420 | (44 | ) | ||||||||||||||||
Corporate debt securities |
82,346 | (951 | ) | | | 82,346 | (951 | ) | ||||||||||||||||
Residential mortgage-backed securities |
74,673 | (52 | ) | | | 74,673 | (52 | ) | ||||||||||||||||
Government-sponsored enterprise
securities |
20,167 | (136 | ) | | | 20,167 | (136 | ) | ||||||||||||||||
Asset-backed securities |
12,716 | (6 | ) | | | 12,716 | (6 | ) | ||||||||||||||||
Subtotal Marketable securities |
189,902 | (1,145 | ) | | | 189,902 | (1,145 | ) | ||||||||||||||||
Corporate debt securities |
9,279 | (35 | ) | | | 9,279 | (35 | ) | ||||||||||||||||
Residential mortgage-backed securities |
753 | (3 | ) | | | 753 | (3 | ) | ||||||||||||||||
Government-sponsored enterprise
securities |
2,694 | (11 | ) | | | 2,694 | (11 | ) | ||||||||||||||||
Asset-backed securities |
1,620 | (1 | ) | | | 1,620 | (1 | ) | ||||||||||||||||
Subtotal Restricted investments |
14,346 | (50 | ) | | | 14,346 | (50 | ) | ||||||||||||||||
Total |
$ | 277,668 | $ | (1,239 | ) | $ | | $ | | $ | 277,668 | $ | (1,239 | ) | ||||||||||
13
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HUMAN GENOME SCIENCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Quarter Ended March 31, 2011
(dollars in thousands, except per share data)
Note 3. Investments (continued)
December 31, 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 | |||||||||||||||||||
Corporate debt securities |
$ | 35,432 | $ | (18 | ) | $ | 1,536 | $ | (1 | ) | $ | 36,968 | $ | (19 | ) | |||||||||
Residential mortgage-backed securities |
54,718 | (13 | ) | | | 54,718 | (13 | ) | ||||||||||||||||
Asset-backed securities |
3,286 | | | | 3,286 | | ||||||||||||||||||
Subtotal Short-term investments |
93,436 | (31 | ) | 1,536 | (1 | ) | 94,972 | (32 | ) | |||||||||||||||
Corporate debt securities |
56,992 | (881 | ) | | | 56,992 | (881 | ) | ||||||||||||||||
Residential mortgage-backed securities |
80,746 | (20 | ) | | | 80,746 | (20 | ) | ||||||||||||||||
Government-sponsored enterprise
securities |
20,237 | (120 | ) | | | 20,237 | (120 | ) | ||||||||||||||||
Asset-backed securities |
8,400 | (2 | ) | | | 8,400 | (2 | ) | ||||||||||||||||
Subtotal Marketable securities |
166,375 | (1,023 | ) | | | 166,375 | (1,023 | ) | ||||||||||||||||
Corporate debt securities |
7,110 | (29 | ) | | | 7,110 | (29 | ) | ||||||||||||||||
Government-sponsored enterprise
securities |
1,502 | (6 | ) | | | 1,502 | (6 | ) | ||||||||||||||||
Subtotal Restricted investments |
8,612 | (35 | ) | | | 8,612 | (35 | ) | ||||||||||||||||
Total |
$ | 268,423 | $ | (1,089 | ) | $ | 1,536 | $ | (1 | ) | $ | 269,959 | $ | (1,090 | ) | |||||||||
The Company has evaluated its short-term investments, marketable securities and restricted
investments and has determined that none of these investments has 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 additional securities with unrealized
losses, given the Companys current and anticipated financial position.
The Company owned 332 available-for-sale U.S Treasury obligations, government-sponsored enterprise
securities and corporate debt securities at March 31, 2011. Of these 332 securities, 92 had
unrealized losses at March 31, 2011.
The Companys equity investments of less than 20% in privately-held companies are carried at cost
and are included in Other assets on the consolidated balance sheets. During the three months ended
March 31, 2011, the Company determined that its investment in Aegera had incurred an
other-than-temporary impairment and wrote down its investment of approximately $3,150 to
approximately $240. See Note 4, Collaborations and Other Agreements, for additional information
regarding Aegera. Long-term equity investments of 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.
14
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HUMAN GENOME SCIENCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Quarter Ended March 31, 2011
(dollars in thousands, except per share data)
Note 3. Investments (continued)
Other Information
The following table summarizes maturities of the Companys short-term investments, marketable
securities and restricted investments at March 31, 2011:
Short-term | Marketable | Restricted | ||||||||||||||||||||||
Investments | Securities | Investments | ||||||||||||||||||||||
Amortized | Fair | Amortized | Fair | Amortized | Fair | |||||||||||||||||||
Cost | Value | Cost | Value | Cost | Value | |||||||||||||||||||
Less than one year |
$ | 247,503 | $ | 249,747 | $ | | $ | | $ | 37,455 | $ | 37,664 | ||||||||||||
Due in year two through year three |
| | 352,192 | 355,192 | 39,031 | 39,375 | ||||||||||||||||||
Due in year four through year five |
| | 48,738 | 48,951 | 2,431 | 2,473 | ||||||||||||||||||
Due after five years |
| | 15,684 | 15,439 | 185 | 188 | ||||||||||||||||||
Total |
$ | 247,503 | $ | 249,747 | $ | 416,614 | $ | 419,582 | $ | 79,102 | $ | 79,700 | ||||||||||||
The Companys investments in mortgage-backed securities have no single maturity date and,
accordingly, have been allocated on a pro rata basis to each maturity range based on each maturity
ranges percentage of the total value.
Realized gains and losses on securities sold before maturity, which are included in the Companys
investment income for the three months ended March 31, 2011 and 2010, and their respective net
proceeds were as follows:
Three months ended March 31, | ||||||||
2011 | 2010 | |||||||
Proceeds on sale of investments prior to maturity |
$ | 176,852 | $ | 177,425 | ||||
Realized gains |
119 | 325 | ||||||
Realized losses |
(496 | ) | (428 | ) |
The cost of the securities sold is based on the specific identification method.
15
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HUMAN GENOME SCIENCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Quarter Ended March 31, 2011
(dollars in thousands, except per share data)
Note 4. Collaborations and Other Agreements
Collaboration Agreement with GlaxoSmithKline
During 2006, the Company entered into a license agreement with 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 are jointly conducting 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 share sales and marketing expenses and profits of any product commercialized
under the agreement. The Company has 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 recognized this payment as revenue over the remaining clinical development period, which
ended in 2010. In March 2011, the U.S. Food and Drug Administration (FDA) approved BENLYSTA.
GSKs share of the collaboration profit with respect to BENLYSTA in the U.S. and HGS share of the
ROW collaboration expense incurred by GSK are included in the Commercial collaboration expense line
in the consolidated statement of operations for the three months ended March 31, 2011.
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. Based on
regulatory feedback received in 2010, the Company and Novartis decided to end development of
ZALBIN.
Under the agreement, Novartis had paid the Company $207,500. The Company was recognizing these
payments as revenue ratably over the estimated remaining development period. The Company
recognized revenue of $27,602 during the three months ended March 31, 2010 under this agreement.
Collaboration reimbursements with respect to GSK and Novartis
Research and development expenses for the three months ended March 31, 2011 and 2010 are net of
$5,178 and $15,716 of costs reimbursed or reimbursable by GSK. The Company shares certain research
and development costs including personnel costs, outside services, clinical manufacturing, and
overhead with GSK under cost sharing provisions in the GSK collaboration agreement. Research and
development expenses for the three months ended March 31, 2011 are net of $926 of costs reimbursed
or reimbursable by Novartis. There were no reimbursable costs from Novartis for the three months
ended March 31, 2010.
16
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HUMAN GENOME SCIENCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Quarter Ended March 31, 2011
(dollars in thousands, except per share data)
Note 4. Collaborations and Other Agreements (continued)
U.S. Government Agreement
In July 2009, the USG agreed to purchase 45,000 additional doses of
raxibacumab for the SNS, to be delivered over a three-year period
beginning in 2009. The Company expects to receive a total of approximately $142,000 from this order
as deliveries are completed The Company recognized $14,031 and $13,547 in product revenue related
to raxibacumab during the three months ended March 31, 2011 and 2010, respectively. The Company
recognized $920 and $214 in manufacturing and development services revenue related to the work to
conduct animal and human studies and other raxibacumab activities during the three months ended
March 31, 2011 and 2010, respectively. The Company is entitled to receive approximately $20,000
under the contract with the USG upon FDA licensure of raxibacumab.
Aegera Agreement
During 2007, the Company entered into a collaboration and license agreement with Aegera 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 research period
extended through 2011. Under the agreement, the Company paid Aegera an aggregate of $20,000 for
the license and for an equity investment in Aegera. The Company allocated $16,852 to the license
fee and $3,148 to the investment. The Company incurred and expensed research costs of $625 and
$590 related to the Aegera agreement during the three months ended March 31, 2011 and 2010,
respectively.
During the three months ended March 31, 2011, the Company determined that its investment in Aegera
had incurred an other-than-temporary impairment based on changes in Aegeras business activities
and wrote down its investment to approximately $240. This investment is included in Other assets
on the consolidated balance sheets and the impairment loss is included in Other expense on the
consolidated statement of operations for the three months ended March 31, 2011.
FivePrime Therapeutics Agreement
During the three months ended March 31, 2011 the Company entered into an agreement with FivePrime
Therapeutics, Inc. (FivePrime) to develop and commercialize FivePrimes FP-1039 product for
multiple cancers. The Company paid FivePrime an upfront license fee of $50,000 which is reflected
in research and development expenses in the consolidated statement of operations for the three
months ended March 31, 2011. Upfront and milestone payments made to third parties for in-licensed
products that have not yet received marketing approval and for which no alternative future use has
been identified are expensed as incurred. The Company may be required to pay up to $445,000 in
future development, regulatory and commercial milestone payments, as well as royalty payments on
net sales if the product is commercialized. HGS has exclusive rights to develop and commercialize
FP-1039 for all indications in the United States, Canada and the European Union (EU). FivePrime
has an option to co-promote FP-1039 and any next-generation products in the United States, and
retains full development and commercialization rights in all other regions of the world outside the
U.S., Canada and the EU.
