Attached files

file filename
EXCEL - IDEA: XBRL DOCUMENT - AUXILIUM PHARMACEUTICALS INCFinancial_Report.xls
EX-32 - SECTION 906 CEO AND CFO CERTIFICATION - AUXILIUM PHARMACEUTICALS INCdex32.htm
EX-31.2 - SECTION 302 CFO CERTIFICATION - AUXILIUM PHARMACEUTICALS INCdex312.htm
EX-31.1 - SECTION 302 CEO CERTIFICATION - AUXILIUM PHARMACEUTICALS INCdex311.htm
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

 

 

FORM 10-Q

 

 

 

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

For the quarterly period ended June 30, 2011

OR

 

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

For the transition period from              to             .

Commission File Number: 000-50855

 

 

Auxilium Pharmaceuticals, Inc.

(Exact name of registrant as specified in its charter)

 

 

 

Delaware   23-3016883

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

40 Valley Stream Parkway, Malvern, PA 19355

(Address of principal executive offices) (Zip Code)

(484) 321-5900

(Registrant’s telephone number, including area code)

 

 

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate 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  x    No  ¨

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

 

Large accelerated filer   x    Accelerated filer   ¨
Non-accelerated filer   ¨    Smaller reporting company   ¨

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

As of July 28, 2011, the number of shares outstanding of the issuer’s common stock, $0.01 par value, was 47,949,362.

 

 

 


Table of Contents

 

PART I FINANCIAL INFORMATION

     3   

Item 1.

 

Unaudited Financial Statements

     3   
 

Consolidated Balance Sheets

     3   
 

Consolidated Statements of Operations

     4   
 

Consolidated Statements of Cash Flows

     5   
 

Consolidated Statement of Stockholders’ Equity

     6   
 

Notes to Consolidated Financial Statements

     7   

Item 2.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

     15  

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

     24   

Item 4.

 

Controls and Procedures

     24   

PART II OTHER INFORMATION

     24   

Item 1A.

 

Risk Factors

     25   

Item 6.

 

Exhibits

     25   

SIGNATURES

     27   


Table of Contents

PART I. FINANCIAL INFORMATION

 

Item 1. Financial Statements.

AUXILIUM PHARMACEUTICALS, INC. AND SUBSIDIARIES

Consolidated Balance Sheets

(In thousands, except share and per share amounts)

(Unaudited)

 

     June 30,
2011
    December 31,
2010
 
Assets     

Current assets:

    

Cash and cash equivalents

   $ 89,707     $ 128,207  

Short-term investments

     62,131       —     

Accounts receivable, trade, net

     34,408       32,624  

Accounts receivable, other

     598       909  

Inventories

     49,528       38,800  

Prepaid expenses and other current assets

     2,325       2,372  
                

Total current assets

     238,697       202,912  

Property and equipment, net

     31,152       29,936  

Long-term investments

     2,794       2,732  

Other assets

     11,580       8,324  
                

Total assets

   $ 284,223     $ 243,904  
                
Liabilities and Stockholders’ Equity     

Current liabilities:

    

Accounts payable

   $ 3,938     $ 5,085  

Accrued expenses

     59,044       51,272  

Deferred revenue, current portion

     7,445       6,828  

Deferred rent, current portion

     1,094       988  
                

Total current liabilities

     71,521       64,173  
                

Deferred revenue, long-term portion

     117,840       78,889  
                

Deferred rent, long-term portion

     5,971       6,399  
                

Commitments and contingencies

     —          —     

Stockholders’ equity:

    

Preferred stock, $0.01 par value per share, 5,000,000 shares authorized, no shares issued or outstanding

     —          —     

Common stock, $0.01 par value per share; authorized 120,000,000 shares; issued 48,070,911 and 47,904,563 shares at June 30, 2011 and December 31, 2010, respectively

     481       479  

Additional paid-in capital

     484,199       472,665  

Accumulated deficit

     (392,138     (375,143

Treasury stock at cost: 130,587 and 123,539 shares at June 30, 2011 and December 31, 2010, respectively

     (3,223     (3,065

Accumulated other comprehensive income

     (428     (493
                

Total stockholders’ equity

     88,891       94,443  
                

Total liabilities and stockholders’ equity

   $ 284,223     $ 243,904  
                

See accompanying notes to consolidated financial statements.

 

3


Table of Contents

AUXILIUM PHARMACEUTICALS, INC. AND SUBSIDIARIES

Consolidated Statements of Operations

(In thousands, except share and per share amounts)

(Unaudited)

 

     Three Months Ended June 30,     Six Months Ended June 30,  
     2011     2010     2011     2010  

Net revenues

   $ 65,937      $ 50,487      $ 124,306      $ 95,967   
                                

Operating expenses*:

        

Cost of goods sold

     14,379        11,537        25,631        20,988   

Research and development

     13,315        11,142        29,069        19,621   

Selling, general and administrative

     43,368        41,228        86,527        77,331   
                                

Total operating expenses

     71,062        63,907        141,227        117,940   
                                

Loss from operations

     (5,125     (13,420     (16,921     (21,973

Interest income

     64        40        105        75   

Interest expense

     (88     (91     (179     (182
                                

Net loss

   $ (5,149   $ (13,471   $ (16,995   $ (22,080
                                

Basic and diluted net loss per common share

   $ (0.11   $ (0.28   $ (0.36   $ (0.47
                                

Weighted average common shares outstanding

     47,830,131        47,327,751        47,797,758        47,230,671   
                                

* includes the following amounts of stock-based compensation expense:

        

Cost of goods sold

   $ 14      $ 3      $ 27      $ 3   

Research and development

     767        804        1,570        1,357   

Selling, general and administrative

     3,174        3,825        6,702        7,062   

See accompanying notes to consolidated financial statements.

 

4


Table of Contents

AUXILIUM PHARMACEUTICALS, INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)

 

     Six Months Ended June 30,  
     2011     2010  

Cash flows from operating activities:

    

Net loss

   $ (16,995   $ (22,080

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

    

Stock-based compensation

     8,299       8,422  

Depreciation and amortization

     3,707       2,887  

Changes in operating assets and liabilities:

    

Increase in accounts receivable, trade and other

     (1,473     (2,188

Increase in inventories

     (9,730     (14,891

Increase in prepaid expenses and current assets

     (3,868     (670

Increase (decrease) in accounts payable and accrued expenses

     6,619       (956

Increase in deferred revenue

     39,568       13,302  

Decrease in deferred rent

     (322     (222
  

 

 

   

 

 

 

Net cash provided by (used in) operating activities

     25,805       (16,396
  

 

 

   

 

 

 

Cash flows from investing activities:

    

Purchases of short-term investments

     (62,131     —     

Purchases of property and equipment

     (4,264     (5,388

Redemptions of long-term investments

     —          600  
  

 

 

   

 

 

 

Net cash used in investing activities

     (66,395     (4,788
  

 

 

   

 

 

 

Cash flows from financing activities:

    

Proceeds from exercise of common stock options

     1,247       3,307  

Employee Stock Purchase Plan purchases

     922       1,082  

Treasury stock acquisition

     (158     (216

Payments in common stock

     70       67  
  

 

 

   

 

 

 

Net cash provided by financing activities

     2,081       4,240  
  

 

 

   

 

 

 

Effect of exchange rate changes on cash

     9       (23
  

 

 

   

 

 

 

Decrease in cash and cash equivalents

     (38,500     (16,967

Cash and cash equivalents, beginning of period

     128,207       181,977  
  

 

 

   

 

 

 

Cash and cash equivalents, end of period

   $ 89,707     $ 165,010  
  

 

 

   

 

 

 

See accompanying notes to consolidated financial statements.

