Table of Contents
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark
one)
x
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QUARTERLY REPORT UNDER
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For
the quarterly period ended June 30, 2009
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OR
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o
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TRANSITION REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For
the transition period from
to
.
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Commission
File No. 0-19312
MEDAREX, INC.
(Exact Name of Registrant as Specified in Its
Charter)
New
Jersey
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22-2822175
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(State or Other Jurisdiction of Incorporation or
Organization)
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(I.R.S. Employer Identification No.)
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707
State Road, Princeton, New Jersey
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08540
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(Address of Principal Executive Offices)
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(Zip Code)
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Registrants Telephone Number, Including Area Code:
(609) 430-2880
Indicate by check
x
whether 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
o
Indicate by check
x
whether registrant has submitted electronically and posted on its corporate Web
site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or
for such shorter period that the registrant was required to submit and post
such files). Yes
o
No
o
Indicate by check
x
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
x
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Accelerated
filer
o
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Non-accelerated
filer
o
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Smaller
Reporting Company
o
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(Do not check if a smaller reporting Company)
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Indicate by check
x
whether the registrant is a shell company (as defined
in Rule 12b-2 of the Exchange Act). Yes
o
No
x
Indicate the number of
shares of each of the issuers classes of common stock, as of the latest
practicable date:
Class
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Outstanding at July 31, 2009
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Common Stock,
$.01 par value
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129,052,783
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Table of Contents
MEDAREX,
INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In
thousands, except share data)
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June 30,
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December 31,
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2009
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2008
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ASSETS
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Current assets:
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Cash and cash equivalents
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$
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78,976
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$
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72,482
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Marketable securities
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261,672
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281,186
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Prepaid expenses and other current assets
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18,661
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21,793
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Total current assets
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359,309
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375,461
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Property, buildings and equipment:
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Land
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6,780
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6,780
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Buildings and leasehold improvements
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86,963
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86,901
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Machinery and equipment
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69,011
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70,314
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Furniture and fixtures
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4,947
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4,932
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167,701
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168,927
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Less accumulated depreciation and amortization
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(105,421
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)
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(101,773
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)
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62,280
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67,154
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Marketable securities Genmab
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78,596
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87,428
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Marketable securities Celldex Therapeutics
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23,154
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Investment in Celldex Therapeutics
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3,047
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Investments in, and advances to, other partners
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790
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790
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Segregated securities
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1,300
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1,300
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Other assets
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1,321
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1,675
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Total assets
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$
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526,750
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$
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536,855
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LIABILITIES AND SHAREHOLDERS EQUITY
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Current liabilities:
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Trade accounts payable
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$
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4,991
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$
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5,721
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Accrued liabilities
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43,287
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30,516
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Deferred contract revenue - current
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26,919
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28,062
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Total current liabilities
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75,197
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64,299
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Deferred contract revenue - long-term
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97,997
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73,577
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Other long-term liabilities
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4,415
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4,670
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2.25% Convertible senior notes due May 15, 2011
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146,392
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145,430
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Commitments and contingencies
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Shareholders equity:
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Preferred stock, $1.00 par value, 2,000,000 shares authorized; none
issued and outstanding
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Common stock, $.01 par value; 200,000,000 shares authorized;
128,773,193 shares issued and 128,739,353 shares outstanding at June 30,
2009 and 128,539,618 shares issued and 128,505,778 shares outstanding at
December 31, 2008
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1,288
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1,285
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Capital in excess of par value
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1,206,100
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1,192,709
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Treasury stock, at cost 33,840 shares in 2009 and 2008
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(85
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)
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(85
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)
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Accumulated other comprehensive income
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102,482
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84,156
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Accumulated deficit
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(1,107,036
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)
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(1,029,186
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)
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Total shareholders equity
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202,749
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248,879
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Total liabilities and shareholders equity
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$
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526,750
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$
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536,855
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See
notes to these unaudited consolidated financial statements.
3
Table of Contents
MEDAREX,
INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In
thousands, except per share data)
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Three Months Ended
June 30,
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Six Months Ended
June 30,
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2009
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2008
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2009
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2008
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Contract and license revenues
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$
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15,493
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$
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5,516
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$
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22,469
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$
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12,626
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Contract and license revenues from Genmab
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179
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375
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724
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1,249
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Reimbursement of development costs
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3,829
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4,069
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7,145
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8,088
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Total revenues
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19,501
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9,960
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30,338
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21,963
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Costs and expenses:
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Research and development
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50,759
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52,574
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97,828
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101,866
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General and administrative
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10,527
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12,435
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21,040
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24,844
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Total costs and expenses
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61,286
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65,009
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118,868
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126,710
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Operating loss
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(41,785
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)
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(55,049
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)
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(88,530
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)
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(104,747
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)
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Equity in net loss of affiliate
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(2,500
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)
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(3,546
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)
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(4,916
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)
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(5,331
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)
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Interest and dividend income and realized gains
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2,157
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3,710
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4,198
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8,238
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Gain on sale of Genmab stock
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151,834
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Gain on sale of Celldex Therapeutics stock
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14,300
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3,331
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14,300
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3,331
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Interest expense
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(1,499
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)
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(1,545
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)
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(2,998
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)
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(3,089
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)
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Income (loss) before provision (benefit) for income taxes
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(29,327
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)
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(53,099
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)
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(77,946
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)
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50,236
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Provision (benefit) for income taxes
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(80
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)
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(96
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)
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23
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Net income (loss)
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$
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(29,247
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)
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$
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(53,099
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)
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$
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(77,850
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)
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$
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50,213
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|
|
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Net income (loss) per share:
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|
|
|
|
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basic
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$
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(0.23
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)
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$
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(0.42
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)
|
$
|
(0.60
|
)
|
$
|
0.39
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|
diluted
|
|
$
|
(0.23
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)
|
$
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(0.42
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)
|
$
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(0.60
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)
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$
|
0.38
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|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares outstanding:
|
|
|
|
|
|
|
|
|
|
basic
|
|
128,931
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|
127,724
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|
128,803
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|
127,927
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|
diluted
|
|
128,931
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|
127,724
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|
128,803
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138,864
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See notes to these unaudited consolidated financial statements.