17
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HUMAN GENOME SCIENCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Quarter Ended March 31, 2011
(dollars in thousands, except per share data)
Note 5. Other Financial Information
Collaboration Receivables
Collaboration receivables of $19,189 as of March 31, 2011 includes $12,760 due to the Company from
GSK for manufacturing costs incurred to produce pre-launch commercial product which is expected to
be sold within the next year. Collaboration receivables also include $5,623 in unbilled receivables
from GSK in connection with the Companys cost-sharing agreements and other unbilled receivables.
Collaboration receivables of $18,856 as of December 31, 2010 includes $13,165 due to the Company
from GSK for manufacturing costs incurred to produce pre-launch commercial product which is
expected to be sold within the next year, $5,166 in unbilled receivables from GSK in connection
with the Companys cost sharing agreements, and other unbilled receivables.
Collaboration receivables, non-current of $27,602 and $29,225 as of March 31, 2011 and December 31,
2010, respectively, relate to the amount due to the Company from GSK for manufacturing costs
incurred to produce pre-launch commercial product which is not expected to be sold within the next
year.
Inventory
Inventories consist of the following:
March 31, 2011 | December 31, 2010 | |||||||
Raw materials |
$ | 23,381 | $ | 12,641 | ||||
Work-in-process |
39,437 | 23,426 | ||||||
Finished goods |
9,332 | 7,024 | ||||||
Subtotal |
72,150 | 43,091 | ||||||
Less: non-current portion |
(38,034 | ) | | |||||
Current portion |
$ | 34,116 | $ | 43,091 | ||||
Inventory that is not expected to be sold until more than twelve months from the balance sheet date
is classified as non-current.
BENLYSTA-related inventories that
were either purchased or manufactured prior to the date the Company began capitalizing BENLYSTA
inventory have a carrying value of zero, as the costs to produce this inventory were expensed as
research and development expense, and accordingly are not reflected in the inventory balances
shown above.
Collaboration Payable
Collaboration payable of $16,082 and $12,984 as of March 31, 2011 and December 31, 2010,
respectively, represents cost reimbursements due to GSK and Novartis in connection with the
Companys cost sharing agreements.
Note 6. Commitments and Contingencies
In the ordinary course of business, the Company is involved in various legal proceedings,
including, among others, patent oppositions, patent infringement litigation and other matters
incidental to its business. While it is not possible to accurately predict or determine the
eventual outcome of these matters or estimate a range of loss, one or more of these matters
currently pending could have a material adverse effect on the Companys financial condition,
results of operations or cash flows.
18
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HUMAN GENOME SCIENCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Quarter Ended March 31, 2011
(dollars in thousands, except per share data)
Note 7. Facility-Related Exit Credits
During the three months ended March 31, 2011, the Company decided to utilize certain space which it
had previously not used and was not expecting to use. In conjunciton with this decision, the
Company reversed the remaining reserve related to this space, recording a facility-related exit
credit of $1,717 in the consolidated statement of operations.
The following table summarizes the activity related to the liability for exit charges for the three
months ended March 31, 2011:
Balance as of January 1, 2011 |
$ | 1,938 | ||
Accretion recorded |
37 | |||
Subtotal |
1,975 | |||
Cash items |
(258 | ) | ||
Reserve adjustment |
(1,717 | ) | ||
Balance as of March 31, 2011 |
$ | | ||
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.
Stock-based compensation expense for the three months ended March 31, 2011 is not necessarily
representative of the level of stock-based compensation expense in future periods due to, among
other things, the fair value
of additional stock option grants and other awards in future years and the vesting period of the stock options and other awards.
The Company recorded stock-based compensation expense pursuant to these plans of $6,612 during the
three months ended March 31, 2011, which is net of $1,035 that was capitalized as part of inventory
production. The Company recorded stock-based compensation expense pursuant to these plans of
$3,844 during the three months ended March 31, 2010, none of which was capitalized. 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 579,028 shares of common stock in conjunction with
stock option exercises during the three months ended March 31, 2011. The Company granted 3,145,015
stock options under the Incentive Plan during the same period, with a weighted-average grant date
fair value of $15.12 per share.
During the three months ended March 31, 2011, the Company awarded 241,906 restricted stock units
(RSUs) with a weighted-average grant date fair value of $27.02 per share. During the same
period, 94,021 RSUs vested and the Company issued 58,155 shares of common stock to employees, net
of 35,866 shares purchased to satisfy the employees tax liability related to the RSUs vesting.
The treasury stock was retired prior to March 31, 2011. During the three months ended March 31,
2011, 3,400 restricted stock awards vested.
19
Table of Contents
HUMAN GENOME SCIENCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Quarter Ended March 31, 2011
(dollars in thousands, except per share data)
Note 8. Stock-Based Compensation (continued)
At March 31, 2011, the total authorized number of shares under the Incentive Plan, including prior
plans, was 54,845,420. Options available for future grant were 1,496,438 as of March 31, 2011.
Note 9. Fair Value Measurements
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 as of March 31, 2011 | ||||||||||||||||
Level 1 | Level 2 | Level 3 | Total | |||||||||||||
Cash and cash equivalents |
$ | 47,960 | $ | | $ | | $ | 47,960 | ||||||||
Corporate debt securities |
$ | | $ | 171,193 | $ | | $ | 171,193 | ||||||||
Residential mortgage-backed securities |
| 44,448 | | 44,448 | ||||||||||||
Government-sponsored enterprise securities |
| 27,212 | | 27,212 | ||||||||||||
Asset-backed securities |
| 6,894 | | 6,894 | ||||||||||||
Short-term investments |
$ | | $ | 249,747 | $ | | $ | 249,747 | ||||||||
Corporate debt securities |
$ | | $ | 250,988 | $ | | $ | 250,988 | ||||||||
Residential mortgage-backed securities |
| 74,673 | | 74,673 | ||||||||||||
Government-sponsored enterprise securities |
| 20,168 | | 20,168 | ||||||||||||
Asset-backed securities |
| 73,753 | | 73,753 | ||||||||||||
Marketable securities |
$ | | $ | 419,582 | $ | | $ | 419,582 | ||||||||
Corporate debt securities |
$ | | $ | 48,892 | $ | | $ | 48,892 | ||||||||
Money market funds |
12,556 | | | 12,556 | ||||||||||||
U.S. Treasury securities |
1,307 | | | 1,307 | ||||||||||||
Residential mortgage-backed securities |
| 5,378 | | 5,378 | ||||||||||||
Government-sponsored enterprise securities |
| 7,560 | | 7,560 | ||||||||||||
Asset-backed securities |
| 4,007 | | 4,007 | ||||||||||||
Restricted investments |
$ | 13,863 | $ | 65,837 | $ | | $ | 79,700 | ||||||||
The Company evaluates the types of securities in its investment portfolios to determine the proper
classification in the fair value hierarchy based on trading activity and the observability of
market inputs. 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.
20
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HUMAN GENOME SCIENCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Quarter Ended March 31, 2011
(dollars in thousands, except per share data)
Note 9. Fair Value Measurements (continued)
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
$680,000 (book value of $378,951) as of March 31, 2011. With respect to its lease financing, the
Company evaluated its incremental borrowing rate as of March 31, 2011, based on the current
interest rate environment and the Companys credit risk. The fair value of the BioMed lease
financing was approximately $259,000 (book value of $250,969) as of March 31, 2011 based on a
discounted cash flow analysis, and current rates for corporate debt having similar characteristics
and companies with similar creditworthiness.
Note 10. Net Loss Per Share
The following table sets forth the computation of basic and diluted net loss per share:
March 31, | ||||||||
2011 | 2010 | |||||||
Numerator: |
||||||||
Net loss |
$ | (130,995 | ) | $ | (47,877 | ) | ||
Denominator: |
||||||||
Denominator for basic and diluted earnings per share-
weighted-average shares |
189,076,628 | 186,140,744 | ||||||
Net loss per share, basic and diluted: |
||||||||
Net loss per share |
$ | (0.69 | ) | $ | (0.26 | ) | ||
Common stock issued in connection with the Companys Employee Stock Purchase Plan and through
exercised options granted pursuant to the Incentive Plan are included in the Companys weighted
average share balance based upon the issuance date of the related shares. As of March 31, 2011 and
2010, the Company had 26,466,429 and 25,951,029, respectively, stock options outstanding. As of
March 31, 2011 and 2010, the Company had 24,302,742 of shares issuable upon the conversion of the
Companys convertible subordinated debt. The stock options outstanding and shares issuable upon
conversion of the Companys convertible subordinated debt as of March 31, 20101 and 2011 are
excluded from the weighted average shares as they are anti-dilutive.
21
Table of Contents
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Three months ended March 31, 2011 and 2010
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Three months ended March 31, 2011 and 2010
Overview
Human Genome
Sciences, Inc. (HGS) is a biopharmaceutical company that exists to place new
therapies into the hands of those battling serious disease. Our lead products are
BENLYSTA® (belimumab) for systemic lupus erythematosus (SLE) and raxibacumab
for inhalation anthrax.
BENLYSTA was approved on March 9, 2011 by the U.S. Food and Drug Administration (FDA) for
the treatment of adult patients with active, autoantibody-positive SLE who are receiving standard
therapy. We recognized revenue from our first BENLYSTA sales in March 2011. In June 2010,
GlaxoSmithKline (GSK), our partner in the co-development and commercialization of BENLYSTA,
submitted a Marketing Authorization Application (MAA) to the European Medicines Agency (EMA)
for approval to market BENLYSTA in Europe. We expect to have the EMA decision in the second half of
2011. GSK has also submitted regulatory applications in various other countries. Regulatory
submissions in additional countries are planned later in 2011.