 

5


Table of Contents

AUXILIUM PHARMACEUTICALS, INC. AND SUBSIDIARIES

Consolidated Statement of Stockholders’ Equity

Six Months Ended June 30, 2011

(In thousands, except share amounts)

(Unaudited)

 

                                             Accumulated
other
comprehensive
loss
    Total  
                   Additional
paid-in
capital
     Accumulated
deficit
                  
     Common stock           Treasury Stock      
     Shares      Amount           Shares      Cost      

Balance, January 1, 2011

     47,904,563      $ 479      $ 472,665      $ (375,143     123,539      $ (3,065   $ (493   $ 94,443  

Exercise of common stock options

     107,629        1        1,246        —          —           —          —          1,247  

Employee Stock Purchase Plan purchases

     55,292        1        921        —          —           —          —          922  

Stock-based compensation

     —           —           9,297        —          —           —          —          9,297  

Payments in common stock

     3,427        —           70        —          —           —          —          70  

Treasury stock acquisition

     —           —           —           —          7,048        (158     —          (158

Other comprehensive income

     —           —           —           —          —           —          65       65  

Net loss

     —           —           —           (16,995     —           —          —          (16,995
                                                                    

Balance, June 30, 2011

     48,070,911      $ 481      $ 484,199      $ (392,138     130,587      $ (3,223   $ (428   $ 88,891  
                                                                    

See accompanying notes to consolidated financial statements.

 

6


Table of Contents

AUXILIUM PHARMACEUTICALS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2011

(Unaudited)

 

1.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

(a) Basis of Presentation

The accompanying unaudited consolidated financial statements include the accounts of Auxilium Pharmaceuticals, Inc. and its wholly owned subsidiaries (the Company), and have been prepared in accordance with U.S. generally accepted accounting principles for interim financial information and pursuant to the rules and regulations of the Securities and Exchange Commission (SEC) pertaining to Form 10-Q. Certain disclosures required for complete annual financial statements are not included herein. All significant intercompany accounts and transactions have been eliminated in consolidation. The information at June 30, 2011 and for the respective three and six month periods ended June 30, 2011 and 2010 is unaudited but includes all adjustments (consisting only of normal recurring adjustments) which, in the opinion of the Company’s management, are necessary to state fairly the financial information set forth herein. The December 31, 2010 balance sheet amounts and disclosures included herein have been derived from the Company’s December 31, 2010 audited consolidated financial statements. The interim results are not necessarily indicative of results to be expected for the full fiscal year. These unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements for the year ended December 31, 2010 included in the Company’s Annual Report on Form 10-K filed with the SEC.

(b) Short-term Investments

Short-term investments as of June 30, 2011 are stated at fair value. The following table provides the composition and duration of these investments (in thousands).

 

     Fair
value
     Duration of
one year
or less
     Duration of
one year to
two years
 

Commercial paper

   $ 26,571       $ 26,571       $ —     

U.S. Treasury securities

     16,408         16,408         —     

Corporate notes

     8,952         1,939         7,013   

U.S. government agency obligations

     8,094         4,395         3,699   

State government obligations

     2,106         1,055         1,051   
  

 

 

    

 

 

    

 

 

 
   $ 62,131       $ 50,368       $ 11,763   
  

 

 

    

 

 

    

 

 

 

The Company considers its short-term investments to be “available for sale” and accordingly classifies them as current, as management can sell these investments at any time at their option. The cost basis of short-term investments held at June 30, 2011 approximated the fair value of these securities. Related unrealized gains and losses are recorded as a component of accumulated other comprehensive income (loss) in the equity section of the accompanying balance sheet.

 

7


Table of Contents

(c) Net Loss Per Common Share

The basic net loss per common share is computed by dividing the net loss for the period by the weighted average number of common shares outstanding during the period reduced, where applicable, for unvested outstanding restricted shares.

The following table sets forth the computation of basic and diluted net loss per common share (in thousands, except share and per share amounts):

 

     Three Months Ended June 30,     Six Months Ended June 30,  
     2011     2010     2011     2010  

Numerator:

        

Net loss

   $ (5,149   $ (13,471   $ (16,995   $ (22,080
                                

Denominator:

        

Weighted-average common shares outstanding

     47,857,545        47,454,831        47,833,434        47,371,339   

Weighted-average unvested restricted common shares subject to forfeiture

     (27,414     (127,080     (35,676     (140,668
                                

Shares used in calculating net loss per common share

     47,830,131        47,327,751        47,797,758        47,230,671   
                                

Basic and diluted net loss per common share

   $ (0.11   $ (0.28   $ (0.36   $ (0.47
                                

Diluted net loss per common share is computed giving effect to all potentially dilutive securities, including stock options and warrants. Diluted net loss per common share for all periods presented is the same as basic net loss per common share because the potential common stock is anti-dilutive. Anti-dilutive common shares not included in diluted net loss per common share are summarized as follows:

 

     June 30,  
     2011      2010  

Common stock options

     7,116,027         6,342,445   

Restricted stock awards

     97,330         127,080   
                 
     7,213,357         6,469,525   
                 

(d) XIAFLEX Revenue Recognition

Up-front and milestone payments-

On March 22, 2011, the Company entered into a development, commercialization and supply agreement with Asahi Kasei Pharma Corporation (“Asahi”) (the “Asahi agreement”). See Note 5 for a summary of the contract terms. For accounting purposes, the Company has determined that the Asahi agreement includes multiple deliverables, including development and commercialization rights and manufacturing and product supply. In accordance with the accounting guidance on revenue recognition

 

8


Table of Contents

for multiple-element agreements, the supply element of the Asahi agreement meets the criteria for separation. Therefore, it is being treated as a single unit of accounting and, accordingly, the associated royalties on net sales of the product will be recognized as revenue when earned. All other deliverables under the contract are being accounted for as one unit of accounting since each of these elements do not have stand-alone value to Asahi. The up-front payment of $15,000,000 received from Asahi and all potential future milestone payments are considered to relate to this one combined unit of accounting and will be amortized to revenue on a straight-line basis over the estimated life of the Asahi agreement, which is estimated to be 20 years. When future milestones are earned, the Company will record as revenue a cumulative catch-up adjustment on the date each milestone is earned for the period of time since contract commencement through the date the milestone.

The Company paid BioSpecifics Technologies Corp. (BioSpecifics) $750,000 for its share of the up-front payment received from Asahi. This amount is being amortized as cost of goods sold on a straight-line basis over the estimated life of the Asahi agreement. As potential future milestone payments are received from Asahi, the required payments to BioSpecifics for their share of such milestone payments will be recognized as cost of goods sold, or as deferred costs, in proportion to the related milestone revenue or deferral, respectively.

During the second quarter of 2011, the Company announced the achievement of $37,500,000 regulatory milestones upon the first sale of XIAPEX in the United Kingdom (UK) and Germany by Pfizer Inc. (“Pfizer”), its European partner. As a result of accomplishing these milestones, the Company received payments from Pfizer aggregating approximately $33,591,000. This amount represents the $37,500,000 of milestones, net of certain development and regulatory costs that Pfizer was contractually allowed to recoup upon achievement of the UK milestone. These milestone payments are considered to be contingent consideration relating to the license, development and regulatory deliverables under the agreement with Pfizer which together are being accounted for as one unit of accounting. As such, this contingent consideration is recognized as revenue on a straight-line basis over the estimated life of the contract with a cumulative catch-up adjustment recorded on the date each milestone is earned for the period of time since inception of the agreement through such milestone date. The company paid BioSpecifics approximately $3,188,000 as its share of the milestone payments and this amount has been recognized as cost of goods sold, or as deferred costs, in proportion to the related milestone revenue or deferral, respectively.