4
Table of Contents
MEDAREX,
INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In
thousands)
|
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Six Months Ended
June 30,
|
|
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2009
|
|
2008
|
|
Operating activities:
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(77,850
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)
|
$
|
50,213
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|
Adjustments to reconcile net income (loss) to net cash used in
operating activities:
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|
|
|
|
|
Depreciation
|
|
6,192
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|
6,932
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|
Amortization
|
|
1,321
|
|
1,435
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|
Amortization of net bond premium/discount
|
|
554
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|
(1,206
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)
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Stock based compensation and vesting of restricted stock units
|
|
11,655
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|
12,506
|
|
Equity in net loss of Celldex Therapeutics
|
|
4,916
|
|
5,331
|
|
Gain on sale of Genmab stock
|
|
|
|
(151,834
|
)
|
Gain on sale of Celldex Therapeutics/AVANT stock
|
|
(14,300
|
)
|
(3,331
|
)
|
Gain on sale of IDM Pharma stock
|
|
(157
|
)
|
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
Prepaid expenses and other current assets
|
|
1,263
|
|
6,557
|
|
Trade accounts payable
|
|
(730
|
)
|
(1,685
|
)
|
Accrued liabilities
|
|
13,160
|
|
(5,789
|
)
|
Deferred contract revenue
|
|
23,277
|
|
(4,532
|
)
|
Net cash used in operating activities
|
|
(30,699
|
)
|
(85,403
|
)
|
|
|
|
|
|
|
Investing activities:
|
|
|
|
|
|
Purchase of property and equipment
|
|
(1,318
|
)
|
(2,988
|
)
|
Proceeds from sale of Genmab stock
|
|
|
|
151,834
|
|
Proceeds from sale of Celldex Therapeutics/AVANT stock
|
|
14,300
|
|
4,343
|
|
Decrease in segregated cash
|
|
|
|
49
|
|
Purchase of marketable securities
|
|
|
|
(60,160
|
)
|
Sales and maturities of marketable securities
|
|
23,121
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|
77,264
|
|
Net cash provided by investing activities
|
|
36,103
|
|
170,342
|
|
|
|
|
|
|
|
Financing activities:
|
|
|
|
|
|
Cash received from sales of securities and exercise of stock options,
net
|
|
1,121
|
|
3,204
|
|
Principal payments under capital lease obligations
|
|
(31
|
)
|
(33
|
)
|
Net cash provided by financing activities
|
|
1,090
|
|
3,171
|
|
Effect of exchange rate differences on cash and cash equivalents
|
|
|
|
(20
|
)
|
Effect of change in accounting from consolidation to equity method
|
|
|
|
3,584
|
|
Net increase in cash and cash equivalents
|
|
6,494
|
|
91,674
|
|
Cash and cash equivalents at beginning of period
|
|
72,482
|
|
37,335
|
|
Cash and cash equivalents at end of period
|
|
$
|
78,976
|
|
$
|
129,009
|
|
|
|
|
|
|
|
Non-cash investing and financing activities:
|
|
|
|
|
|
Unrealized loss on investment in Genmab
|
|
$
|
(8,832
|
)
|
$
|
(52,277
|
)
|
Unrealized gain on investment in Celldex Therapeutics
|
|
$
|
23,154
|
|
$
|
|
|
|
|
|
|
|
|
Supplemental disclosures of cash flow information
|
|
|
|
|
|
Cash paid during period for:
|
|
|
|
|
|
Income taxes
|
|
$
|
|
|
$
|
|
|
Interest
|
|
$
|
1,688
|
|
$
|
1,688
|
|
See notes to these
unaudited consolidated financial statements.
5
Table of Contents
MEDAREX,
INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars
in thousands, unless otherwise indicated, except per share data)
1.
Basis of
Presentation and Summary of Significant Accounting Policies
Basis of Presentation
The accompanying consolidated financial statements
are unaudited and have been prepared from the books and records of Medarex, Inc.
and its subsidiaries (collectively, the Company) in accordance with U.S.
generally accepted accounting principles for interim financial information and
with the instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes required
by U.S. generally accepted accounting principles for complete financial
statements. The consolidated interim
financial statements, in the opinion of management, reflect all adjustments
(consisting of normal recurring adjustments) considered necessary for a fair
presentation of the results for the interim periods ended June 30, 2009
and 2008.
The
Companys financial statements consolidate all of its subsidiaries, including
those that it controls and those in which it holds a majority voting
interest. Medarex currently owns
approximately 18.7% of the outstanding common stock of Celldex Therapeutics, Inc. (Celldex
Therapeutics) (see Note 2). All
significant intercompany balances and transactions have been eliminated in
consolidation.
The
unaudited consolidated results of operations for the interim periods are not
necessarily indicative of the results of operations to be expected for the full
year. The unaudited consolidated balance
sheet at December 31, 2008 has been derived from the audited financial
statements at that date, but does not include all of the information and
footnotes required for complete financial statements. These consolidated
interim financial statements should be read in conjunction with the audited
consolidated financial statements and footnotes thereto, which are contained in
the Companys annual report on Form 10-K for the year ended December 31,
2008 filed with the Securities and Exchange Commission, or SEC.
Use of Estimates
The
preparation of the financial statements and related disclosures in conformity
with accounting principles generally accepted in the United States requires
management to make estimates and judgments that affect the amounts reported in
the consolidated financial statements and accompanying notes. The Company bases its estimates and judgments
on historical experience and on various other assumptions that it believes are
reasonable under the circumstances. The
amounts of assets and liabilities reported in the Companys consolidated
balance sheets and the amounts of revenues and expenses reported for each of
the periods presented are affected by estimates and assumptions, which are used
for, but not limited to, the accounting for revenue recognition, stock-based
compensation, income taxes, loss contingencies and accounting for research and
development costs. Actual results could differ from those estimates.
6
Table of Contents
MEDAREX,
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars
in thousands, unless otherwise indicated, except per share data)
Net Income (Loss) per Share
Basic and diluted net income (loss) per share are
calculated in accordance with SFAS No. 128,
Earnings per Share
. Basic net income (loss) per share is
based upon the number of weighted average shares of common stock outstanding.
Diluted net income (loss) per share is based upon the weighted average number
of shares of common stock and dilutive potential shares of common stock
outstanding. Potentially dilutive
securities have been excluded from the computation of diluted net loss per
share for the three and six month periods ended June 30, 2009 and the
three month period ended June 30, 2008, as their effect is antidilutive.