We continue to deliver raxibacumab to the U.S. Strategic National Stockpile (SNS) for
emergency use in treating inhalation anthrax. In July 2009, the U.S. Government (USG) exercised
its option under our contract to purchase 45,000 additional doses of raxibacumab, with delivery to
be completed over a three-year period. HGS expects to receive approximately $142.0 million from
this second order as deliveries are completed, $78.9 million of which has been recognized as
revenue through March 31, 2011. In May 2009, we submitted a Biologics License Application (BLA)
to the FDA for raxibacumab for the treatment of inhalation anthrax. We received a Complete Response
Letter in November 2009, and we will continue to work closely with the FDA to obtain approval. HGS
will receive approximately $20.0 million from the USG upon FDA licensure of raxibacumab.
In addition to our internal pipeline, we have substantial financial rights to two novel drugs
that GSK has advanced to late-stage development. The first of these is darapladib, which was
discovered by GSK using HGS technology. In two pivotal Phase 3 trials, GSK is currently evaluating
whether darapladib can reduce the risk of adverse cardiovascular events such as heart attack or
stroke in patients with chronic coronary heart disease and acute coronary syndrome, respectively.
With a planned enrollment of more than 27,000 patients in the two trials, the Phase 3 clinical
program for darapladib is among the largest ever conducted to evaluate the safety and efficacy of
any cardiovascular medication. The second is albiglutide, for which GSK currently has eight Phase
3 trials in progress to evaluate the long-term efficacy, safety and tolerability of albiglutide as
monotherapy and add-on therapy for patients with type 2 diabetes mellitus. Albiglutide was created
by HGS using its proprietary albumin-fusion technology, and the product was licensed to GSK in
2004.
We are also working to expand and advance our mid- and early-stage pipeline beyond potential
additional indications for BENLYSTA, with a primary focus on immunology and oncology. In March
2011, we entered into an agreement with FivePrime Therapeutics, Inc. (FivePrime) to develop and
commercialize FivePrimes FP-1039 product for multiple cancers. We continue to develop our
oncology portfolio around our expertise in the apoptosis, or programmed cell death, pathway. In
addition, we plan to initiate Phase 1b development of our human monoclonal antibody to the CCR5
receptor for the treatment of ulcerative colitis.
We and Novartis were developing ZALBINTM for the treatment of patients with chronic
hepatitis C. Based on regulatory feedback in 2010, we and Novartis decided to end further
development of ZALBIN.
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Critical Accounting Policies and the Use of Estimates
A critical accounting policy is one that is both important to the portrayal of our financial
condition and results of operations and that requires managements most difficult, subjective or
complex judgments. Such judgments are often the result of a need to make estimates about the
effect of matters that are inherently uncertain. The preparation of our financial statements in
conformity with accounting principles generally accepted in the United States requires management
to make estimates and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting period. Actual results could differ
materially from those estimates. There were no significant changes in critical accounting policies
from those at December 31, 2010, however the following information is in addition to, and should be
read in conjunction with, the accounting policies included in Part II, Item 7 of our Annual Report
on Form 10-K for the year ended December 31, 2010.
Accounts receivable. Trade accounts receivable are recorded net of allowances for prompt
payment discounts and doubtful accounts.
Non-current inventory. Inventory that is not expected to be sold until more than twelve
months from the balance sheet date is classified as non-current.
Product sales. Product sales consist of U.S. sales of BENLYSTA and raxibacumab. Revenue
from product sales is recognized when persuasive evidence of an arrangement exists, title to
product and associated risk of loss have passed to the customer, the price is fixed or
determinable, collection from the customer is reasonably assured, all performance obligations have
been met, and returns can be reasonably estimated. Product sales are recorded net of accruals for
estimated rebates, chargebacks, discounts and other deductions (collectively, sales deductions)
and returns. Amounts accrued for sales deductions and returns are adjusted when trends,
significant events, or actual results indicate that adjustment is appropriate. With the exception
of allowances for prompt payment, allowances for sales deductions and returns are included in
accounts payable and accrued expenses in the accompanying consolidated balance sheets.
Specific considerations for BENLYSTA sold in the U.S. are as follows:
| With respect to BENLYSTA, we have determined that we qualify as the principal based on
various elements of our agreement with GSK, including responsibility for manufacturing
product for sale in the U.S., inventory risk and primary responsibility over changes to
the product, including product specifications. We have an agreement
with GSK whereby GSK provides
distribution services. |
| BENLYSTA is distributed in the Unites States using specialty distributors and
wholesalers. Under this model, exclusive distributors purchase and take physical delivery
of product, and then sell to physicians or their clinics. At this time we do not
recognize revenue upon product delivery to specialty distributors, even though the
distributor is invoiced upon product shipment. Instead, we record deferred revenue at gross
invoice sales price. We currently recognize the revenue when physicians or their clinics
purchase product from the specialty distributors. Wholesalers supply product to all other
healthcare providers (e.g. hospitals, pharmacies), however they do not take physical
delivery of product. All wholesaler orders are drop-shipped directly from GSK to the
healthcare providers. For wholesaler purchases, we currently recognize revenue upon
delivery to the healthcare provider. |
| Rebates: Allowances for rebates include mandated discounts under the Medicaid Drug
Rebate Program. Rebates are amounts owed after the final dispensing of the product to a
benefit plan participant and are based upon contractual agreements or legal requirements
with public sector (e.g. Medicaid) benefit providers. The allowance for rebates is based
on statutory discount rates and expected utilization. Our estimates for expected
utilization for rebates are based in part on third party market research data. Rebates are
generally invoiced and paid quarterly in arrears so that our accrual balance consists of
an estimate of the amount expected to be incurred for the current quarters activity, plus
an accrual balance for prior quarters unpaid rebates. |
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Critical Accounting Policies and the Use of Estimates (continued)
| Chargebacks: Chargebacks are discounts that occur when contracted customers purchase
directly from an intermediary distributor or wholesaler. Contracted customers, which
currently consist primarily of Public Health Service institutions and Federal government
entities purchasing via the Federal Supply Schedule, generally
purchase the product at a discounted price. The distributor or wholesaler, in turn, charges back the difference
between the price initially paid by the distributor or wholesaler and
the discounted price
paid to the distributor or wholesaler by the customer. The allowance for
distributor/wholesaler chargebacks is based on expected sales to contracted customers. |
| Distributor / Wholesaler Deductions: U.S. specialty distributors and wholesalers are
offered various consideration including allowances, service fees, and prompt payment
discounts. |
| Co-pay assistance. Patients who have commercial insurance and meet certain
eligibility requirements may receive co-pay assistance. We accrue a liability for co-pay
assistance based on assumptions regarding average co-pay amounts and participation in the
program. |
| Product returns. BENLYSTA customers are not offered a general right of return.
However, we will accept product that is damaged or defective when shipped directly from
GSK or for expired product up to 12 months subsequent to its expiration date. Product
returned is generally not resalable as our products must be temperature-controlled
throughout the supply chain and such control is difficult to confirm. In developing
estimates for sales returns, we consider inventory levels in the distribution channel,
shelf life of the product and expected demand based on market data. |
We are not the principal with respect to BENLYSTA sold in the rest of world (ROW).
Therefore, we will not record product sales with respect to this activity.
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Results of Operations
Revenues. Revenues were $26.6 million for the three months ended March 31, 2011 compared to
revenues of $46.5 million for the three months ended March 31, 2010. Revenues for the three months
ended March 31, 2011 included $14.0 million in raxibacumab product sales, as well as our first
BENLYSTA product sales and $12.3 million in manufacturing and development services revenue.
Revenues for the three months ended March 31, 2010 included $27.6 million recognized from Novartis
related to straight-line recognition of up-front license fees and milestones reached for ZALBIN,
$13.5 million in raxibacumab product sales and $4.1 million in manufacturing and development
services revenue. The increase in manufacturing and development services revenue is primarily due
to increased contract manufacturing services during the quarter end March 31, 2011. BENLYSTA
revenue in future periods is expected to increase as BENLYSTA progresses through launch.
Cost of sales. Cost of sales includes cost of product sales of $10.0 million for the three
months ended March 31, 2011 compared to $7.6 million for the three months ended March 31, 2010.
Cost of sales also includes cost of manufacturing and development services of $11.6 million for the
three months ended March 31, 2011 compared to $0.9 million for the three months ended March 31,
2010. Cost of product sales for both periods includes the cost of manufacturing raxibacumab,
third-party royalties and costs expensed related to rejected or terminated production batches.
Cost of product sales for the three months ended March 31, 2011 also includes distribution services
costs related to BENLYSTA sales. Cost of product sales for BENLYSTA does not include manufacturing
costs of the product sold this quarter as they have been previously expensed. Our manufacturing and
development services costs include costs associated with contract manufacturing services and
raxibacumab development services costs. The increase in manufacturing and development services
costs is primarily due to higher costs associated with contract
manufacturing services. Our cost of sales with respect to contract
manufacturing services can represent a significant portion of sales,
depending upon production volumes, efficiencies and product mix. Cost of
sales in future periods with respect to BENLYSTA is expected to increase as BENLYSTA sales
increase.
Expenses. Research and development net expenses were $84.5 million for the three months ended
March 31, 2011 compared to $57.5 million for the three months ended March 31, 2010. Our research
and development expenses for the three months ended March 31, 2011 and 2010 are net of $6.6 million
and $15.8 million, respectively, of costs reimbursed 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 $6.3 million for the three months ended March 31, 2011 from
$4.7 million for the three months ended March 31, 2010. This increase is primarily due to
increased new target activity, partially offset by decreased BENLYSTA, ZALBIN and HGS1029 research
activity. Our research costs for the three months ended March 31, 2011 and 2010 are net of $0.5
million and $1.0 million, respectively, of cost reimbursement primarily from GSK under cost sharing
provisions in our collaboration agreements.