 

9


Table of Contents

Product sales-

In March 2010, the Company began shipping XIAFLEX to its specialty distributor and specialty pharmacy customers. As XIAFLEX was new to the marketplace, the Company could not reasonably assess the flow of product through its distribution channels, market acceptance and potential product returns. As a result, the Company deferred the recognition of revenues, and related product costs, on XIAFLEX product shipments until the time the product was shipped to physicians for administration to patients. Based on historical experience gathered through the end of the first quarter of 2011, the Company began in the first quarter of 2011 to recognize revenue for XIAFLEX sales at the time of shipment of the product to its specialty distributor, specialty pharmacy and wholesale customers. As a result of this change in revenue recognition, net revenues for the six months ended June 30, 2011 include a benefit of $1,804,000 (representing revenue previously deferred, net of allowances of $59,000) and the net loss for the six months ended June 30, 2011 includes a benefit of $1,743,000, or $0.04 per share (representing the net revenue benefit partially offset by the related cost of goods sold).

During the second quarter of 2011, Pfizer began offering XIAPEX for sale in the United Kingdom, Germany, Denmark, Sweden, Finland, Norway and Austria. Under the Pfizer agreement, the Company receives, on a quarterly basis consistent with Pfizer’s reporting calendar, a percentage of Pfizer XIAPEX net sales. These royalty payments are being recognized by the Company as revenue in payment for the product supplied to Pfizer. Since Pfizer’s reporting calendar is one month earlier than that of the Company, such royalty revenue is recognized on a one month lag basis.

(e) New Accounting Pronouncements

In September 2009, the Financial Accounting Standards Board (FASB) ratified the consensus reached by the Emerging Issues Task Force (EITF) that revises the authoritative guidance for revenue arrangements with multiple deliverables that contain more than one unit of accounting. The guidance addresses how to determine whether an arrangement involving multiple deliverables contains more than one unit of accounting and how the arrangement consideration should be allocated among the separate units of accounting. For the Company, the guidance is effective for revenue arrangements entered into or materially modified after December 31, 2010, although early adoption and/or retroactive application are permitted. Application of this new guidance to future outsourcing arrangements may advance the revenue recognition as compared to the previous authoritative guidance.

In April 2011, the FASB amended the fair value measurement guidance in order to achieve common measurement and disclosure requirements between U.S. generally accepted accounting principles and the International Financial Reporting Standards. These amendments are also intended to provide increased transparency around valuation inputs and investment categorization and, for the Company, are effective for 2012 reporting. The adoption of this new guidance is not expected to have a material effect on the Company’s financial statements.

In June 2011, the FASB issued new guidance on the presentation of comprehensive income. Specifically, the new guidance eliminates the current option to report other comprehensive income within the statement of changes in equity and requires an entity to present the components of net income and other comprehensive income in one continuous statement, referred to as the statement of comprehensive income, or alternatively in two, but consecutive, statements. For the Company, the new guidance is effective for 2012 reporting. The adoption of this new guidance is not expected to have a material effect on the Company’s financial statements.

 

2.   FAIR VALUE MEASUREMENTS

The authoritative literature for fair value measurements established a three-tier fair value hierarchy, which prioritizes the inputs in measuring fair value. These tiers are as follows: Level 1, defined as observable inputs such as quoted market prices in active markets; Level 2, defined as inputs other than the quoted prices in active markets that are either directly or indirectly observable; and Level 3, defined as significant unobservable inputs (entity developed assumptions) in which little or no market data exists.

 

10


Table of Contents

As of June 30, 2011, the Company held certain investments that are required to be measured at fair value on a recurring basis. The following tables present the Company’s fair value hierarchy for these financial assets as of June 30, 2011 and December 31, 2010 (in thousands):

 

     June 30, 2011  
     Fair Value      Level 1      Level 2      Level 3  

Cash and cash equivalents

   $ 89,707       $ 88,208       $ 1,499       $ —     

Short-term investments

     62,131         16,408         45,723      

Long-term investments:

           

Auction rate securities

     2,794         —           —           2,794   
                                   

Total financial assets

   $ 154,632       $ 104,616       $ 47,222       $ 2,794   
                                   
     December 31, 2010  
     Fair Value      Level 1      Level 2      Level 3  

Cash and cash equivalents

   $ 128,207       $ 128,207       $ —         $ —     

Long-term investments:

           

Auction rate securities

     2,732        —           —           2,732   
                                   

Total financial assets

   $ 130,939       $ 128,207       $ —         $ 2,732   
                                   

Short-term investments as of June 30, 2011 classified above under Level 2 inputs represent commercial paper, corporate notes, U.S. government agency obligations and state government obligations as shown in Note 1 (b).

The following table summarizes the changes in the financial assets measured at fair value using Level 3 inputs for the three and six months ended June 30, 2011 (in thousands):

 

Long -term Investments

   Three Months
Ended
June  30, 2011
     Six Months
Ended
June  30, 2011
 

Beginning balance

   $ 2,747       $ 2,732   

Transfers into Level 3

     —           —     

Settlements

     —           —     

Unrealized loss- included in other comprehensive income

     47         62   
                 

Ending balance

   $ 2,794       $ 2,794   
                 

The securities classified as Level 3 are auction rate securities that are not actively traded. The Company determined the fair value of these securities based on a discounted cash flow model which incorporated a discount period, coupon rate, liquidity discount and coupon history. In determining the fair value, the Company considered the rating of the securities by investment rating agencies and whether or not the securities were backed by the United States government.

 

11


Table of Contents
3.   INVENTORIES

Inventories consist of the following (in thousands):

 

          June 30,     
2011
     December 31,
2010
 

Raw materials

   $ 7,338       $ 7,163   

Work-in-process

     33,280         22,044   

Finished goods

     8,910         9,593   
                 
   $ 49,528       $ 38,800   
                 

Finished goods inventories at June 30, 2011 and December 31, 2010 above are net of a $3,900,000 reserve recorded in 2010 for packaged XIAFLEX inventory that may expire prior to its expected sale date.

 

4.   ACCRUED EXPENSES

Accrued expenses consist of the following (in thousands):

 

          June 30,     
2011
     December 31,
2010
 

Payroll and related expenses

   $ 10,825       $ 11,538   

Royalty expenses

     7,166         6,457   

Research and development expenses

     4,575         2,982   

Sales and marketing expenses

     12,712         7,359   

Rebates, discounts and returns accrual

     20,428         19,129   

Other expenses

     3,338         3,807   
                 
   $ 59,044       $ 51,272   
                 

 

5.   COLLABORATION AND LICENSE AGREEMENT

Under the Asahi agreement, the Company granted Asahi the exclusive right to develop and commercialize XIAFLEX for the treatment of Dupuytren’s and Peyronie’s in Japan. Asahi also was granted the right of first negotiation to obtain exclusive rights to commercialize any new XIAFLEX indications in Japan during the term of the Asahi agreement. In addition to an up-front payment of $15,000,000 that the Company received in March 2011, Asahi may make up to $247,000,000 in potential payments, with $37,000,000 tied to development and regulatory milestones and $210,000,000 in milestones based on achievement of aggregate annual net sales thresholds. Further, the Asahi agreement provides for quarterly royalty payments based on a specified percentage of net sales of XIAFLEX in Japan. This royalty percentage increases upon the achievement of a specified threshold of aggregate annual net sales of XIAFLEX and decreases if a generic to XIAFLEX is marketed in Japan.

As provided in the Asahi agreement, Asahi is primarily responsible for the clinical development, regulatory and commercialization activities for the Japanese market and the Company will be reimbursed for all costs it may incur in connection with these activities. The Company retains the responsibility for development of XIAFLEX for the treatment of Peyronie’s outside the Japanese market, and will be responsible for all clinical and commercial manufacturing and supply of XIAFLEX for the Japanese market. Subject to each party’s termination rights, the term of the Asahi agreement extends on a product-by-product basis from the date of the agreement until the last to occur of (i) the date on which the product is no longer covered by a valid claim of a patent, (ii) the 15th anniversary of the first commercial sale of the product, or (iii) a generic entry in the Japanese market.