Potential shares of common stock result from the assumed conversion of
convertible senior notes and are included in the calculation of diluted net
income per share for the six month period ended June 30, 2008. Stock options have been excluded from the
computation of diluted net income per share for the six month period ended June 30,
2008 as their effect is antidilutive. A summary of such potentially dilutive
securities is as follows:
The
following table sets forth the computation of basic and diluted income per
share for the six month period ended June 30, 2008:
Income (Numerator):
|
|
|
|
Net income for basic and diluted income per share
|
|
$
|
50,213
|
|
Adjustment for interest expense on convertible notes
|
|
2,982
|
|
Income for diluted income per share
|
|
$
|
53,195
|
|
|
|
|
|
Shares (Denominator):
|
|
|
|
Weighted average shares for basic income per share
|
|
127,926,596
|
|
Effect of dilutive securities (stock options)
|
|
|
|
Effect of convertible notes, after assumed conversion
|
|
10,936,935
|
|
Weighted average shares for diluted income per share
|
|
138,863,531
|
|
|
|
|
|
Basic net income per share
|
|
$
|
0.39
|
|
Diluted net income per share
|
|
$
|
0.38
|
|
Potential shares of common stock that would be
issued if all outstanding stock options were exercised (18,992,313 shares),
without regard to whether the outstanding stock options were in the money,
are not included in the computation of diluted net income per share for the six
months ended June 30, 2008 because to do so would be antidilutive.
The following table sets
forth potential shares of common stock that would be issued if all of the
convertible notes were converted to common stock and all of the outstanding
stock options were exercised, without regard to whether the convertible notes
or outstanding stock options were in the money. These potential shares of common stock are
not included in the computation of diluted loss per share for the three and six
month periods ended June 30, 2009 and the three month period ended June 30,
2008 because to do so would be antidilutive.
7
Table of Contents
MEDAREX,
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars
in thousands, unless otherwise indicated, except per share data)
|
|
Three Months
Ended
June 30, 2009
|
|
Six Months
Ended
June 30, 2009
|
|
Three Months
Ended
June 30, 2008
|
|
Convertible notes
|
|
10,936,935
|
|
10,936,935
|
|
10,936,935
|
|
Outstanding stock options
|
|
20,424,235
|
|
20,424,235
|
|
18,992,313
|
|
Total shares
|
|
31,361,170
|
|
31,361,170
|
|
29,929,248
|
|
Marketable Securities and Long-Term
Non-Marketable Investments
Marketable securities consist of fixed income
investments with a maturity of greater than three months and other highly
liquid investments that can be readily purchased or sold using established
markets. Under SFAS No. 115,
Accounting
for Certain Investments in Debt and Equity Securities
(SFAS No. 115), these
investments are classified as available-for-sale and are reported at fair value
on the Companys consolidated balance sheet. Unrealized holding gains and
losses are reported within accumulated other comprehensive income as a separate
component of shareholders equity. Under the Companys accounting policy, a
decline in the fair value of equity securities is deemed to be other than
temporary and such equity securities are generally considered to be impaired
if their fair value is less than the Companys cost basis for more than six
months, or some other period in light of the particular facts and circumstances
surrounding the equity securities. If a decline in the fair value of a
marketable security below the Companys cost basis is determined to be other
than temporary, such marketable security is written down to its estimated fair
value as a new cost basis and the amount of the write-down is included in
earnings as an impairment charge.
In addition, the Company has investments in several
of its partners whose securities are not publicly traded. These investments are
accounted for under the cost basis.
Because these securities are not publicly traded, the Company values
these investments by using information acquired from industry trends,
management of these companies, such companies financial statements and other
external sources. Specifically, the
Companys determination of any potential impairment of the value of the
privately held securities includes an analysis of the following for each
company on a periodic basis: review of
interim and year-end financial statements, cash position and overall rate of
cash used to support operations, the progress and development of technology and
product platform, the per share value of subsequent financings and potential
strategic alternatives. Based on the
information acquired through these sources, the Company records an impairment
charge when it believes an investment has experienced a decline in value that
is considered to be other than temporary.
The Company recorded no impairment charges related
to investments in partners whose securities are publicly traded for the three
and six month periods ended June 30, 2009 and 2008. The Company recorded no impairment charges
related to investments in partners whose securities are privately held for the
three and six month periods ended June 30, 2009 and 2008. If the Company deems any of its investments
to be impaired at the end of any future period, it may incur impairment charges
on these investments.
8
Table of Contents
MEDAREX,
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars
in thousands, unless otherwise indicated, except per share data)
Financial Instruments
The fair values of cash and cash equivalents,
marketable securities, accounts payable and accrued liabilities are not
materially different from their carrying amounts as of June 30, 2009 and December 31,
2008. As of June 30, 2009, the
estimated fair value of the Companys convertible senior notes payable was
approximately $142.2 million as compared to a carrying value of approximately
$146.4 million. As of December 31,
2008, the estimated fair value of the Companys convertible senior notes
payable was approximately $104.2 million as compared to a carrying value of
approximately $145.4 million. The
estimated fair value of the Companys convertible senior notes payable as of June 30,
2009 and December 31, 2008 are based on quoted market prices. Receivables
from partners are concentrated primarily in the pharmaceutical and
biotechnology industries. Although the Companys partners are concentrated
primarily within these two industries, management considers the likelihood of
material credit risk as remote.
Revenue Recognition
The
Company receives payments from customers and partners from the sale of
antibodies, for licenses to its proprietary technology for product development,
for services and from the achievement of product development milestones. These
payments are generally non-refundable and are reported as deferred revenue
until they are recognizable as revenue. The Company follows the following
principles in recognizing revenue:
·
Fees received
from the licensing of the Companys proprietary technologies for research and
development performed by its customers and partners are recognized generally on
a straight line basis over the term of the respective license period beginning
after both the license period has begun and the technology has been delivered.
·
Fees received
for product development services are recognized ratably over the period during
which the services are performed.
·
Milestone
payments are recognized as revenue upon the achievement of mutually agreed
milestones, provided that (i) the milestone event is substantive and its
achievement is not reasonably assured at the inception of the agreement and (ii) there
are no continuing performance obligations associated with the milestone
payment. Milestone payments are
triggered either by the results of research efforts or by the efforts of the
Companys partners and include such events as submission of an Investigational
New Drug Application, or IND, commencement of Phase 1, 2 or 3 clinical trials,
submission of a Biologic License Application, or BLA, and regulatory approval
of a product. Milestone payments are
substantially at risk at the inception of an agreement.