Our pharmaceutical sciences costs, where we focus on improving formulation, process
development and production methods, decreased to $6.0 million for the three months ended March 31,
2011 from $6.6 million for the three months ended March 31, 2010. This decrease is primarily due
to decreased activity related to ZALBIN partially offset by increased activity related to our
contract manufacturing services. Pharmaceutical sciences costs for the three months ended March
31, 2011 are net of $1.1 million in cost reimbursement primarily from GSK.
Our manufacturing costs that relate to research and development activities decreased to $4.8
million for the three months ended March 31, 2011 compared to $29.9 million for the three months
ended March 31, 2010. This decrease is primarily due to the expensing of manufacturing costs
incurred to produce BENLYSTA during 2010 prior to the point at which we started to capitalize such
costs during the fourth quarter of 2010. Our manufacturing costs for the three months ended March
31, 2011 and 2010 are net of $1.0 million and $8.6 million, respectively, of cost reimbursement
from GSK under the commercial cost sharing provisions in our collaboration agreements.
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Results of Operations (continued)
Our clinical development costs increased to $67.4 million for the three months ended March 31,
2011 from $16.3 million for the three months ended March 31, 2010. The increase is primarily due
to the payment of a $50.0 million upfront license fee to FivePrime which was expensed in the three
months ended March 31, 2011. Our clinical development expenses for the three months ended March
31, 2011 and 2010 are net of $4.0 million and $6.3 million, respectively, of cost reimbursement
primarily from GSK and Novartis under cost sharing provisions in our collaboration agreements.
Selling, general and administrative expenses increased to $35.1 million for the three months
ended March 31, 2011 from $18.3 million for the three months ended March 31, 2010. This increase
is primarily due to increased commercial activities, such as marketing programs and materials, and
the hiring in late 2010 of additional personnel, including our sales force. Selling, general and
administrative expenses in future periods are likely to increase as the level of commercial
activities rises.
Commercial collaborations expenses of $3.1 million for the three months ended March 31, 2011
include GSKs share of the collaboration profit with respect to BENLYSTA in the United States. It
also includes our share of the rest of world (ROW) collaboration expense incurred by GSK. In the
period when ROW results become profitable, we will begin to reflect the ROW results as commercial
collaboration income.
Facility-related exit credits of $1.7 million for the three months ended March 2011 relate to
the reversal of our remaining exit reserve for certain exited space. During the three months ended
March 31, 2011, we decided to use this remaining exited space and therefore reversed the remaining
reserve. See Note 7, Facility-Related Exit Credits, of the Notes to the Consolidated Financial
Statements for additional discussion.
Investment income decreased to $3.3 million for the three months ended March 31, 2011 from
$4.6 million for the three months ended March 31, 2010. The decrease in investment income for the
three months ended March 31, 2011 was primarily due to lower average investment balances.
Interest expense increased to $15.3 million for the three months ended March 31, 2011 compared
to $14.7 million for the three months ended March 31, 2010. Interest expense includes non-cash
interest expense related to amortization of debt discount of $6.1 million and $5.6 million for the
three months ended March 31, 2011 and 2010, respectively, as a result 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.
Other expenses of $3.0 million for the three months ended March 31, 2011 consists primarily of
a charge for the other-than-temporary impairment of our investment in Aegera Therapeutics, Inc. We
review our investments for impairment on a recurring basis, and based on changes in Aegeras
business activities during the three months ended March 31, 2011, we believe the value of the
investment fell below our carrying value, and that this impairment is other-than-temporary.
Net Income (Loss). We recorded a net loss of $131.0 million, or $0.69 per basic and diluted
share, for the three months ended March 31, 2011 compared to a net loss of $47.9 million, or $0.26
per basic and diluted share, for the three months ended March 31, 2010. The increased net loss for
the first quarter of 2011 is primarily due to the $50.0 million,
or $0.26 per basic and diluted share,
upfront license fee paid to FivePrime, lower revenue recognized in 2011 from research and development
collaborative agreements, and increased selling, general and administrative expenses as we launch
BENLYSTA.
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Liquidity and Capital Resources
We had working capital of $98.4 million and $250.2 million at March 31, 2011 and December 31,
2010, respectively. The decrease in our working capital for the three months ended March 31, 2011
is primarily due to the use of working capital to fund our operations and the $50.0 million upfront
license paid to FivePrime. Our working capital position would improve after October 2011 if the
convertible subordinated debt of approximately $197.1 million is redeemed in the form of common
stock rather than cash at maturity.
We expect to continue to incur substantial expenses relating to our research and development
efforts, as we focus on clinical trials and manufacturing required for the development of our
active product candidates, including BENLYSTA for additional indications, and fulfill our Phase 4
commitments. We will also continue to incur costs related to our commercial launch activities, and
will incur significant sales and marketing costs now that BENLYSTA has been approved. In the event
our working capital needs exceed our available working capital, we may 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 $142.0 million from this
order as deliveries are completed, $78.9 million of which was recognized as revenue through March
31, 2011. We may also receive payments under collaboration agreements, to the extent milestones are
met, which would further improve our working capital position.
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 have
several ongoing Phase 1 and Phase 2 trials and expect to initiate additional trials in the future,
including post-marketing trials required by the FDA in connection with the approval of BENLYSTA.
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. However, the duration of these phases may vary considerably according to the type,
complexity, novelty and intended use of the drug candidate. Some trials may take considerably
longer to complete.
Our clinical development expenses are dependent on the clinical phase of our product
candidates. Our expenses increase as our product candidates move to later phases of clinical
development. The status of our clinical projects is as follows:
Clinical Trial Status as of March 31,(2) | ||||||
Product Candidate(1) | Indication | 2011 | 2010 | |||
BENLYSTA |
Systemic Lupus Erythematosus | (3) | Phase 3 | |||
BENLYSTA |
Rheumatoid Arthritis | (4) | (4) | |||
Raxibacumab |
Anthrax | (5) | (5) | |||
HGS1029 |
Cancer | Phase 1 | Phase 1 | |||
Mapatumumab(6) |
Cancer | Phase 2 | Phase 2 | |||
HGS1036 |
Cancer | (7) | |
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Liquidity and Capital Resources (continued)
(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) | Product approved in U.S., MAA filed in June 2010. |
|
(4) | Phase 2 trial completed; treatment IND ongoing. |
|
(5) | BLA filed in 2009; Complete Response Letter received from FDA; additional work ongoing. |
|
(6) | Formerly HGS-ETR1. |
|
(7) | Formerly FP-1039. Phase 1 trial initiated by FivePrime. |
We identify our product 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 product candidates.
We are advancing a number of product 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.
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. Although BENLYSTA and our
large-scale manufacturing facility have received approval, we cannot be certain that we will
establish sufficient safety and efficacy data to receive regulatory approval for any additional
drugs or that our drugs and the manufacturing facilities will satisfy or continue to satisfy all
applicable regulatory requirements.
Part of our business plan includes collaborating with others. For example, we entered into a
collaboration agreement with GSK in 2006 with respect to BENLYSTA and received a payment of $24.0
million in 2006. We and GSK share Phase 3 and 4 development costs, and share sales and marketing
expenses and profits of any product that is commercialized in accordance with the collaboration
agreement. During the three months ended March 31, 2011, we recorded approximately $5.2 million due
from GSK with respect to our cost sharing agreements as a reduction of research and development
expenses. We recognized the up-front fee received from GSK as revenue ratably over the estimated
remaining development period, which ended in 2010. To the extent we enter into additional
collaborations with respect to our product candidates, these could provide us with upfront fees
and/or milestones.
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. 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, and we may acquire such
companies and in-license additional product candidates that have demonstrated positive pre-clinical
and/or clinical data. Any such acquisition or in-license agreement could include consideration in
the form of cash, which would have an adverse effect on our liquidity. For example, we entered into
an agreement with FivePrime during the three months ended March 31, 2011 and paid an upfront fee of
$50.0 million. We expect that our existing funds, payments from BENLYSTA sales, 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.
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Table of Contents
Liquidity and Capital Resources (continued)
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 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 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.
We have certain contractual obligations that may have a future effect on our financial
condition, changes in 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 consolidated balance sheets. Debt associated with the 2006 sale of our LSM to BioMed and
accompanying leaseback is recorded on our consolidated balance sheets as of March 31, 2011 and December 31, 2010.
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.
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 $35.0
million in 2011 to approximately $21.0 million in 2019.
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Cautionary Statement Pursuant to Private Securities Litigation Reform Act of 1995 Safe Harbor
for Forward-looking Statements
The information in this report includes statements that are forward-looking within the meaning
of the Private Securities Litigation Reform Act of 1995. Forward-looking statements may be
identified by the use of words such as believes, plans, expects, will, anticipates,
estimates and other words of similar meaning in conjunction with, among other things, discussions
of financial performance or financial condition, product sales, growth strategy, product
development, regulatory approvals or expenditures.
Forward-looking statements are based on our current intentions, beliefs and expectations
regarding future events. The Company cannot guarantee that any forward-looking statement will be
accurate. Investors should realize that if underlying assumptions prove inaccurate or unknown risks
or uncertainties materialize, actual results could differ materially from the Companys
expectations. Investors are, therefore, cautioned not to place undue reliance on any
forward-looking statement. Any forward-looking statement speaks only as of the date on which such
statement is made, and, except as required by law, the Company does not undertake to update any
forward-looking statement to reflect new information, events or circumstances.