 

12


Table of Contents
6.   STOCK OPTIONS AND STOCK AWARDS

Under the Company’s 2006 Employee Stock Purchase Plan, as approved by the stockholders of the Company, employees may purchase shares of the Company’s common stock at a 15% discount through payroll deductions. In June 2011, employees purchased 55,292 shares of common stock at a price of $16.66 per share, representing 85% of the closing price of the common stock on June 30, 2010, the purchase price for the last day of the purchase period. At June 30, 2011, there were 431,168 shares available for future grants under the plan.

Under the Company’s 2004 Equity Compensation Plan (the 2004 Plan), as approved by the stockholders of the Company, qualified and nonqualified stock options and stock awards may be granted to employees, non-employee directors and consultants and advisors who provide services to the Company. In June 2011, the stockholders approved the increase of shares authorized for issuance under the 2004 Plan to 14,400,000. As of June 30, 2011, the Company has granted non-qualified stock options and restricted stock under this plan. At June 30, 2011, there were 3,728,155 shares available for future grants under the 2004 Plan.

(a) Stock Option Information

During the six months ended June 30, 2011, the Company granted non-qualified stock options to purchase shares of the Company’s common stock pursuant to the 2004 Plan. These options expire ten years from date of grant. Their exercise prices represent the closing price of the common stock of the Company on the respective dates that the options were granted and they generally vest rateably over four years at one year intervals from the grant date, assuming continued employment of the grantee.

The following tables summarize stock option activity for the six month period ended June 30, 2011:

 

     Six Months Ended June 30, 2011  

Stock options

   Shares     Weighted
average
exercise
price
     Weighted
average
remaining
contractual
life (in years)
     Aggregate
intrinsic

value
 

Options outstanding:

          

Outstanding at December 31, 2010

     6,136,249     $ 23.46         

Granted

     1,349,954       21.91         

Exercised

     (107,629     11.59         

Forfeited

     (262,547     27.47         
  

 

 

         

Outstanding at June 30, 2011

     7,116,027       23.19         7.17       $ 17,468,000   
  

 

 

         

Exercisable at June 30, 2011

     3,776,353       20.49         5.74         17,460,000   

The aggregate intrinsic values in the preceding table represent the total pre-tax intrinsic value, based on the Company’s stock closing price of $19.60 per share as of June 30, 2011, that would have been received by the option holders had all option holders exercised their options as of that date. During the six months ended June 30, 2010, total intrinsic value of options exercised was $1,203,000. As of June 30, 2011, exercisable options to purchase 1,816,940 shares of the Company’s common stock were in-the-money.

(b) Stock Awards

During the six months ended June 30, 2011, the Company granted performance-based restricted stock awards to certain officers. A total of 122,500 shares of restricted stock are subject to these awards and the

 

13


Table of Contents

amount of restricted stock ultimately earned (subject to vesting) is based on U.S. net sales of XIAFLEX in the year ending December 31, 2011. The number of shares of restricted stock earned will vest 33 1/3% on the date the performance goal is achieved with the balance vesting in two equal installments thereafter on the first and second anniversary of the date the performance goal is achieved.

In addition, during the six months ended June 30, 2011, the Company granted 69,953 restricted share units to certain employees. These restricted share units vest rateably over four years at one year intervals from the grant date, assuming continued employment of the grantee. Upon vesting, each restricted share unit is converted into one share of the common stock of the Company. Through June 30, 2011, 3,037 of these restricted share units have been cancelled.

(c) Restricted Stock

The following table summarizes the restricted stock activity for the six-month period ended June 30, 2011:

 

     Shares     Weighted
average
grant-date
fair value
 

Nonvested at December 31, 2010

     50,828      $ 26.21   

Vested

     (23,414     24.62   

Cancelled

     —       
          

Nonvested at June 30, 2011

     27,414        27.55   
          

(d) Valuation Assumptions and Expense Information

Total stock-based compensation costs charged against income for the six months ended June 30, 2011 and 2010 amounted to $8,299,000 and $8,422,000, respectively. Stock-based compensation costs capitalized as part of inventory amounted to $1,025,000 and $1,066,000 for six months ended June 30, 2011 and 2010, respectively.

The fair value of each stock option award was estimated on the date of grant using the Black-Scholes model and applying the assumptions in the following table.

 

     Three Months Ended June 30,     Six Months Ended June 30,  
     2011     2010     2011     2010  

Weighted average assumptions:

        

Expected life of options (in years)

     6.49       5.65       6.29       6.17  

Risk-free interest rate

     2.18     2.56     2.94     2.77

Expected volatility

     49.98     50.71     50.43     49.92

Expected dividend yield

     0.00     0.00     0.00     0.00

During the six months ended June 30, 2011, the weighted-average grant-date fair value of options granted was $11.25. As of June 30, 2011, there was approximately $33,650,000 of total unrecognized stock-based compensation cost related to all share-based payments that will be recognized over the weighted-average period of 2.74 years.

 

14


Table of Contents
7.   OTHER COMPREHENSIVE LOSS

Total comprehensive loss was as follows (in thousands):

 

     Three Months Ended June 30,     Six Months Ended June 30,  
     2011     2010     2011     2010  

Net loss

   $ (5,149   $ (13,471   $ (16,995   $ (22,080

Other comprehensive loss:

        

Unrealized gain on available for sale securities

     47        135        62        135   

Foreign currency translation

     —          (13     3        (25
                                

Comprehensive loss

   $ (5,102   $ (13,349   $ (16,930   $ (21,970
                                

The unrealized gain on available for sale securities relates to the Company’s short and long-term investments. The foreign currency translation amounts relate to the Company’s foreign subsidiary.

 

8.   CONTINGENCIES

The Company is party to various actions and claims arising in the normal course of business. The Company believes that amounts accrued for awards or assessments in connection with all such matters are adequate and that the ultimate resolution of these matters will not have a material adverse effect on the Company’s financial position or the manner in which the Company conducts its business. However, there exists a reasonable possibility of loss in excess of the amounts accrued, the amount of which cannot currently be estimated. While the Company does not believe that the amount of such excess loss could be material to Company’s financial position, any such loss could have a material adverse effect on Company’s results of operations or the manner in which the Company conducts its business in the period(s) during which the underlying matters are resolved.

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

The following discussion is qualified in its entirety by, and should be read in conjunction with, the more detailed information set forth in the consolidated financial statements and the notes thereto appearing elsewhere in this report.

Special Note Regarding Forward-Looking Statements

Certain statements in this “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and elsewhere in this Quarterly Report are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, including statements made with respect to our strategy, progress and timing of development programs and related trials, the timing of actions to be taken by regulatory authorities, the efficacy, market acceptance and commercial viability of our products and product candidates, third-party coverage and reimbursement for XIAFLEX, the commercial benefits available to us as a result of our agreements with third parties, future operations, future financial position, future revenues, projected costs, the size of addressable markets, prospects, plans and objectives of management and other statements regarding matters that are not historical facts.