·
Revenue
arrangements that include multiple deliverables are divided into separate units
of accounting if the deliverables meet certain criteria, including whether the
fair value of the delivered items can be determined and whether there is
evidence of fair value of the undelivered items. In addition, the consideration
is allocated among the separate units of accounting based on their fair values,
and the applicable revenue recognition criteria are considered separately for
each of the separate units of accounting.
9
Table of Contents
MEDAREX,
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars
in thousands, unless otherwise indicated, except per share data)
·
Revenues
derived from reimbursements of costs associated with the development of product
candidates are recorded in compliance with EITF Issue 99-19,
Reporting Revenue Gross as a Principal Versus Net as an Agent
(EITF 99-19). According to the
criteria established by EITF 99-19, in transactions where the Company acts as a
principal, with discretion to choose suppliers, bears credit risk and performs
part of the services required in the transaction, the Company believes it has
met the criteria to record revenue for the gross amount of the reimbursements.
·
The Company
sells antibodies primarily to partners in the United States and overseas. Revenue from these sales is recognized when
the antibodies are shipped and the Company has no further obligations related
to the development of the antibodies.
·
Grant revenues
are recognized as the Company provides the services stipulated in the
underlying grant based on the time and materials incurred. Amounts received in
advance of services provided are recorded as deferred revenue and amortized as
revenue when the services are provided.
Income Taxes
The Company uses the
asset and liability method to account for income taxes, including the
recognition of deferred tax assets and deferred tax liabilities for the
anticipated future tax consequences attributable to differences between
financial statement amounts and their respective tax bases. The Company reviews
its deferred tax assets for recovery. A valuation allowance is established when
the Company believes that it is more likely than not that its deferred tax assets
will not be realized. Changes in valuation allowances from period to period are
included in the Companys tax provision in the period of change.
Recently Adopted Accounting Pronouncements
In December 2007, the
EITF reached a consensus on Issue No. 07-1,
Accounting for Collaborative Arrangements
(EITF 07-1). The
EITF concluded on the definition of a collaborative arrangement and that
revenues and costs incurred with third parties in connection with collaborative
arrangements would be presented gross or net based on the criteria in EITF
99-19 and other accounting literature. Based on the nature of the arrangement,
payments to or from collaborators would be evaluated and the terms, the nature
of the entitys business, and whether those payments are within the scope of
other accounting literature would be presented. Companies are also required to
disclose the nature and purpose of collaborative arrangements along with the
accounting policies and the classification and amounts of significant financial
statement amounts related to the arrangements. Activities in the arrangement
conducted in a separate legal entity should be accounted for under other
accounting literature; however required disclosure under EITF 07-1 applies to
the entire collaborative agreement. EITF 07-1 is effective for financial
statements issued for fiscal years beginning after December 15, 2008, and
interim periods within those fiscal years, and is to be applied retrospectively
to all periods presented for all collaborative arrangements existing as of the
effective date. The Company adopted EITF 07-1 effective January 1, 2009
and its adoption did not have a significant impact on its consolidated
financial statements.
In December 2007, the
FASB issued SFAS No. 141 (R),
Business
Combinations
(Statement No. 141 (R)), which replaces SFAS No. 141,
Business Combinations
, and
requires an acquirer to recognize the assets acquired, the liabilities assumed
and any non-controlling interest in the acquiree at the acquisition date,
measured at their fair values as of that date, with limited exceptions.
Statement No. 141 (R) also requires the
10
Table of Contents
MEDAREX,
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars
in thousands, unless otherwise indicated, except per share data)
acquirer in a business combination achieved in stages to recognize the
identifiable assets and liabilities, as well as the non-controlling interest in
the acquiree, at the full amounts of their fair values. Statement No. 141 (R) makes
various other amendments to authoritative literature intended to provide
additional guidance or conform the guidance in that literature to that provided
in Statement No. 141 (R). Statement No. 141 (R) applies
prospectively to business combinations for which the acquisition date is on or
after the beginning of the first annual reporting period beginning on or after December 15,
2008. The adoption of Statement No. 141 (R) did not have a
significant impact on the Companys consolidated financial statements.
In December 2007, the
FASB issued SFAS No. 160,
Noncontrolling
Interests in Consolidated Financial Statements
(Statement No. 160),
which amends Accounting Research Bulletin No. 51,
Consolidated Financial Statements
, to
improve the relevance, comparability and transparency of the financial
information that a reporting entity provides in its consolidated financial
statements. Statement No. 160 establishes accounting and reporting
standards that require the ownership interests in subsidiaries not held by the
parent to be clearly identified, labeled and presented in the consolidated
statement of financial position within equity, but separate from the parents
equity. Statement No. 160 also requires the amount of consolidated net
income attributable to the parent and to the non-controlling interest to be
clearly identified and presented on the face of the consolidated statement of
operations. Changes in a parents ownership interest while the parent retains
its controlling financial interest must be accounted for consistently, and when
a subsidiary is deconsolidated, any retained non-controlling equity investment
in the former subsidiary must be initially measured at fair value. The gain or
loss on the deconsolidation of the subsidiary is measured using the fair value
of any non-controlling equity investment. Statement No. 160 also requires
entities to provide sufficient disclosures that clearly identify and
distinguish between the interests of the parent and the interests of the
non-controlling owners. Statement No. 160 applies prospectively to all
entities that prepare consolidated financial statements and applies
prospectively for all fiscal years, and interim periods within those fiscal
years, beginning on or after December 15, 2008. The Company adopted
Statement No. 160 effective January 1, 2009 and its adoption did not
have a significant impact on its consolidated financial statements.
In
November 2008, the FASB ratified the consensus reached in EITF Issue No. 08-6,
Equity Method Investment Accounting Considerations
(EITF
08-6). The equity method of accounting
is required for investments when the investor does not control an investee but
has the ability to exercise significant influence over its operating and
financial policies in accordance with APB Opinion No. 18,
The Equity Method of Accounting for Investments in Common Stock
. The EITF concluded that an equity method
investor shall recognize gains and losses in earnings for the issuance of
shares by the equity method investee, provided that the issuance of shares
qualifies as a sale of shares (and not a financing, as would be the case if the
shares were sold subject to a forward contract to repurchase the shares).