Some important factors that could cause the Companys actual results to differ from the
Companys expectations in any forward-looking statement include:
| our lack of commercial experience and dependence on the sales growth of BENLYSTA; |
| the occurrence of adverse safety events with our products, resulting in product
recalls, withdrawals, regulatory action on the part of the FDA or the termination of
clinical trials for products in development; |
| changes in the availability of reimbursement for BENLYSTA; |
| the inherent uncertainty of the timing and success of, and expense associated with,
research, development, regulatory approval and commercialization of our pipeline products; |
| substantial competition in our industry, including from branded and generic products; |
| the highly regulated nature of our business; |
| uncertainty regarding our intellectual property rights and those of others; |
| the ability to manufacture at appropriate scale, and in compliance with regulatory
requirements, to meet market demand for our product; |
| our substantial indebtedness and lease obligations; |
| our dependence on collaborations over which we may not always have full control; |
| the impact of our acquisitions and strategic transactions; |
| changes in the health care industry in the U.S. and other countries, including
government laws and regulations relating to sales and promotion, reimbursement and pricing
generally; |
| significant litigation adverse to the Company, including product liability and patent
infringement claims; and |
| increased scrutiny of the health care industry by government agencies and state
attorneys general resulting in investigations and prosecutions. |
The foregoing list sets forth many, but not all, of the factors that could cause actual
results to differ from the Companys expectations in any forward-looking statement. New factors
emerge from time to time and it is not possible for management to predict all such factors, nor can
it assess the impact of any such factor on the business or the extent to which any factor, or
combination of factors, may cause results to differ materially from those contained in any
forward-looking statement. Investors should consider this cautionary statement, as well as the
factors discussed in Part II, Item 1A below under Risk Factors, when evaluating our
forward-looking statements.
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Item 3. | Quantitative and Qualitative Disclosures About Market Risk |
We do not currently have operations of a material nature that are subject to risks of foreign
currency fluctuations. We do not use derivative financial instruments in our operations or
investment portfolio. Our investment portfolio may be comprised of low-risk U.S. Treasuries,
government-sponsored enterprise securities, high-grade debt having at least an A rating at time
of purchase and various money market instruments. The short-term nature of these securities, which
currently have an average term of approximately 14 months, decreases the risk of a material loss
caused by a market change related to interest rates.
We believe that a hypothetical 100 basis point adverse move (increase) in interest rates along
the entire interest rate yield curve would adversely affect the fair value of our cash, cash
equivalents, short-term investments, marketable securities and restricted investments by
approximately $9.0 million, or approximately 1.1% of the aggregate fair value of $796.7 million, as
of March 31, 2011. 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 March 31, 2011. We believe that any interest rate
change related to our investment securities held as of March 31, 2011 is not material to our
consolidated financial statements. As of March 31, 2011, the yield on comparable one-year
investments was approximately 0.3%, as compared to our current portfolio yield of approximately
1.7%. However, given the short-term nature of these securities, a general decline in interest rates
may adversely affect the interest earned from our portfolio as securities mature and may be
replaced with securities having a lower interest rate.
To minimize our exposure to credit risk, we invest in securities with strong credit ratings
and have established guidelines relative to diversification and maturity with the objectives of
maintaining safety of principal and liquidity. We do not invest in derivative financial
instruments, auction rate securities, loans held for sale or mortgage-backed securities backed by
sub-prime or Alt-A collateral, and we generally hold our investments in debt securities until
maturity. However, adverse changes in the credit markets relating to credit risks would adversely
affect the fair value of our cash, cash equivalents, short-term investments, marketable securities
and restricted investments.
Our facility leases for our Traville headquarters 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.
During 2010 we formed several wholly-owned European subsidiaries in
preparation for commercial activity in that region. The formation of these subsidiaries slightly
increases our exposure to foreign currency fluctuation risks beyond our prior exposure when we had
one European subsidiary with limited activity. We do not believe the risk of foreign currency gains
or losses to be material to our overall operations. Another 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 March 31, 2011. 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 March 31, 2011, and has concluded that there was no change that occurred
during the quarterly period ended March 31, 2011 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 of operations.
COMMERCIAL RISKS
Our near-term prospects are highly dependent on the success of BENLYSTA, our first FDA-approved
product. To the extent we fail to successfully commercialize BENLYSTA, our business, financial
condition and results of operations would be materially adversely affected and the price of our
common stock would likely decline.
BENLYSTA is our first FDA-approved product. On March 9, 2011, the FDA approved BENLYSTA for
the treatment of adult patients with active, autoantibody-positive systemic lupus erythematosus
(SLE). We believe that BENLYSTA product sales will constitute all or most of our total revenue
over the next several years.
The degree of market acceptance and commercial success of BENLYSTA and our ability to generate
and increase revenues will depend on a number of factors, including the following:
| the number of patients with SLE who are diagnosed with the disease, and those that may
be treated with BENLYSTA; |
| the safety and efficacy of BENLYSTA, our ability to provide acceptable evidence of
safety and efficacy, and the perceptions in the medical community, by regulatory agencies
and among insurers and other payers of BENLYSTAs safety and efficacy; |
| BENLYSTAs perceived advantages over alternative 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); |
| the claims, limitations, warnings and other information in BENLYSTAs labeling; |
| our establishment of an effective sales force and the ability of our sales, marketing
and other representatives to accurately describe BENLYSTA consistent with its approved
labeling; |
| BENLYSTAs price and perceived cost-effectiveness; |
| the ability of patients and physicians and other providers to obtain and maintain
sufficient coverage and reimbursement by third-party payers, including government payers; |
| the receipt of European and other ex-U.S. marketing approvals; |
| the receipt and maintenance of marketing approvals from the United States and foreign
regulatory authorities; |
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| the growth of commercial sales in the United States and successful launch in countries
where we have not yet obtained marketing approval; |
| in the United States, the ability of group purchasing organizations, or GPOs (including
distributors and other network providers), to sell BENLYSTA to their constituencies; |
| the establishment and maintenance of commercial manufacturing capabilities ourselves or
through third-party manufacturers, and our ability to meet commercial demand for BENLYSTA;
and |
| the effectiveness of our partnership with GSK in successfully obtaining foreign
regulatory approvals and in marketing and selling BENLYSTA in both the U.S. and abroad. |
We cannot predict whether physicians, patients, healthcare insurers or maintenance
organizations, or the medical community in general, will accept or utilize BENLYSTA. Our efforts to
educate the medical community and third-party payers regarding the benefits of BENLYSTA will
require significant resources and may not be successful in achieving our objectives. If BENLYSTA
does not achieve broad market acceptance, the revenues we generate from sales will be limited and
our business may not be profitable.
Data generated or analyzed after BENLYSTA approval may result in decreased demand and lower sales
or product withdrawal.
As a condition to obtaining U.S. marketing approval of BENLYSTA, we are required to conduct
additional clinical trials. The size and scope of these Phase IV trials are significant and will
be costly. The results generated in these Phase IV trials could result in loss of marketing
approval, changes in product labeling, or new or increased concerns about side effects or the
efficacy of BENLYSTA that may decrease demand and lower sales. Foreign regulatory agencies may
impose comparable post-approval requirements that require significant additional expenditures.
Post-marketing studies and other emerging data about BENLYSTA, such as adverse event reports, may
also adversely affect sales or result in withdrawal of BENLYSTA from the market. Furthermore, the
discovery of significant problems with a product or class of products similar to BENLYSTA could
have an adverse effect on the sales of BENLYSTA.
In addition, new data and information, including information about product misuse, may lead
government agencies, professional societies, practice management groups or organizations involved
in various diseases to publish guidelines or recommendations related to the use of BENLYSTA or
place restrictions on sales. Such guidelines or recommendations may lead to lower sales of
BENLYSTA.
If we are unable to obtain marketing approvals for BENLYSTA in Europe and additional jurisdictions,
or if we are significantly delayed or limited in doing so, our results of operations and business
will be materially and adversely affected and our stock price would likely decline.
In June 2010, our collaboration partner GSK submitted an MAA for BENLYSTA with the EMA.
Regulatory applications have also been submitted and are currently under consideration in Canada,
Australia, Switzerland, Russia, Brazil and The Philippines. We currently expect a decision by the
EMA in the second half of 2011. Despite approval by the FDA, we cannot offer any assurances or
predict with any certainty that the EMA or other regulatory authorities will grant marketing
approval for BENLYSTA, or the expected timeframe of such approvals. Furthermore, as was the case
with FDA approval, other regulatory approvals, even if obtained, may be limited to specific
indications, limit the type of patients in which the drug may be used, or otherwise require
specific warning or labeling language, any of which might reduce the commercial potential of
BENLYSTA. Regulatory authorities may condition BENLYSTA marketing approval on the conduct of
specific post-marketing studies to further evaluate safety and efficacy, in either particular
patient populations or general patient populations or both. The results of these studies, the
discovery of previously unknown issues involving safety or efficacy or the failure to comply with
post-approval regulatory requirements, including requirements with respect to manufacturing
practices, reporting of adverse effects, advertising, promotion and marketing, may result in
restrictions on the marketing of BENLYSTA or the withdrawal of BENLYSTA from the market.
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If we are unable to obtain approval for expansion of the labeled uses for BENLYSTA, we may not be
able to recognize the value of the product in other indications.
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 SLE. In
March 2011, the FDA approved BENLYSTA for the treatment of SLE. We and our partner intend to
conduct new clinical trials for additional approved, or labeled, uses of BENLYSTA, such as
vasculitis, post-renal transplant and other autoimmune indications and seek expansion of the
labeled uses in the U.S. and in other countries. However, we may be unable to obtain approval for
such label expansion. If we are not able to obtain approval for expansion of the labeled uses for
BENLYSTA, we will have incurred clinical trial costs without corresponding benefits and our stock
price may suffer to the degree that our prospects for expanded labeled uses were assigned value in
our trading price.
We may be unable to maintain or to expand our commercial manufacturing capability and may be unable
to obtain required quantities of our products for commercial use.