In some cases you can identify forward-looking statements by terminology such as “may,” “will,” “should,” “would,” “expect,” “intend,” “plan,” “anticipate,” “believe,” “estimate,” “predict,” “potential,” “seem,” “seek,” “future,” “continue,” or “appear” or the negative of these terms or similar expressions, although not all forward-looking statements contain these identifying words. Forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause actual results, performance, achievements or prospects to be materially different from any future results, performance, achievements or prospects expressed in or implied by such forward-looking statements. Such risks and uncertainties include, among other things:

 

 

the commercial success in the United States (U.S.) of XIAFLEX® (collagenase clostridium histolyticum) for the treatment of adult Dupuytren’s contracture (Dupuytren’s) patients with a palpable cord;

 

 

the continuing launch and commercial success in the European Union (EU) of XIAPEX® (EU tradename for XIAFLEX) for Dupuytren’s;

 

 

the success of the development and commercialization in the U.S. and EU of XIAFLEX and XIAPEX, respectively, for Peyronie’s disease;

 

 

the success of the development and commercialization in Japan of XIAFLEX;

 

15


Table of Contents
 

achieving market acceptance of XIAFLEX by physicians and patients;

 

 

obtaining and maintaining third-party payor coverage and reimbursement for XIAFLEX, Testim® and our product candidates;

 

 

the size of addressable markets for XIAFLEX, Testim and our other product candidates;

 

 

achieving market acceptance of Testim by physicians and patients and competing effectively with other Testosterone Replacement Therapy (TRT) products;

 

 

growth in sales of Testim;

 

 

growth of the overall androgen market;

 

 

the ability to manufacture or have manufactured XIAFLEX, Testim and other product candidates in commercial quantities at reasonable costs and compete successfully against other products and companies;

 

 

the availability of and ability to obtain additional funds through public or private offerings of debt or equity securities;

 

 

obtaining and maintaining all necessary patents or licenses;

 

 

purchasing ingredients and supplies necessary to manufacture XIAFLEX, Testim and our product candidates at terms acceptable to us;

 

 

the costs associated with acquiring and the ability to acquire additional product candidates or approved products;

 

 

the ability to enroll patients in clinical trials for XIAFLEX in the expected timeframes;

 

 

the ability to obtain authorization from the U.S. Food and Drug Administration (FDA) or other regulatory authority to initiate clinical trials of XIAFLEX within the expected timeframes;

 

 

demonstrating the safety and efficacy of product candidates at each stage of development;

 

 

results of clinical trials;

 

 

meeting applicable regulatory standards, filing for and receiving required regulatory approvals;

 

 

complying with the terms of our licenses and other agreements;

 

 

changes in industry practice;

 

 

changes in the markets for, acceptance by the medical community of, and exclusivity protection for, our products and product candidates as a result of the Patient Protection and Affordable Care Act and the associated reconciliation bill or any amendments thereto or any full or partial repeal thereof; and

 

 

one-time events.

These risks and uncertainties are not exhaustive. For a more detailed discussion of risks and uncertainties, see “Item 1A – Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2010 and “Item 1A – Risk Factors” of Part II of this Quarterly Report. Other sections of this Quarterly Report and our other SEC filings, verbal or written statements and presentations may include additional factors which could materially and adversely impact our future results, performance, achievements and prospects. Moreover, we operate in a very competitive and rapidly changing environment. Given these risks and uncertainties, we cannot guarantee that the future results, performance, achievements and prospects reflected in forward-looking statements will be achieved or occur. Therefore, you should not place undue reliance on forward-looking statements. We undertake no obligation to update publicly any forward-looking statement other than as required under the federal securities laws. We qualify all forward-looking statements by these cautionary statements.

 

16


Table of Contents

Special Note Regarding Market and Clinical Data

We obtained the market data used throughout this Quarterly Report from our own research, surveys and/or studies conducted by third parties and industry or general publications. Industry publications and surveys generally state that they have obtained information from sources believed to be reliable, but do not guarantee the accuracy and completeness of such information. While we believe that each of these studies and publications is reliable, we have not independently verified such data. Similarly, we believe our internal research is reliable but it has not been verified by any independent sources.

This Quarterly Report may include discussion of certain clinical studies relating to our products and/or product candidates. These studies typically are part of a larger body of clinical data relating to such products or product candidates, and the discussion herein should be considered in the context of the larger body of data.

Overview

We are a specialty biopharmaceutical company with a focus on developing and marketing products to predominantly specialist audiences, such as urologists, endocrinologists, certain targeted primary care physicians, hand surgeons, subsets of orthopedic, general, and plastic surgeons who focus on the hand, and rheumatologists. We currently have approximately 540 employees, including a sales and marketing organization of over 300 people.

We currently market two products in the United States (U.S.):

XIAFLEX® (collagenase clostridium histolyticum) is a proprietary, injectable collagenase enzyme for the treatment of Dupuytren’s contracture (Dupuytren’s). XIAFLEX received approval from the U.S. Food and Drug Administration (FDA) on February 2, 2010 for the treatment of adult Dupuytren’s patients with a palpable cord. Dupuytren’s is a condition that affects the connective tissue that lies beneath the skin in the palm. The disease is progressive in nature. Typically, nodules develop in the palm as collagen deposits accumulate. As the disease progresses, the collagen deposits form a cord that stretches from the palm of the hand to the base of the finger. Once this cord develops, the patient’s fingers contract and the function of the hand is impaired. Prior to approval of XIAFLEX, surgery was the only effective treatment. We launched XIAFLEX for the treatment of adult Dupuytren’s patients with a palpable cord in the U.S. in March 2010, and we have partnered with Pfizer Inc. (Pfizer) for development and commercialization of XIAPEX® (European Union (EU) tradename for XIAFLEX) for Dupuytren’s and Peyronie’s disease in Europe and certain Eurasian countries. Pfizer received marketing authorization by the European Commission on February 28, 2011 for the treatment of Dupuytren’s in adult patients with a palpable cord and began sales in the EU in April 2011. We have partnered with Asahi Kasei Pharma Corporation for development and commercialization of XIAFLEX for Dupuytren’s contracture and Peyronie’s disease in Japan. We are seeking a partner or partners for development and commercialization in the rest of the world.

Testim® testosterone gel is a proprietary, topical 1% testosterone once-a-day gel indicated for the treatment of hypogonadism. Hypogonadism is defined as reduced or absent secretion of testosterone which can lead to symptoms such as low energy, loss of libido, adverse changes in body composition, irritability and poor concentration. Testim is approved in the U.S., Belgium, Canada, Denmark, Finland, Germany, Greece, Iceland, Ireland, Italy, Luxembourg, the Netherlands, Norway, Portugal, Spain, Sweden and the United Kingdom (U.K.). Ferring International Center S.A. (Ferring) and Paladin Labs Inc. (Paladin) market Testim on our behalf in certain European countries and Canada, respectively.

Our current product pipeline includes:

Phase III:

 

   

XIAFLEX for the treatment of Peyronie’s disease (Peyronie’s)

 

17


Table of Contents

Phase II:

 

   

XIAFLEX for the treatment of Adhesive Capsulitis (Frozen Shoulder syndrome)

In addition to the above, we have an exclusive option for the exclusive rights to pursue any additional indications for XIAFLEX (other than dermal formulations labeled for topical administration). We also have rights to develop other products for the treatment of pain, urologic disease and hormone replacement using our transmucosal film delivery system.

Recent Developments

On April 11, 2011, we announced that we had earned a $30 million regulatory milestone payment from our EU partner, Pfizer, following the first sale of XIAPEX in the UK, the first major EU market. In addition, on May 20, 2011, we also announced an additional $7.5 million regulatory milestone for the Pfizer launch of XIAPEX in Germany. We received $33.6 million in payment from Pfizer, representing the $37.5 million of milestones, net of certain development and regulatory costs that Pfizer was contractually allowed to recoup upon achievement of the UK milestone. XIAPEX is now available for sale in Austria, Denmark, Finland, Germany, Norway, Sweden, Switzerland and the UK. We are eligible to receive up to $22.5 million in additional regulatory milestone payments for this indication, which will be payable in $7.5 million increments, following Pfizer’s first sale of XIAPEX in each of the remaining major markets of the EU. In addition, we paid BioSpecifics approximately $3.2 million as its share of the $37.5 million milestone payments.