Prior
to the adoption of EITF 08-6, equity method investors followed the guidance of
Staff Accounting Bulletin No. 51,
Accounting for Sales of
Stock by a Subsidiary
(SAB No. 51), in accounting for the
issuance of shares by the equity method investee. SAB No. 51 precludes
gain recognition in certain situations (e.g. share issuance as part of a
broader corporate reorganization, situations where an entitys ability to exist
is in question, etc.) and otherwise permits a registrant to elect an accounting
policy of recognizing gains in the statement of operations or in equity. EITF 08-6 eliminated the SAB No. 51
exceptions to gain recognition and the accounting policy choice.
11
Table of Contents
MEDAREX,
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars
in thousands, unless otherwise indicated, except per share data)
The Company previously
accounted for sales of stock by a subsidiary in accordance with SAB No. 51
and accordingly, accounted for any gains as a component of equity as opposed to
including such gains in the statement of operations. With the adoption of EITF 08-6, any gains
arising out of sales of stock by a subsidiary will be included in the Companys
statement of operations.
In May 2008, the FASB
issued FASB Staff Position APB 14-1,
Accounting for Convertible
Debt Instruments That May Be Settled in Cash Upon Conversion
(FSP
APB 14-1). FSP APB 14-1 requires the
issuer of certain debt instruments that may be settled in cash (or other
assets) on conversion to separately account for the liability (debt) and equity
(conversion option) components of the instrument in a manner that reflects the
issuers nonconvertible debt borrowing rate.
FSP APB 14-1 is effective for financial statements issued for fiscal
years beginning after December 15, 2008 and requires retroactive
application to all periods presented and does not grandfather existing
instruments. The Company adopted FSP APB
14-1 effective January 1, 2009 and its adoption did not have any impact on
its consolidated financial statements.
Recently Issued and Adopted Accounting Pronouncements
At
its April 2009 Board meeting, the FASB issued the following:
·
Staff Position No. 115-2,
FAS 124-2 and EITF 99-20-2,
Recognition and
Presentation of Other-Than-Temporary Impairments
(FSP 115-2). FSP 115-2 provides new guidance on the
recognition of an Other Than Temporary Impairment and provides new disclosure
requirements. The recognition and
presentation provisions apply only to debt securities classified as available
for sale and held to maturity.
·
Proposed Staff
Position No. FAS 107-1 and APB 28-1,
Interim Disclosures about
Fair Value of Financial Instruments; An amendment of FASB Statement No 107
(FSP
107-1). FSP 107-1 extends the disclosure
requirements of FASB Statement No. 107,
Disclosures
about Fair Value of Financial Instruments
(Statement No. 107),
to interim financial statements of publicly traded companies. Statement No. 107 requires disclosures
of the fair value of all financial instruments (recognized or unrecognized),
when practicable to do so. These fair
value disclosures must be presented together with the carrying amount of the
financial instruments in a manner that clearly distinguishes between assets and
liabilities and indicates how the carrying amounts relate to amounts reported
on the balance sheet. An entity must
also disclose the methods and significant assumptions used to estimate the fair
value of the financial instruments.
·
FASB Staff
Position No. FAS 157-4,
Determining Fair Value
When the Volume and Level of Activity for the Asset or Liability has
Significantly Decreased and Identifying Transactions that are Not Orderly
(FSP
157-4). FSP 157-4 amends FASB Statement No. 157,
Fair Value Measurement
, to provide
additional guidance on estimating fair value when the volume and level of
activity for an asset or liability has significantly decreased in relation to
normal market activity for the asset or liability.
·
SFAS No. 165,
Subsequent Events
(Statement No. 165)
provides authoritative literature for a topic that was
previously addressed only in the accounting literature, AICPA AU Section 560,
Subsequent Events. Statement No. 165
resulted in three modifications to the guidance under AU
12
Table of Contents
MEDAREX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands, unless otherwise indicated, except per share
data)
Section 560: (i) the names of the two types of
subsequent events have been changed to
recognized
subsequent
events (currently referred to as Type I) and
nonrecognized
subsequent events (currently referred to as Type II), (ii) the
definition of subsequent events has been modified to refer to events or
transactions that occur after the balance sheet date, but before the issuance
of the financial statements; and (iii) establishing a requirement for all
entities to disclose the date through which the entity has evaluated subsequent
events.
The
Company adopted the above standards during the quarter ended June 30,
2009. The adoption of these accounting pronouncements did not have a
material impact on the consolidated financial statements.
In June 2009, the FASB
issued SFAS No. 168,
The FASB Accounting
Standards Codification and the Hierarchy of Generally Accepted Accounting
Principles
(Statement No. 168).
Statement No. 168 will become the source of authoritative U.S.
generally accepted accounting principles (GAAP) recognized by the FASB to be
applied by nongovernmental entities. Rules and
interpretive releases of the SEC under authority of federal securities laws are
also sources of authoritative GAAP for SEC registrants. On the effective date
of Statement No. 168, the Codification will supersede all then-existing
non-SEC accounting and reporting standards. All other non-grandfathered non-SEC
accounting literature not included in the Codification will become
non-authoritative. Statement No. 168 is effective for financial statements
issued for interim and annual periods ending after September 15,
2009. The Company does not expect the
adoption of Statement No. 168 to have an impact on the Companys results
of operations, financial condition or cash flows.
2.
Cash
and Available for Sale Investments
Cash
and available for sale investments consisted of the following as of June 30,
2009 and December 31, 2008:
|
|
As of
June 30, 2009
|
|
As of
December 31, 2008
|
|
|
|
Cost
|
|
Unrealized
Gain
|
|
Unrealized
Loss
|
|
Fair
Value
|
|
Cost
|
|
Unrealized
Gain
|
|
Unrealized
Loss
|
|
Fair
Value
|
|
Cash
Balances
|
|
$
|
22,397
|
|
$
|
|
|
$
|
|
|
$
|
22,397
|
|
$
|
1,981
|
|
$
|
|
|
$
|
|
|
$
|
1,981
|
|
Money
market funds
|
|
56,581
|
|
|
|
(2
|
)
|
56,579
|
|
70,496
|
|
11
|
|
(6
|
)
|
70,501
|
|
U.S.
Treasury Obligations
|
|
164,840
|
|
2,710
|
|
(4
|
)
|
167,546
|
|
130,714
|
|
3,373
|
|
|
|
134,087
|
|
U.S.