Except for raxibacumab and quantities of BENLYSTA manufactured to build our commercial supply
inventory of BENLYSTA in support of commercialization, we have limited experience in manufacturing
materials suitable for commercial use. The FDA must determine that our facilities comply with cGMP
requirements for commercial production to license them for a particular product. Although the FDA
has licensed our facility for the manufacture of BENLYSTA, the FDA will routinely re-inspect our
facilities for such compliance. We may not successfully establish sufficient manufacturing
capabilities or manufacture our products economically or in continuing compliance with cGMPs and
other regulatory requirements. For example, we believe that we have sufficient manufacturing
capacity to launch BENLYSTA and to supply commercial quantities of BENLYSTA for the first two or
three years following launch. In 2010, we entered into a manufacturing agreement with Lonza Sales
AG pursuant to which Lonza will manufacture additional commercial quantities of BENLYSTA. However,
this additional manufacturing capacity may not be available for 12 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
commercial demand, and our revenues may accordingly be limited from BENLYSTA. Our revenues from
BENLYSTA also will be limited if the demand for BENLYSTA exceeds our capacity to supply BENLYSTA to
patients.
BENLYSTA is solely produced at our large-scale manufacturing facility in Rockville, Maryland
and raxibacumab is solely produced at our small-scale manufacturing facility, which is also in
Rockville, Maryland. Furthermore, the filling, finishing and packaging for both BENLYSTA and
raxibacumab are solely performed by a single third party manufacturer. We cannot guarantee that
one or more of these plants will not encounter problems, including but not limited to loss of
power, equipment failure or viral or microbial contamination, which could adversely affect our
ability to deliver adequate supply of one or more of these products to patients or customers.
If we or our third-party manufacturers fail to comply with regulatory requirements imposed on our
manufacturing activities, it could have a material adverse effect on our business, financial
condition and results of operations.
We have previously engaged third-party manufacturers or utilized our collaboration partners
manufacturing capabilities to manufacture products and we expect to continue to do so in the
future. 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. In
addition, because regulatory approval to manufacture a drug is generally site-specific, the FDA and
other regulatory authorities will routinely inspect our manufacturing facilities and our current
and future third-party manufacturers facilities for compliance with cGMPs. If we or our
third-party manufacturers fail to comply with applicable regulatory requirements, 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; revoke
previously granted drug approvals under certain circumstances; or impose civil or criminal
penalties. Any of these actions could delay our development of products, the submission of these
products for regulatory approval or result in insufficient product quantity to support commercial
demand. As a result, our business, financial condition and results of operations could be
seriously harmed.
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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.
Although we have priced BENLYSTA for the U.S. market, we can provide no assurance as to the
price that we may be able to set for BENLYSTA in other markets upon foreign approvals. 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.
BENLYSTA is currently our only commercially marketed product, although we have sold
raxibacumab to the U.S. Government. BENLYSTA will be marketed together with our collaborator, GSK.
If we receive approval for other products that can be marketed, we may market the products either
independently or together with collaborators or strategic partners. Whether we market a product
independently or in collaboration with a strategic partner, we will incur significant additional
expenditures and commit significant additional resources to establish sales forces. 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. 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.
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 revenues and profitability of biopharmaceutical companies like ours may be affected by the
continuing efforts of government and third-party payers 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. Recent United States legislation, rules
and regulations instituted significant changes to the United States healthcare system that could
have a material adverse effect on our business, financial condition and profitability. We cannot
predict what effects, if any, this legislation might have on our company and our products as this
legislation is implemented over the next few years, nor can we predict whether additional
legislative or regulatory proposals may be adopted.
In addition, in the United States and elsewhere, sales of therapeutic and other pharmaceutical
products depend in part on the availability of reimbursement and access to the consumer from
third-party payers, such as government and private insurance plans. Third-party payers are
increasingly challenging the prices charged for medical products and services. Third-party payers
may limit access to pharmaceutical products through the use of prior authorizations and step
therapy. 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. Payers my pursue aggressive cost cutting initiatives such as comparing the effectiveness,
benefits and costs of similar treatments, which could result in lower reimbursement. This would
likely have a material adverse effect on our business, financial condition and results of
operations. 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 and access is
available from such third-party payers.
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Uncertainty exists about the reimbursement status of newly approved biopharmaceutical
products. Healthcare providers and third-party payers 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 payers
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 have applied for a permanent
HCPCS code and intend to 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 and may
cause physicians or other providers to delay use of BENLYSTA until a permanent code has been
assigned.
Under Medicare Part B, reimbursement for BENLYSTA will currently be computed based on
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 payers do not provide adequate coverage and
reimbursement levels for BENLYSTA, its market acceptance may be materially adversely affected.
Because raxibacumab is a product whose current sole purchaser is the U.S. Government, the sale of
raxibacumab faces risks in addition to the risks generally associated with the sale of
biopharmaceutical products, including political considerations, government contracting requirements
and government spending policies.
Raxibacumab, a human monoclonal antibody developed for use in the treatment of anthrax
disease, presents risks in addition to those associated with 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 priorities, policies and
pricing restrictions. In the case of the U.S. Government, executive or legislative action could
attempt to impose production and pricing requirements on us. In the event of extreme urgency, the
government might seek to compel us or we might ourselves choose to reallocate our production in
ways that may not be economically beneficial to the company.
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. Strategic National Stockpile (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. As of March 31, 2011, we have delivered
approximately 25,000 doses of this second order. We, therefore, have future deliveries to make and
ongoing obligations under the contract, including the obligation to seek 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 would not approve our BLA for raxibacumab
in its present form and requested additional studies and data. 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.
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.
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If we are unable to successfully commercialize BENLYSTA or other product candidates we develop, we
may not be able to recover our investment in our research, product development, manufacturing and
marketing efforts.
In March 2011, we received approval from the FDA to market BENLYSTA in the United States. We
have made and continue to make substantial expenditures in advance of commercializing BENLYSTA and
our other product candidates. 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. Before we can commercialize a
product, we must rigorously test the product in the laboratory and complete extensive animal and
human clinical studies. We are also devoting substantial resources to enhancing our manufacturing
capabilities and to building our commercial supply inventories of BENLYSTA to support
commercialization. We have and expect to continue to devote substantial resources to maintain our
marketing capability for BENLYSTA and any of our other products that are approved by the FDA or
other regulatory authorities. These costs increased as we neared the potential launch of BENLYSTA.
If any product we develop is not approved for commercial sale, we may be unable to recover the
large investment we have made in research, development, manufacturing and marketing efforts, and
our business and financial condition could be materially adversely affected.
COMPETITIVE RISKS
Our competitors may develop and market products that are, or are perceived as, less expensive, more
effective, safer, easier to administer or reach the market sooner. This may diminish or eliminate
the commercial success of any products we may commercialize.
The development and commercialization of 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 from pharmaceutical and biotechnology companies worldwide. We also
expect to face increasing competition from governments, 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.
Many of our competitors have significantly greater financial, research and development,
intellectual property estates, regulatory, manufacturing, marketing, sales 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 others 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 are in clinical trials.
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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 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.
We may also face risks to our profitability and financial condition from generic drug or biosimilar
manufacturers.
The United States has enacted legislation establishing a regulatory pathway for follow-on
biologics, also known as biosimilars. This 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 a
follow-on biologic that provides twelve years of exclusivity for the original biologic and an
additional six month exclusivity period if certain pediatric studies are conducted. The FDA is
presently drafting regulations to implement this legislation, which may or may not be favorable to
HGS. Moreover, additional legislation could adversely affect the period of exclusivity for an
original biologic. For example, the Obama Administrations proposed 2012 budget seeks to reduce
the period of exclusivity to seven years and to prohibit additional exclusivity periods for a given
biologic product. 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 original drugs, including biologics, and an
additional one year of exclusivity for obtaining marketing approval for certain additional
indications. If a generic or biosimilar version of one of our products were approved, it could
have a material adverse effect on the sales and gross profits of the product and adversely affect
our business and operating results.
PRODUCT DEVELOPMENT RISKS
Our product development efforts depend on new technologies, which may not prove successful.
Our development of new products depends on the use of cutting-edge, recently discovered
technologies that may never have been successfully utilized in existing commercial products. As a
result, our product development efforts involve risks of failure inherent in the use of innovative
and unproven technologies and the risks associated with drug development generally. These risks
include the possibility that:
| these technologies or any or all of the molecules based on these technologies may
be ineffective or toxic and, therefore fail to receive or retain necessary regulatory
clearances; |
| the products, even if safe and effective, may be difficult to manufacture on a
large scale or uneconomical to market; |
| proprietary rights of third parties may prevent us or our collaborators from
exploiting technologies or marketing products; and |
| third parties may market superior or equivalent products. |
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We have limited experience in developing and commercializing products, and we may be unsuccessful
in our efforts to do so.
Although we are or will be conducting human studies with respect to a number of products,
including
potential new indications for BENLYSTA, we may not be successful in developing or
commercializing any of these products or indications. Our ability to develop and commercialize
products based on proteins, antibodies and small molecules will depend on our abilities 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 appropriately, efficiently and effectively or
enter into arrangements with third parties to provide these functions. |
We cannot assure you that we will be able to develop other products or new indications for BENLYSTA
that will become commercially successful.
We will continue to incur substantial expenditures relating to research, development, clinical
studies and manufacturing efforts. Depending on the stage of development, our products may require
significant further research, development, testing and regulatory approvals. Even if regulatory
approval is obtained for the commercial sale of a product or a new indication for BENLYSTA, 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 are continually evaluating our business strategy and may modify this strategy in light of
developments in our business and other factors.
Our ability to discover and develop new products will depend on our internal research
capabilities and our ability to acquire products. Although we continue to conduct research and
development activities on products and have increased our activities in this area, our limited
resources may not be sufficient to discover and develop new product candidates.
We continue to evaluate our business strategy and, as a result, may modify our 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, as we did with ZALBIN
in 2010. 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. We cannot assure you that any product development changes that we implement will be
successful.
Clinical trials for our products are expensive and protracted and their outcome is uncertain, and
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 expense and devote a significant amount of time to conducting ongoing
trials and initiating new trials.