On June 30, 2011, we announced results from the three-year CORDLESS extension study in Dupuytren’s contracture patients with a nominal recurrence rate of 34.8% for joints previously treated successfully with XIAFLEX. Additionally, 93% of joints that were successfully treated with XIAFLEX did not receive any medical or surgical intervention through three years of follow-up.

 

18


Table of Contents

Results of Operations

Change in XIAFLEX Revenue Recognition

As discussed in Note 1 (d) to the Company’s consolidated financial statements contained herein, in the first quarter of 2011 the Company began recognizing revenue for XIAFLEX sales at the time of shipment to its specialty distributor, specialty pharmacy and wholesale customers. In 2010, the Company deferred the recognition of revenues, and related product costs, on XIAFLEX product shipments until the time the product was shipped to physicians for administration to patients. As a result of this change in revenue recognition, net revenues for the six months ended June 30, 2011 include a benefit of $1.8 million (representing revenue previously deferred, net of allowances of $0.1 million) and the net loss for six months ended June 30, 2011 includes a benefit of $1.7 million, or $0.04 per share (representing the net revenue benefit partially offset by the related cost of goods sold).

Three Months Ended June 30, 2011 and 2010

Net revenues. Net revenues for the three months ended June 30, 2011 and 2010 comprise the following:

 

     Three months ended June 30,     % Change  
     2011     2010     Change    
     (in millions)        

Testim revenues-

        

Net U.S. revenues

   $ 49.7      $ 46.5      $ 3.2        7%   

International product shipments

     0.6        0.7        (0.1     -11%   

International contract revenues

     0.2        0.2        —          0%   
  

 

 

   

 

 

   

 

 

   
     50.5        47.4        3.1        7%   
  

 

 

   

 

 

   

 

 

   

XIAFLEX revenues-

        

Net U.S. revenues

     9.9        2.0        7.9        395%   

International contract revenues

     5.5        1.1        4.4        409%   
  

 

 

   

 

 

   

 

 

   
     15.4        3.1        12.3        400%   
  

 

 

   

 

 

   

 

 

   

Total net revenues

   $ 65.9      $ 50.5      $ 15.4        31%   
  

 

 

   

 

 

   

 

 

   

Revenue allowances as a percentage of gross U.S. revenues

     24     23     1  
  

 

 

   

 

 

   

 

 

   

Testim revenues for the three months ended June 30, 2011 increased over the comparable 2010 period despite new competitors entering the market. The increase in Testim net U.S. revenues resulted primarily from growth in Testim demand resulting from increased prescriptions and increases in pricing, partially offset by an increase in revenue allowances. According to National Prescription Audit data from IMS Health, a pharmaceutical market research firm (IMS), Testim total prescriptions for the second quarter of 2011 grew 3% over the comparable period of 2010. We believe that Testim prescription growth in the 2011 period over the 2010 period was driven by physician and patient acceptance that Testim provides better patient outcomes and the continued focus of our sales force on the promotion of Testim to urologists, endocrinologists and select primary care physicians. Testim revenues in the second quarter of 2011 benefited from price increases having a cumulative impact of 6% over the comparable 2010 period. Testim international contract revenues shown in the above table represent the amortization of deferred up-front and milestone payments we previously received under our Testim out-licensing agreements.

 

19


Table of Contents

Total revenues for XIAFLEX in the second quarter of 2011 were $15.4 million compared to $3.1 million in the second quarter of 2010. Net revenues for the three months ended June 30, 2011 include $9.9 million of net U.S. product sales of XIAFLEX compared to the $2.0 million recorded in the second quarter of 2010 following the initial U.S. product sales of XIAFLEX for Dupuytren’s, which was launched late in the first quarter of 2010. XIAFLEX international contract revenues shown in the above table relate to our out-licensing agreements for XIAFLEX and represent cumulative catch-up adjustments for milestone payments received during the period, the ongoing amortization of deferred up-front and milestone payment amounts and royalties received. The increase in XIAFLEX international contract revenue for the second quarter of 2011 over the comparable period in 2010 is principally due to a cumulative catch-up adjustments and incremental revenue amortization relating to milestone payments we received from Pfizer during the second quarter of 2011.

Revenue allowances as a percentage of gross U.S. revenues for the second quarter of 2011 compared to that of 2010 increased due to higher levels of managed care contract rebates and government health plan charge-backs, partially offset by a lower revenue allowance percentage on XIAFLEX gross U.S. revenues.

Cost of goods sold. Cost of goods sold was $14.4 million and $11.5 million for the three months ended June 30, 2011 and 2010, respectively. Cost of goods sold reflects the cost of product sold, royalty obligations due to the Company’s licensors, and the amortization of the deferred costs associated with the Pfizer Agreement. The increase in cost of goods sold for the three months ended June 30, 2011 over the comparable period in 2010 was principally attributable to the increase in Testim units sold. Gross margin on our net revenues was 78.2% in the second quarter of 2011 compared to 77.1% in the comparable 2010 period. The increase in the gross margin rate is principally due to the contribution of high margin XIAFLEX contract revenues and product sales, and year-over-year price increases of Testim in the U.S., partially offset by increased Testim managed care rebates.

Research and development expenses. Investments in research and development for the quarter ended June 30, 2011 were $13.3 million, compared to $11.1 million for 2010. The increase in expense results principally from the activities related to the phase III XIAFLEX clinical trials for Peyronie’s disease, partially offset by slightly smaller investment in the development of a larger scale XIAFLEX production process.

Selling, general and administrative expenses. Selling, general and administrative expenses totaled $43.4 million for the quarter ended June 30, 2011 compared with $41.2 million for the year-ago quarter. The increase was primarily due to promotional and training activity in support of the launch of XIAFLEX for Dupuytren’s in the U.S.

Interest income. Interest income relates primarily to interest earned on cash, cash equivalents and short-term investments.

Interest expense. Interest expense in 2011 relates primarily to the costs associated the Company’s two year $30 million revolving credit line which was secured in August 2009.

 

20


Table of Contents

Six Months Ended June 30, 2011 and 2010

Net revenues. Net revenues for the six months ended June 30, 2011 and 2010 comprise the following:

 

     Six months ended June 30,     % Change  
     2011     2010     Change    
     (in millions)        

Testim revenues-

        

Net U.S. revenues

   $ 95.2      $ 90.4      $ 4.8        5%   

International product shipments

     1.0        0.9        0.1        9%   

International contract revenues

     0.5        0.3        0.2        49%   
                          
     96.7        91.6        5.1        5%   
                          

XIAFLEX revenues-

        

Net U.S. revenues

     18.5        2.2        16.3        758%   

Revenue recognition change

     1.8        —          1.8        n/a   

International contract revenues

     7.3        2.2        5.1        236%   
                          
     27.6        4.4        23.2        538%   
                          

Total net revenues

   $ 124.3      $ 96.0      $ 28.3        30%   
                          

Revenue allowance as a percentage of gross U.S. revenues

     24     22     2  
                          

The increase in Testim net U.S. revenues resulted primarily from growth in Testim demand resulting from increased prescriptions and increases in pricing, partially offset by an increase revenue allowances. According to National Prescription Audit data from IMS, Testim total prescriptions for the first six months of 2011 grew 6% over the comparable period of 2010. We believe that Testim prescription growth in the 2011 period over the 2010 period was driven by physician and patient acceptance that Testim provides better patient outcomes and the continued focus of our sales force on the promotion of Testim to urologists, endocrinologists and select primary care physicians. Testim revenues the first six months of 2011 benefited from price increases having a cumulative impact of 6% over the comparable 2010 period. Testim international contract revenues shown in the above table represent the amortization of deferred up-front, milestone and royalty payments we previously received under our Testim out-licensing agreements.