Corporate Debt Securities
|
|
66,646
|
|
666
|
|
(47
|
)
|
67,265
|
|
113,355
|
|
302
|
|
(1,562
|
)
|
112,095
|
|
Mortgage-Backed
Securities
|
|
29,448
|
|
530
|
|
(3,295
|
)
|
26,683
|
|
33,619
|
|
339
|
|
(3,180
|
)
|
30,778
|
|
Equity
Securities
|
|
9
|
|
169
|
|
|
|
178
|
|
6,779
|
|
|
|
(2,553
|
)
|
4,226
|
|
Equity
Securities Genmab
|
|
|
|
78,596
|
|
|
|
78,596
|
|
|
|
87,428
|
|
|
|
87,428
|
|
Equity
Securities Celldex Ther.
|
|
|
|
23,154
|
|
|
|
23,154
|
|
|
|
|
|
|
|
|
|
|
|
$
|
339,921
|
|
$
|
105,825
|
|
$
|
(3,348
|
)
|
$
|
442,398
|
|
$
|
356,944
|
|
$
|
91,453
|
|
$
|
(7,301
|
)
|
$
|
441,096
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Included
in cash and cash equivalents
|
|
$
|
78,978
|
|
$
|
|
|
$
|
(2
|
)
|
$
|
78,976
|
|
$
|
72,477
|
|
$
|
11
|
|
$
|
(6
|
)
|
$
|
72,482
|
|
Included
in marketable securities
|
|
260,943
|
|
105,825
|
|
(3,346
|
)
|
363,422
|
|
284,467
|
|
91,442
|
|
(7,295
|
)
|
368,614
|
|
Total
available for sale securities
|
|
$
|
339,921
|
|
$
|
105,825
|
|
$
|
(3,348
|
)
|
$
|
442,398
|
|
$
|
356,944
|
|
$
|
91,453
|
|
$
|
(7,301
|
)
|
$
|
441,096
|
|
13
Table of Contents
MEDAREX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars
in thousands, unless otherwise indicated, except per share data)
Approximately $0.2 million and $151.9
million was reclassified from other comprehensive income and recorded as a realized
gain for the six month period ended June 30, 2009 and the year ended December 31,
2008, respectively.
The Companys available for sale U.S.
Treasury Obligations and U.S. Corporate Debt Securities had the following
maturities at June 30, 2009:
Due in one year or less
|
|
$
|
110,218
|
|
Due after one year, less than five years
|
|
124,594
|
|
Due after five years
|
|
|
|
For the three month periods ended June 30,
2009 and 2008, realized gains totaled $14.5 million and $3.3 million,
respectively, and realized losses totaled $0 and $0.2 million,
respectively. For the six month periods
ended June 30, 2009 and 2008, realized gains totaled $14.5 million and
$155.2 million, respectively, and realized losses totaled $0.1 million and $0.2
million, respectively.
Unrealized loss positions related to
various debt securities for which other-than-temporary impairments have not
been recognized at June 30, 2009, is summarized as follows:
|
|
Fair
Value
|
|
Unrealized
Loss
|
|
Purchased and held less than one year
|
|
$
|
12,822
|
|
$
|
(48
|
)
|
Purchased and held greater than one year
|
|
$
|
17,975
|
|
$
|
(3,298
|
)
|
Unrealized
losses in the portfolio relate to various debt securities including U.S.
treasury obligations, asset backed securities and corporate bonds. The unrealized losses relating to debt
securities (primarily asset backed securities) were due to changes in interest
rates and perceived possible uncertainties regarding scheduled payments. The
Company has concluded that unrealized losses in its debt securities are not
other-than-temporary as the respective issuers have not defaulted on any
payments and Company has the ability to hold securities to maturity date or the
recovery period. There were no
unrealized losses related to equity securities as of June 30, 2009.
Estimated Fair Value of Financial Instruments
On
January 1, 2008, the Company adopted SFAS No. 157,
Fair Value Measurements
(Statement No. 157). Statement No. 157 defines and
establishes a framework for measuring fair value and expands disclosures about
fair value instruments. In accordance
with Statement No. 157, the Company has categorized its financial assets,
based on the priority of the inputs to the valuation technique, into a
three-level fair value
14
Table of
Contents
MEDAREX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands, unless otherwise
indicated, except per share data)
hierarchy
as set forth below. The Company does not
have any financial liabilities that are required to be measured at fair value
on a recurring basis. If the inputs used
to measure the financial instruments fall within different levels of the
hierarchy, the categorization is based on the lowest level input that is
significant to the fair value measurement of the instrument.
Financial
assets recorded on the consolidated balance sheets are categorized based on the
inputs to the valuation techniques as follows:
·
Level 1
Financial assets whose
values are based on unadjusted quoted prices for identical assets or
liabilities in an active market which the company has the ability to access at
the measurement date (examples include active exchange-traded equity securities
and most U.S. Government and agency securities).
·
Level 2
Financial assets whose
values are based on quoted market prices in markets where trading occurs
infrequently or whose values are based on quoted prices of instruments with
similar attributes in active markets.
·
Level 3
Financial assets whose
values are based on prices or valuation techniques that require inputs that are
both unobservable and significant to the overall fair value measurement. These inputs reflect managements own
assumptions about the assumptions a market participant would use in pricing the
asset. The Company does not currently
have any Level 3 financial assets.
A
summary of the fair value of the Companys financial assets (allocated by
Level) as of June 30, 2009 is as follows:
|
|
Level 1
|
|
Level 2
|
|
Total
|
|
Money Market Funds/Cash
|
|
$
|
78,976
|
|
$
|
|
|
$
|
78,976
|
|
U.S. Treasury Obligations
|
|
167,546
|
|
|
|
167,546
|
|
U.S. Corporate Debt Securities
|
|
|
|
67,265
|
|
67,265
|
|
Mortgage-Backed Securities
|
|
|
|
26,683
|
|
26,683
|
|
Equity Securities
|
|
178
|
|
|
|
178
|
|
Equity Securities - Genmab
|
|
78,596
|
|
|
|
78,596
|
|
Equity Securities Celldex Therapeutics
|
|
23,154
|
|
|
|
23,154
|
|
Total
|
|
$
|
348,450
|
|
$
|
93,948
|
|
$
|
442,398
|
|
3.
Investment in Celldex Therapeutics, Inc./AVANT Immunotherapeutics, Inc.
As
a result of a series of transactions, the Company owned an approximate 60%
interest in Celldex as of December 31, 2007.