Before clinical testing in humans can begin, a drug must be subject to rigorous preclinical
testing and documentation. This documentation must be reviewed by the FDA as part of an
Investigational New Drug Application (IND). Data obtained from tests are susceptible to varying
interpretations which may delay, limit or prevent regulatory approval. Furthermore, regulatory
authorities may refuse or delay approval as a result of
many factors, including changes in regulatory policy during the period of product development.
Even if an IND is approved, preclinical studies do not predict clinical success. Many potential
drugs have shown promising results in early testing but subsequently failed to obtain necessary
regulatory approvals.
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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; |
| unavailability or variability in the number and types of patients for each study; |
| difficulty in maintaining contact with patients after treatment, resulting in
incomplete data; |
| safety issues or side effects; |
| ineffectiveness of products during the clinical trials; or |
| government or regulatory delays. |
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 had been developing ZALBIN for many years. In 2010, we and our
collaboration partner Novartis 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. Additionally, 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 could not 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. For raxibacumab, 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. Even if FDA or other regulatory approval is obtained for a
product candidate, it may be limited to specific indications, limit the type of patients in which
the drug may be used, or otherwise require specific warnings or labeling language, any of which
might reduce the commercial potential of the product.
We depend on third parties to conduct many of our clinical trials, and 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
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 our product
candidates may be delayed or prevented.
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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.
We may not be able to generate substantial revenue from agreements with our collaboration partners.
To date we have received substantial revenue from payments made under collaboration agreements
with Novartis and GSK, and to a lesser extent, other agreements. Our agreement with Novartis has
been terminated. 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. If our partners are unsuccessful in such research and
development efforts, we will not receive any revenue from the development or commercialization of
these assets.
Under our present collaboration agreements, we are entitled to certain commercialization
rights, milestones and/or royalty payments based on our partners development of the applicable
product. We may not receive revenue under these agreements if 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 expected 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.
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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 business strategy includes the acquisition of other biotechnology companies or in-license
of additional product candidates to complement and supplement our existing product pipeline, and we
may acquire such companies and in-license additional product candidates that have demonstrated
positive pre-clinical and/or clinical data. We have certain criteria by which we assess 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 if it involves
the issuance of additional shares of our common stock would dilute existing stockholders. In March
2011, we entered into a development and commercialization agreement with FivePrime Therapeutics,
Inc. to develop a product for multiple cancers. We paid FivePrime an upfront license fee of $50
million and could be required to pay up to $445 million in future development, regulatory and
commercial milestone payments. However, there can be no assurance that we will be able to develop
and commercialize such a product or ever be able to recover our initial or subsequent investment in
the development of this product. If we are unsuccessful in our efforts to acquire other companies
or in-license and develop additional product candidates, or if we acquire or license unproductive
assets, 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 and,
accordingly, 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.
REGULATORY AND COMPLIANCE RISKS
If we fail to comply with the extensive health care legal and regulatory requirements applicable to
us, we may be subject to significant liability.
Our activities, and the activities of our agents, including some contracted third parties, are
subject to extensive government regulation and oversight both in the U.S. and in foreign
jurisdictions. As discussed in other risk factors, the FDA directly regulates many of our business
activities, including the conduct of preclinical and clinical studies, product manufacturing,
advertising and promotion, product distribution, and adverse event reporting. Additionally, our
interactions in the U.S. or abroad with physicians and other potential referral sources that
prescribe or purchase our products are also subject to government regulation designed to prevent
health care fraud and abuse. Relevant U.S. laws include:
| the Anti-Kickback Law, which prohibits persons from, among other things, knowingly and
willfully soliciting, receiving, offering or paying remuneration, directly or indirectly,
in exchange for or to induce either the referral of an individual for, or the purchase,
order or recommendation of, any good or service for which payment may be made under federal
health care programs, such as the Medicare and Medicaid programs; |
| federal false claims laws which prohibit individuals or entities from, among other
things, knowingly presenting, or causing to be presented, claims for payment from Medicare,
Medicaid or other third-party payers that are false or fraudulent; |
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| laws that require transparency regarding financial arrangements with health care
professionals, such as the reporting and disclosure requirements imposed by the Patient
Protection and Affordable Care Act (PPACA) that will take effect in 2012 and state laws
that are currently in effect; and |
| state law equivalents of each of the above federal laws, such as anti-kickback and
false claims laws which may apply to items or services reimbursed by state health insurance
programs or any third-party payer, including commercial insurers. |
Moreover, recent health care reform legislation has increased the risks and consequences for
some of these laws. For example, PPACA provides that the government may assert that a claim, which
includes items or services resulting from a violation of the Federal Anti-Kickback Law constitutes
a false or fraudulent claim for purposes of the Federal False Claims Act and other federal false
claims statutes.
The FDA, the Office of Inspector General for the Department of Health and Human Services, the
Department of Justice, states Attorneys General and other governmental authorities actively
enforce the laws and regulations discussed above. In the U.S., pharmaceutical and biotechnology
companies have been the target of numerous government prosecutions and investigations alleging
violations of law, including claims asserting impermissible off-label promotion of pharmaceutical
products, payments intended to influence the referral of federal or state health care business,
submission of false claims for government reimbursement, or submission of incorrect pricing
information.
Violations of any of the laws described above or any other applicable governmental regulations
and other similar foreign laws may subject us, our employees or our agents to criminal and/or civil
sanctions, including fines, civil monetary penalties, exclusion from participation in government
health care programs (including Medicare and Medicaid), and the restriction or restructuring of our
operations, any of which could adversely affect our ability to operate our business and our
financial results. Additionally, whether or not we have complied with the law, an investigation
into alleged unlawful conduct may incur significant expense, cause reputational damage, divert
management time and attention, and otherwise adversely affect our business. While we have
developed and instituted a corporate compliance program, we cannot guarantee that we, our
employees, our consultants, contractors, or other agents are or will be in compliance with all
applicable U.S. or foreign laws.
Furthermore, we expect there will continue to be federal and state laws and/or regulations,
proposed and implemented, that could impact our operations and business. The extent to which future
legislation or regulations, if any, relating to health care fraud abuse laws and/or enforcement,
may be enacted or what effect such legislation or regulation would have on our business remains
uncertain.
Our growing international operations increase our risk of exposure to potential claims of bribery
and corruption.
Failure to comply with applicable legislation such as the U.S. Foreign Corrupt Practices Act
and the recently enacted United Kingdom (U.K.) Bribery Act and other similar foreign laws could
expose us and senior management to civil and criminal penalties, potential debarment from public
procurement, and reputational damage, all of which could materially and adversely affect our
business. While we have developed and instituted a corporate compliance program, we cannot
guarantee that we, our employees, our consultants, contractors, or other agents are or will be in
compliance with all applicable U.S. or foreign laws.
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Because we are subject to extensive and changing government regulatory requirements, we may not be
able to obtain regulatory approval of our product candidates in a timely manner, if at all.
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.
United States Regulatory Approval. 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 (NDA) or a biologics license application
(BLA), depending on the type of drug. In responding to an application, 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. In March 2011 we received
marketing approval for BENLYSTA from the FDA. We cannot assure you that any approval required by
the FDA for any other product candidates will be obtained on a timely basis, or at all.
Furthermore, regulatory approvals, even if obtained, may be limited to specific indications,
limit the type of patients in which the drug may be used, or otherwise require specific warning or
labeling language, any of which might reduce the commercial potential of the product and 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, including in particular patient populations. 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. In addition, such post-marketing studies may be
expensive, time-consuming and difficult to complete in a timely fashion, any of which may limit our
ability to develop other indications of existing products as well as indications for new products.
Foreign Regulatory Approvals. 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. We currently expect a decision
by the EMA in the second half of 2011, but can provide no assurance that the EMA will grant
regulatory approval for BENLYSTA on such timeframe, if at all. Applications have also been
submitted and are currently under consideration in Canada, Australia, Switzerland, Russia, Brazil
and The Philippines. Foreign regulatory approvals, even if obtained, may be limited to specific
indications, limit the type of patients in which the drug may be used, or otherwise require
specific warning or labeling language, any of which might reduce the commercial potential of the
product.
We are subject to environmental, health and safety laws that may restrict us from conducting our
business in the most economically 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 that
regulations that might result from any future legislative or administrative action might
affect our business. 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; this case is on appeal to
the U.S. Court of Appeals for the Federal Circuit. 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.
In addition, the United States Congress is considering significant changes to U.S.
intellectual property laws that could affect the extent and scope of existing protections for
biotechnology products and processes. For example, the U.S. Senate recently passed the America
Invents Act, which in part provides opportunities for third parties to challenge issued patents
and submit evidence to be considered by the Patent Office prior to the issuance of a patent.
Similar legislation is currently pending in the U.S. House of Representatives. 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.
On January 25, 2011, HGS filed suit against Genentech, Inc. and City of Hope in the United
States District Court for the District of Delaware seeking a ruling that US Patent No. 6,331,415
(the Cabilly II Patent) is invalid, unenforceable, and not infringed by the manufacture, use,
importation, offer for sale and sale of BENLYSTA. On February 18, 2011, HGS filed a separate suit
against Genentech in the United States District Court for the District of Delaware seeking a ruling
that Genentech violated numerous antitrust and unfair competition laws in obtaining and enforcing
the Cabilly II patent. Genentech, along with City of Hope in the first case, has moved to dismiss
or to stay the Delaware actions or, alternatively, to transfer them to the United States District
Court for the Central District of California. Those motions are pending. On April 12, 2011, HGS
filed suit against Genentech and City of Hope in the United States District Court for the District
of Delaware seeking a ruling that US Patent No. 7,923,221 (the Cabilly III Patent) is invalid,
unenforceable, and not infringed by the manufacture, use, importation, offer for sale and sale of
BENLYSTA. On the same day, Genentech and City of Hope filed an infringement action against HGS,
Glaxo Group Ltd., GlaxoSmithKline LLC, Lonza Biologics plc and Lonza Biologics, Inc., in the United
States District Court for the Central District of California, alleging that the manufacture, offer
for sale and sale of BENLYSTA infringes one or more claims of the Cabilly III patent.