Including the change in revenue recognition discussed above, total revenues for XIAFLEX for the six months ended June 30, 2011 were $27.6 million compared to $4.4 million for the comparable period of 2010. Net revenues for the six months ended June 30, 2011 include $18.5 million of net U.S. product sales of XIAFLEX compared to the $2.2 million recorded for the first six months of 2010 following the initial U.S. product sales of XIAFLEX for Dupuytren’s, which was launched late in the first quarter of 2010. XIAFLEX international contract revenues shown in the above table relate to our out-licensing agreements for XIAFLEX and represent cumulative catch-up adjustments for milestone payments received during the period, the ongoing amortization of deferred up-front and milestone payment amounts and royalties received. The increase in XIAFLEX international contract revenue for the first six months of 2011 over the comparable period of 2010 is principally due to cumulative catch-up adjustments and incremental revenue amortization relating to milestone payments we received from Pfizer during the second quarter of 2011.

Revenue allowances as a percentage of gross U.S. revenues for the first six months of 2011 compared to that of 2010 increased due to higher levels of managed care contract rebates and government health plan charge-backs, partially offset by a lower revenue allowance percentage on XIAFEX gross U.S. revenues.

Cost of goods sold. Cost of goods sold was $25.6 million and $21.0 million for the six months ended June 30, 2011 and 2010, respectively. Cost of goods sold reflects the cost of product sold, royalty obligations due to the Company’s licensors, and the amortization of the deferred costs associated with the Pfizer Agreement. The increase in cost of goods sold for the six months ended June 30, 2011 over the

 

21


Table of Contents

comparable period in 2010 was principally attributable to the increase in Testim units sold. Gross margin on our net revenues was 79.4% in the first six months of 2011 compared to 78.1% in the comparable 2010 period. The increase in the gross margin rate is principally due to the contribution of high margin XIAFLEX contract revenues and product sales, including the contribution from the impact of the change in revenue recognition, and year-over-year price increases of Testim in the U.S., partially offset by increased Testim managed care rebates. In addition, gross margin on XIAFLEX U.S. product sales reflect the benefit of past claims from our licensor of approximately $1.1 million in the first six months of 2011 compared to $0.2 million of such claims in the comparable 2010 period.

Research and development expenses. Research and development spending for the six months ended June 30, 2011 was $29.1 million, compared to $19.6 million for 2010. The increase in expense results principally from the commencement of start-up activities related to the phase III XIAFLEX clinical trials for Peyronie’s disease and costs incurred to address inspection comments received from European regulators concerning our manufacturing plant.

Selling, general and administrative expenses. Selling, general and administrative expenses totaled $86.5 million for the six months ended June 30, 2010 compared with $77.3 million for the year-ago comparable period. The increase was primarily due to the addition of the sales and reimbursement field force and infrastructure, and promotional and training activity in support of the launch of XIAFLEX for Dupuytren’s in the U.S.

Interest income. Interest income relates primarily to interest earned on cash, cash equivalents and short-term investments.

Interest expense. Interest expense relates primarily to the costs associated the Company’s two year $30 million revolving credit line which was secured in August 2009.

Liquidity and Capital Resources

We had $151.8 million and $128.2 million in cash, cash equivalents and short-term investments as of June 30, 2011 and December 31, 2010, respectively. We believe that our current financial resources and sources of liquidity will be adequate for the Company to fund our anticipated operations beyond reaching profitability based on our current plans and expectations. We may, however, elect to raise additional funds prior to this time in order to enhance our sales and marketing efforts for additional products we may acquire, commercialize any product candidates that receive regulatory approval, acquire or in-license approved products or product candidates or technologies for development and to maintain adequate cash reserves to minimize financial market fundraising risks. Insufficient funds may cause us to delay, reduce the scope of, or eliminate one or more of our development, commercialization or expansion activities. Our future capital needs and the adequacy of our available funds will depend on many factors, including:

 

   

our ability to successfully increase sales in the U.S. of XIAFLEX for Dupuytren’s;

 

   

third-party payor coverage and reimbursement for our products;

 

   

the cost of manufacturing, distributing, marketing and selling our products;

 

   

the scope, rate of progress and cost of our product development activities;

 

   

the costs of supplying and commercializing our products and product candidates;

 

   

the effect of competing technological and market developments;

 

   

the cost of filing, prosecuting, defending and enforcing any patent claims and other intellectual property rights, including costs associated with the matter of Auxilium Pharmaceuticals, Inc. and CPEX Pharmaceuticals, Inc. vs. Upsher-Smith Laboratories, Inc. filed on December 4, 2008 in the United States District Court for the District of Delaware and the outcome thereof;

 

22


Table of Contents
   

the extent to which we acquire or invest in businesses and technologies, although we currently have no commitments or agreements relating to any of these types of transactions; and

 

   

entry into the marketplace of competitive products.

If additional funds are required, we may raise such funds from time to time through public or private sales of equity or debt securities or from bank or other loans. Financing may not be available on acceptable terms, or at all, and our failure to raise capital when needed could materially adversely impact our growth plans and our financial condition or results of operations. Additional equity financing, if available, may be dilutive to the holders of our common stock and may involve significant cash payment obligations and covenants that restrict our ability to operate our business.

Sources and Uses of Cash

Cash provided by operations was $25.8 million for the six months ended June 30, 2011 compared to cash used in operations of $16.4 million for the comparable 2010 period. Cash provided by operations for the six months ended June 30, 2011 resulted primarily from the $15.0 million up-front payment received from Asahi and the $33.6 million of net milestone payments received from Pfizer, offset by BioSpecific’s share of these up-front and milestone payments and operating losses (net of stock compensation expenses and other non-cash charges). Cash used in operations for 2010 resulted primarily from operating losses (net of stock compensation expenses) and other non-cash charges, offset in part by approximately $13.7 million of net milestone receipts in the first six months of 2010.

Cash used in investing activities was $66.4 million for the six months ended June 30, 2011 compared to cash used of $4.8 million for the six months ended June 30, 2010. The cash impact of investing activities in 2011 relates primarily to purchases of short-term investments in marketable debt securities and investments in property and equipment. In 2010, the cash impact of investing activities relates primarily to our investments in property and equipment, net of the redemptions of long-term investments. Our investments in property and equipment relate primarily to improvements made to our Horsham biological manufacturing facility and our information technology infrastructure for the production of XIAFLEX.

Cash provided by financing activities was $2.1 million and $4.2 million for the six months ended June 30, 2011 and 2010, respectively. Cash provided by financing activities in both periods resulted primarily from cash receipts from stock option exercises and employee stock purchases, net of treasury shares acquired in satisfaction of tax withholding requirements on stock awards to certain officers and employees.

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements as defined in Item 303(a) (4) of Regulation S-K.

New Accounting Pronouncements

See Note 1(e) - New Accounting Pronouncements to the Company’s Consolidated Financial Statements.

 

23


Table of Contents
Item 3. Quantitative and Qualitative Disclosures About Market Risk.

We are subject to market risks in the normal course of our business, including changes in interest rates and exchange rates. There have been no significant changes in our exposure to market risks since December 31, 2010. Refer to “Item 7 A. Quantitative and Qualitative Disclosures About Market Risk” of our Annual Report on Form 10-K for the year ended December 31, 2010 for additional information.

 

Item 4. Controls and Procedures.

Evaluation of Disclosure Controls and Procedures.

Our Chief Executive Officer and Chief Financial Officer have concluded, based on their respective evaluations as of the end of the period covered by this Report, that our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this Report are effective to provide reasonable assurance that the information required to be disclosed in the reports we file under the Exchange Act is (i) recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and (ii) is accumulated and communicated to management as appropriate to allow timely decisions regarding required disclosures. A controls system cannot provide absolute assurances, however, that the objectives of the controls system are met, and no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within a company have been detected.

Changes in Internal Control over Financial Reporting.

No change in our internal control over financial reporting occurred during our most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

 

Item 1. Legal Proceedings.