On
March 7, 2008, AVANT Immunotherapeutics, Inc. and Celldex merged with
the combined company named AVANT Immunotherapeutics, Inc. (AVANT) which
traded under the NASDAQ ticker symbol AVAN through September 30, 2008.
Under
the terms of the merger agreement, Celldex shareholders received approximately
4.96 shares of AVANT common stock in exchange for each share of Celldex stock
they owned. In connection with the
merger, AVANTs board of directors approved a 1-for-12 reverse stock split of
AVANTs common stock which
15
Table of
Contents
MEDAREX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands, unless otherwise
indicated, except per share data)
became
effective on March 7, 2008. The
Company received a total of 5,312,539 shares of AVANT representing
approximately 35.6% of the total post-split outstanding shares of AVANT.
For
the period from January 1, 2008 through March 6, 2008, the Company
(as the majority shareholder) continued to record 100% of Celldexs losses
which amounted to approximately $2.3 million.
As a result of the merger
with AVANT and the corresponding reduction in the Companys ownership from
approximately 60% to approximately 35.6%, the Company ceased consolidating the
operations of Celldex as of March 6, 2008 and began to account for its
investment in AVANT under the equity method of accounting in accordance with
APB No. 18,
The Equity Method of Accounting for
Investments in Common Stock
(APB No. 18).
The Company recorded a
non-cash change in interest gain of approximately $14.3 million during the six
month period ended June 30, 2008 associated with the change from the
consolidation basis to the equity method of accounting. Because of the uncertainty surrounding the
ultimate realizability of the gain, the gain was recorded as an increase to
capital in excess of par value, a component of shareholders equity.
In
May 2008, AVANT sold 781,250 shares of its common stock to a corporate
partner in connection with a license and commercialization agreement. As a result of this sale of common stock, the
Companys ownership percentage in AVANT was reduced to approximately
33.8%. The difference between the
Companys proportionate share of the equity and the carrying value after
completion of AVANTs sale of stock to the corporate partner was approximately
$2.9 million and was accounted for in accordance with APB Opinion No. 18
and Staff Accounting Bulletin No. 51,
Accounting for Sales of
Stock by a Subsidiary
. This
transaction is reflected as an increase to capital in excess of par value in
the Companys consolidated financial statements as of June 30, 2008.
In June 2008, the
Company sold 351,691 shares of AVANT for $12.35 per share resulting in net
proceeds of approximately $4.3 million.
The Company realized a gain of approximately $3.3 million from this
transaction. As a result of this sale of
common stock, the Companys ownership percentage in AVANT was further reduced
to approximately 31.6%.
Pursuant to the Amended
Certificate of Incorporation approved by its stockholders in September 2008,
AVANT changed its name to Celldex Therapeutics, Inc. (Celldex
Therapeutics) and began trading under the symbol CLDX effective October 1,
2008. In October 2008, Celldex
Therapeutics issued 81,512 shares of its common stock in settlement of a
payable further reducing the Companys ownership percentage to approximately
31.4%.
On June 24, 2009, the
Company sold 2,000,000 shares of Celldex Therapeutics for $7.15 per share
resulting in net proceeds of approximately $14.3 million. The Company realized a gain of approximately
$14.3 million from this transaction. As
a result of this sale of common stock, the Companys ownership percentage in
Celldex Therapeutics was reduced to approximately 18.7%. As a result of the decrease in the Companys
ownership below 20%, on June 25, 2009 the Company began accounting for its
investment in Celldex Therapeutics as a marketable security in accordance with
SFAS No. 115. Accounting for the
Companys investment in Celldex Therapeutics as a marketable security in
accordance with SFAS No. 115 resulted in an unrealized gain of
approximately $23.2 million as of June 30, 2009. Such unrealized gain is also included
16
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MEDAREX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars
in thousands, unless otherwise indicated, except per share data)
within accumulated other comprehensive income
classified within shareholders equity in the June 30, 2009 consolidated
balance sheet.
As of June 30, 2009,
the Company had a receivable from Celldex Therapeutics of approximately $3.0
million which is included within prepaid expenses and other current assets in
the Companys June 30, 2009 consolidated balance sheet.
A member of the Companys
board of directors is also the chairman of the board of directors of Celldex
Therapeutics. As of June 30, 2009,
the market value of the Companys investment in Celldex Therapeutics was
approximately $23.2 million.
4.
Equity-Based Compensation
The
Companys equity awards are governed by its 2005 Equity Incentive Plan, as
amended (the Plan).
The purchase
price of stock options under the Plan is determined in accordance with the
Companys Equity Grant Policy as approved by the Board of Directors of the
Company. The term is fixed by the
Compensation and Organization Committee of the Board of Directors, but no
incentive stock option is exercisable after 10 years from the date of
grant. Stock options generally vest over
a four year period. As of June 30, 2009, a total of 8,928,979 shares were
available for future grants under the Plan.
Total stock based
compensation expense of approximately $4.7 million for the three month period
ended June 30, 2009 has been included in the consolidated statement of
operations within research and development expenses ($2.4 million) and general
and administrative expenses ($2.3 million).
Total stock based compensation expense of approximately $6.2 million for
the three month period ended June 30, 2008 has been included in the
consolidated statement of operations within research and development expenses
($2.6 million) and general and administrative expenses ($3.6 million).
Total stock based
compensation expense of approximately $9.6 million for the six month period
ended June 30, 2009 has been included in the consolidated statement of
operations within research and development expenses ($5.1 million) and general
and administrative expenses ($4.5 million).
Total stock based compensation expense of approximately $11.5 million
for the six month period ended June 30, 2008 has been included in the
consolidated statement of operations within research and development expenses
($4.6 million) and general and administrative expenses ($6.9 million).
The
following summarizes all stock option transactions for the Company under the
Plan for the period from January 1, 2009 through June 30, 2009.