We have also 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 U.K. 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.
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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. 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, government agencies 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. Such litigation could consume a
substantial portion of our resources.
Because issued patents may not fully protect our discoveries, our competitors may be able to
commercialize products similar to those covered by our issued patents.
Issued patents may not provide commercially meaningful protection against competitors and may
not provide us with competitive advantages. Other parties may challenge our patents or design
around our issued patents or develop products providing effects similar to our products. In
addition, others may discover uses for genes, proteins or antibodies other than those uses covered
in our patents, and these other uses may be separately patentable. The holder of a patent covering
the use of a gene, protein or antibody for which we have a patent claim could exclude us from
selling a product for a use covered by its patent.
We rely on our collaboration partners to seek patent protection for the products they develop based
on our research.
A significant portion of our future revenue may be derived from royalty payments from our
collaboration partners. These partners face patent protection issues similar to those that we and
other biotechnology or pharmaceutical companies face. As a result, we cannot assure you that any
product developed by our collaboration partners will be patentable, and therefore, revenue from any
such product may be limited, which would reduce the amount of any royalty payments. We also rely on
our collaboration partners to effectively prosecute their patent applications. Their failure to
obtain or protect necessary patents could also result in a loss of royalty revenue to us.
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If we are unable to protect our trade secrets, others may be able to use our secrets to compete
more effectively.
We may not be able to meaningfully protect our trade secrets. We rely on trade secret
protection to protect our confidential and proprietary information. We believe we have acquired or
developed proprietary procedures and materials for the production of proteins and antibodies. We
have not sought patent protection for these procedures. While we have entered into confidentiality
agreements with employees and collaborators, we may not be able to prevent their disclosure of
these data or materials. Others may independently develop substantially equivalent information and
processes.
Other parties may seek to cancel or revoke our trademarks and/or restrict the use of our
trademarks.
Our trademarks, including BENLYSTA, 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 This may be time-consuming and could adversely
affect our revenue.
FINANCIAL AND MARKET RISKS
Because of our substantial indebtedness and lease obligations, we may be unable to adjust our
strategy to meet changing conditions in the future.
As of March 31, 2011, we had convertible subordinated debt of $379.0 million ($403.8 million
on a face value basis) and a long-term lease financing for our large-scale manufacturing facility
of $251.0 million. During the three months ended March 31, 2011 we made cash interest payments on
our convertible subordinated debt of $2.3 million. During the three months ended March 31, 2011 we
made cash payments on our long-term lease financing of $6.2 million. In addition, we have
operating leases, primarily our long-term operating lease for our headquarters, for which we made
cash payments of $5.3 million during the three months ended March 31, 2011. 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 marketing efforts,
continued clinical trials, capital expenditures, acquisitions or general corporate
purposes; |
| we may be unable to withstand changing competitive pressures, economic conditions
and governmental regulations; and |
| we may be unable to make acquisitions or otherwise take advantage of significant
business opportunities that may arise. |
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We may not have adequate financial 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 March 31, 2011, 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 believe we currently have
sufficient unrestricted cash should note holders seek cash payment upon maturity. However, since
there are other potential uses for these funds and 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. If we do not
obtain this funding on acceptable terms, we may not be able to generate sufficient revenue to repay
our debt, to continue our research and development efforts or to launch and successfully market our
products.
We continue to expend substantial funds on our research and development programs and human
studies on current and future product candidates. We also expect to expend significant funds to
support commercial marketing activities, to acquire other biotechnology companies or in-license and
develop additional product candidates, and to enhance our manufacturing capacity. We may need
additional financing to fund these activities. We may not be able to obtain additional financing on
acceptable terms, if at all. 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.
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 timing and costs involved in obtaining regulatory approvals; |
| the timing and costs of increasing our manufacturing capacity; |
| 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, enforcing and defending patent claims; |
| the costs involved in bringing and defending against litigation; and |
| scientific progress in our research and development programs. |
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If we are unable to raise additional funds, we may, among other things:
| delay, scale back or eliminate some or all of our research and development
programs; |
| delay, scale back or eliminate some or all of our commercialization activities; |
||
| lose rights under existing licenses; |
| relinquish more of, or all of, our rights to product candidates on less favorable
terms than we would otherwise seek; and |
| be unable to operate as a going concern. |
Our short-term investments, marketable securities and restricted investments are subject to certain
risks that 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
several 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 seek 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 have invested, 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.
We may be subject to product liability or other claims from the use of BENLYSTA or other of our
products which could negatively affect our future operations. We have limited product liability
insurance.
Our business exposes us to potential product liability and other liability risks that are
inherent in the testing, manufacturing, marketing and sales of biopharmaceutical formulations and
products and product candidates. If the use of one or more of our products or product candidates
harms people, we may be subject to costly and damaging product liability claims. This liability
might result from claims made directly by patients, hospitals, clinics or other consumers, or by
other companies manufacturing these products on our behalf. Our future operations may be negatively
affected from the litigation costs, settlement expenses, management resources and lost product
sales inherent to these claims. In addition, negative publicity associated with any claims,
regardless of their merit, may decrease the future demand for our products. Any of these effects
could have a material adverse effect on our business, financial condition and results of
operations. While we will continue to attempt to take appropriate precautions, we cannot assure you
that we will avoid significant product liability exposure.
We currently maintain product liability insurance. There is no guarantee that such insurance
will provide adequate coverage against potential liabilities. We may not be able to obtain or
maintain adequate product liability insurance, when needed, on acceptable terms, if at all, or such
insurance may not provide adequate coverage against potential liabilities. Furthermore, our current
and potential partners with whom we have collaborative agreements or our future licensees may not
be willing to indemnify us against these types of liabilities and may not themselves be
sufficiently insured or have sufficient liquidity to satisfy any product liability claims. Claims
or losses in excess of any product liability insurance coverage that may be obtained by us could
have a material adverse effect on our business, financial condition and results of operations.
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We are not currently profitable and might never become profitable.
We have a history of losses and expect to continue to incur substantial losses and negative
operating cash flow, and we might never achieve or maintain profitability.
OTHER BUSINESS RISKS
Our success is dependent on our continued ability to attract, motivate 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. Part of being able to attract, motivate and
retain key personnel is our ability to offer a competitive compensation package, including cash
bonus and equity incentive awards. Our ability to offer attractive equity incentive awards in the
future may be limited or nonexistent if we are unable to increase the number of shares available
under our stock incentive plan. If we are unable to provide a compensation package that is
competitive within our industry, or otherwise successfully compete to attract, motivate and retain
qualified management and other highly skilled employees, this 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.
To more fully utilize our existing manufacturing capacity, we have entered into agreements
with customers pursuant to which we have agreed to develop manufacturing processes for, and
manufacture clinical and commercial supplies of, certain biopharmaceutical products, and may enter
into similar agreements with other potential customers in the future. Our receipt of revenue under
these agreements is dependent on our ability to successfully manufacture such products. If we are
unable to develop a validated manufacturing process for such products or are otherwise unable to
deliver product that meets the manufacturing specifications, we may not receive any additional
payments under such agreements. Even if successful, we may not be able to enter into additional
agreements with other customers. 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.
RISKS RELATED TO OWNERSHIP OF OUR COMMON STOCK
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 $21.84 per share and as high as $33.30 per share. These broad market fluctuations may cause the
market price of our common stock to be lower or more volatile than you expected.
The price and volume fluctuations in our stock may often be unrelated to our operating
performance. 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; |
| 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; |
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| 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; |
| public concern as to the safety of our products; and |
| political and economic factors affecting market prices generally or our market
segment or our company particularly. |
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 would dilute the holdings of
our existing stockholders and 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 March 31,
2011, we had 189,629,583 shares of common stock outstanding. 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; 26,466,429 shares of our common stock are issuable upon the exercise of
options outstanding as of March 31, 2011, having a weighted-average exercise price of $16.09 per
share, including 3,145,015 stock options granted during the three months ended March 31, 2011 with
a weighted-average grant date fair value of $15.12 per share; and 344,625 shares of our common
stock are issuable upon the vesting of restricted stock unit awards outstanding as of March 31,
2011. If we issue additional equity securities, including in exchange for our outstanding
convertible debt or in connection with the exercise or vesting of equity awards, the price of our
common stock may be materially and adversely affected and the holdings of our existing stockholders
would be diluted.
Our certificate of incorporation and bylaws could discourage acquisition proposals, delay a change
in control or prevent transactions that may be 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 |
31.1 | Rule 13a-14(a) Certification of Principal Executive Officer. |
|||
31.2 | Rule 13a-14(a) Certification of Principal Financial Officer. |
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32.1 | Section 1350 Certification of Principal Executive Officer. |
|||
32.2 | Section 1350 Certification of Principal Financial Officer. |
|||
101.INS | * | XBRL Instance Document |
||
101.SCH | * | XBRL Schema Document |
||
101.CAL | * | XBRL Calculation Linkbase Document |
||
101.LAB | * | XBRL Labels Linkbase Document |
||
101.PRE | * | XBRL Presentation Linkbase Document |
In accordance with Regulation S-T, the XBRL-related information in Exhibit 101 to this
Quarterly Report on Form 10-Q shall be deemed to be furnished and not filed.
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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: April 29, 2011
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EXHIBIT INDEX
Exhibit No. | Description | |||
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. |
|||
101.INS | * | XBRL Instance Document |
||
101.SCH | * | XBRL Schema Document |
||
101.CAL | * | XBRL Calculation Linkbase Document |
||
101.LAB | * | XBRL Labels Linkbase Document |
||
101.PRE | * | XBRL Presentation Linkbase Document |
In accordance with Regulation S-T, the XBRL-related information in Exhibit 101 to this
Quarterly Report on Form 10-Q shall be deemed to be furnished and not filed.