As previously reported in Part I, Item 3 in our Annual Report on Form 10-K for the year ended December 31, 2010, on February 15, 2011, we filed a complaint against BioSpecifics Technologies Corp. (BioSpecifics) alleging that BioSpecifics has breached the Amended and Restated Development and License Agreement, dated December 11, 2008, by and between BioSpecifics and the Company (the BioSpecifics Agreement) by its commencement of clinical trials for the use of injectable collagenase to treat canine lipomas without the prior knowledge and approval of the parties’ Joint Development Committee (JDC). We are seeking preliminary and permanent injunctions ordering BioSpecifics to, among other things, (a) suspend its canine lipoma clinical trial known as Chien-803 and (b) refrain from initiating any new clinical trials related to collagenase until such time as any such trial has been reviewed and approved by the parties’ JDC pursuant to the terms of the BioSpecifics Agreement. In addition, we are seeking a declaratory judgment as to the rights and responsibilities of the JDC under the BioSpecifics Agreement. The suit was filed in the Court of Common Pleas, Chester County, Pennsylvania. The court ordered that the papers filed with the court were to be deemed under seal and not available to the public until further order. On April 27, 2011, we filed a motion seeking to unseal the judicial record. On June 20, 2011, the court heard oral argument regarding the preliminary objections and the motion seeking to unseal the judicial record.

We are also party to various other actions and claims arising in the normal course of business. One example of such a claim is a complaint filed, on May 2, 2011, in the Supreme Court of the State of New York, Nassau County, Commercial Division by BioSpecifics against Recipharm AB, RecipharmCobra Holdings Limited (Recipharm entities collectively Cobra) and us claiming that we have breached an oral contract with BioSpecifics and interfered with a contract BioSpecifics has with Cobra. We believe that amounts accrued for awards or assessments in connection with all such matters are adequate and that the ultimate resolution of these matters will not have a material adverse effect on the

 

24


Table of Contents

our financial position or the manner in which we conduct our business. However, there exists a reasonable possibility of loss in excess of the amounts accrued, the amount of which cannot currently be estimated. While we do not believe that the amount of such excess loss could be material to our financial position, any such loss could have a material adverse effect on our results of operations or the manner in which we conduct our business in the period(s) during which the underlying matters are resolved.

 

Item 1A. Risk Factors.

In addition to the other information contained in this Report, you should carefully consider the factors discussed in Part I, Item 1A “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2010 in evaluating our business, financial position, future results and prospects. Although there have been no material changes to the risk factors described in such Annual Report on Form 10-K, the risks described therein are not the only risks facing our company. Additional risks that we do not presently know or that we currently believe are immaterial could also materially and adversely affect our business, financial position, future results and prospects.

 

Item 6. Exhibits.

 

Exhibit

No.

  

Description

    3.1    Fifth Restated Certificate of Incorporation of the Registrant (filed as Exhibit 3.1 to the Registrant’s Quarterly Report on Form 10-Q filed on August 16, 2004, File No. 000-50855, and incorporated by reference herein).
    3.2    Amended and Restated Bylaws of the Registrant (filed as Exhibit 3.2 to the Registrant’s Quarterly Report on Form 10-Q filed on August 16, 2004, File No. 000-50855, and incorporated by reference herein).
  10.1*    Registrant’s 2004 Equity Compensation Plan, amended and restated effective as of June 16, 2011 (filed as Appendix A to the Registrant’s Definitive Proxy Statement, dated April 29, 2011, for its 2011 Annual Meeting of Stockholders, and incorporated by reference herein).
  31.1    Certification of Armando Anido, the Registrant’s Principal Executive Officer, required by Rule 13a-14(a) or Rule 15d-14(a).
  31.2    Certification of James E. Fickenscher, the Registrant’s Principal Financial Officer, required by Rule 13a-14(a) or Rule 15d-14(a).
32    Certification of Armando Anido, the Registrant’s Principal Executive Officer, and James E. Fickenscher, the Registrant’s Principal Financial Officer, required by Rule 13a-14(b) or Rule 15d-14(b) and Section 1350 of Chapter 63 of Title 18 of the United States Code (18 U.S.C. 1350).
101.INS†    XBRL Instance Document
101.SCH†    XBRL Taxonomy Extension Schema Document
101.CAL†    XBRL Taxonomy Extension Calculation Linkbase Document
101.LAB†    XBRL Taxonomy Extension Label Linkbase Document
101.PRE†    XBRL Taxonomy Extension Presentation Linkbase Document
101.DEF†    XBRL Taxonomy Extension Definition Linkbase Document

 

25


Table of Contents
* Indicates management contract or compensatory plan or arrangement.
XBRL (Extensible Business Reporting Language) information is furnished and not filed for purposes of Sections 11 and 12 of the Securities Act of 1933 and Section 18 of the Securities Exchange Act of 1934, and is not subject to liability under those sections, is not part of any registration statement or prospectus to which it relates and is not incorporated or deemed to be incorporated by reference into any registration statement, prospectus or other document.

 

26


Table of Contents

SIGNATURES

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

 

  AUXILIUM PHARMACEUTICALS, INC.
Date: August 2, 2011  

/s/ Armando Anido

  Armando Anido
  Chief Executive Officer and President
  (Principal Executive Officer)
  AUXILIUM PHARMACEUTICALS, INC.
Date: August 2, 2011  

/s/ James E. Fickenscher

  James E. Fickenscher
  Chief Financial Officer
  (Principal Financial and Accounting Officer)

 

27


Table of Contents

EXHIBIT INDEX

 

Exhibit

No.

  

Description

    3.1    Fifth Restated Certificate of Incorporation of the Registrant (filed as Exhibit 3.1 to the Registrant’s Quarterly Report on Form 10-Q filed on August 16, 2004, File No. 000-50855, and incorporated by reference herein).
    3.2    Amended and Restated Bylaws of the Registrant (filed as Exhibit 3.2 to the Registrant’s Quarterly Report on Form 10-Q filed on August 16, 2004, File No. 000-50855, and incorporated by reference herein).
  10.1*    Registrant’s 2004 Equity Compensation Plan, amended and restated effective as of June 16, 2011 (filed as Appendix A to the Registrant’s Definitive Proxy Statement, dated April 29, 2011, for its 2011 Annual Meeting of Stockholders, and incorporated by reference herein).
  31.1    Certification of Armando Anido, the Registrant’s Principal Executive Officer, required by Rule 13a-14(a) or Rule 15d-14(a).
  31.2    Certification of James E. Fickenscher, the Registrant’s Principal Financial Officer, required by Rule 13a-14(a) or Rule 15d-14(a).
32    Certification of Armando Anido, the Registrant’s Principal Executive Officer, and James E. Fickenscher, the Registrant’s Principal Financial Officer, required by Rule 13a-14(b) or Rule 15d-14(b) and Section 1350 of Chapter 63 of Title 18 of the United States Code (18 U.S.C. 1350).
101.INS†    XBRL Instance Document
101.SCH†    XBRL Taxonomy Extension Schema Document
101.CAL†    XBRL Taxonomy Extension Calculation Linkbase Document
101.LAB†    XBRL Taxonomy Extension Label Linkbase Document
101.PRE†    XBRL Taxonomy Extension Presentation Linkbase Document
101.DEF†    XBRL Taxonomy Extension Definition Linkbase Document

 

* Indicates management contract or compensatory plan or arrangement.
XBRL (Extensible Business Reporting Language) information is furnished and not filed for purposes of Sections 11 and 12 of the Securities Act of 1933 and Section 18 of the Securities Exchange Act of 1934, and is not subject to liability under those sections, is not part of any registration statement or prospectus to which it relates and is not incorporated or deemed to be incorporated by reference into any registration statement, prospectus or other document.

 

28