17
Table of
Contents
MEDAREX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands, unless otherwise indicated, except per share
data)
|
|
Common
Stock
Options
|
|
Weighted
Average
Exercise Price
|
|
Weighted
Average
Remaining
Contractual
Life (years)
|
|
Aggregate
Intrinsic
Value
|
|
Outstanding
at January 1, 2009
|
|
17,730,125
|
|
$
|
10.08
|
|
|
|
|
|
Granted
|
|
3,102,830
|
|
$
|
3.76
|
|
|
|
|
|
Exercised
|
|
(27,215
|
)
|
$
|
5.32
|
|
|
|
|
|
Canceled
|
|
(157,809
|
)
|
$
|
9.68
|
|
|
|
|
|
Forfeited
|
|
(223,696
|
)
|
$
|
8.03
|
|
|
|
|
|
Outstanding
at June 30, 2009
|
|
20,424,235
|
|
$
|
9.15
|
|
6.1
years
|
|
$
|
27,122
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable
at end of period
|
|
13,699,723
|
|
$
|
9.71
|
|
4.8 years
|
|
$
|
13,005
|
|
|
|
|
|
|
|
|
|
|
|
Vested
and unvested expected to vest at
June 30, 2009
|
|
19,860,262
|
|
$
|
9.19
|
|
6.0 years
|
|
$
|
25,873
|
|
The
weighted-average grant-date fair value of options granted during the six month
periods ended June 30, 2009 and 2008 were $
2.68 and $6.48, respectively. The
aggregate intrinsic value of options exercised during these same periods was $0.2
million and $1.3 million,
respectively. The grant-date fair value
of shares which vested during the six month periods ended June 30, 2009
and 2008 was $13.5 million and $9.9 million, respectively. Cash proceeds from stock options exercised
during the six month periods ended June 30, 2009 and 2008 totaled $0.1 million and $2.2 million, respectively.
The
fair value of each option grant is estimated using the Black-Scholes option
pricing method. The fair value is then
amortized on a straight-line basis over the requisite service periods of the
awards, which is generally the vesting period (generally 4 years). Use of a valuation model requires management
to make certain assumptions with respect to selected model inputs.
To estimate the grant date
fair value, option pricing models require the use of estimates and assumptions
as to (i) the expected term of the option, (ii) the expected
volatility of the price of the underlying stock, (iii) the risk free
interest rate for the expected term of the option and (iv) pre-vesting
forfeiture rates. The expected term of the option is based upon the contractual
term, taking into account expected employee exercise and expected post-vesting
termination behavior. The expected volatility of the price of the underlying
stock is based on the historical volatility of the Companys common stock. The
risk free interest rate is based on U.S. Treasury zero-coupon issues with a
remaining term equal to the expected life assumed on the date of grant.
Pre-vesting forfeiture rates are estimated based on past voluntary termination
behavior, as well as an analysis of actual option forfeitures. The following
table sets forth the assumptions used to calculate the fair value of options
granted for the three and six month periods ended June 30, 2009 and 2008:
18
Table of
Contents
MEDAREX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands, unless otherwise indicated, except per share
data)
|
|
Three Months Ended
June 30,
|
|
Six Months
Ended
June 30,
|
|
|
|
2009
|
|
2008
|
|
2009
|
|
2008
|
|
Expected stock price volatility
|
|
81.5%-81.8%
|
|
81.8%
|
|
80.1%-81.8%
|
|
81.5%-81.9%
|
|
Weighted average expected volatility
|
|
81.6%
|
|
81.9%
|
|
81.7%
|
|
81.5%
|
|
Risk-free interest rate
|
|
2.03%-2.57%
|
|
3.32%
|
|
1.66%-2.57%
|
|
2.57%-3.50%
|
|
Expected life of options (years)
|
|
6.3
|
|
6.4
|
|
6.4
|
|
6.4
|
|
Expected dividend yield
|
|
0%
|
|
0%
|
|
0%
|
|
0%
|
|
As
of June 30, 2009, the total unrecognized compensation cost related to
non-vested stock options was approximately $
28.2 million. This cost is expected to
be recognized over a weighted average period of 2.2 years.
A
summary of the Companys non-vested restricted stock as of June 30, 2009
and changes during the six month period ended June 30, 2009 is as follows:
Non-Vested Restricted Stock
|
|
Number of Awards
|
|
Non-vested as of January 1, 2009
|
|
376,333
|
|
Granted
|
|
|
|
Vested
|
|
(124,167
|
)
|
Cancelled
|
|
(5,000
|
)
|
Non-vested as of June 30, 2009
|
|
247,166
|
|
Deferred Compensation
The Company maintains
deferred compensation programs, under which each of the Companys executive
officers may elect to have a portion of their bonuses, which were otherwise
payable in cash, converted to restricted stock units representing shares of the
Companys common stock. Participants in the deferred compensation programs can
elect to defer up to 100% of their respective bonuses. The number of restricted
stock units awarded upon such conversion is determined by dividing (i) the
amount of the bonus to be converted by (ii) the fair market value of the
Companys common stock on the grant date. Participants in the deferred
compensation programs elect to defer receipt of these restricted stock units
until at least the earlier of three years from the grant date or the
participants termination from the Company. The bonus portion deferred by each
participant was matched by the Company at 25%, for deferrals related to 2008
bonuses, and 100% for deferrals related to bonuses prior to 2008. The Company match related to the 2008 bonus
deferrals vests ratably on the first, second and third anniversaries of the
grant date. For deferrals prior to 2008,
25% of the match vested on the grant date, with an additional 25% vesting on
each anniversary of the grant date for the next three years. All benefits under
each of the deferred compensation programs are distributed in a single payment
and will be paid exclusively in the form of shares of the Companys common
stock. The Companys matching contribution was approximately $0.2 million and
$0.2 million for the three month periods ended June 30, 2009 and 2008,
respectively, and $0.4 million and $0.3 million for the six month periods ended
June 30, 2009 and 2008, respectively.
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MEDAREX,
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars
in thousands, unless otherwise indicated, except per share data)
A summary of the Companys
non-vested restricted stock units as of June 30, 2009 and changes during
the six month period ended June 30, 2009 is as follows:
Non-Vested Restricted Stock
Units
|
|
Number of Units
|
|
Non-vested as of January 1, 2009
|
|
258,013
|
|
Granted
|
|
557,643
|
|
Vested
|
|
(292,846
|
)
|
Forfeited
|
|
(11,667
|
)
|
Non-vested as of June 30, 2009
|
|
511,143
|
|
5. Investments in Genmab
The
Company accounts for its investment in Genmab A/S (Genmab) in accordance with
Statement of Financial Accounting Standards (SFAS) No. 115,
Accounting for Certain Investments in Debt and Equity
Securities
.
As a result of a series of
transactions, including an initial public offering by Genmab of its ordinary
shares in October 2000, the Company owned an approximate 10.8% interest in
Genmab as of December 31, 2007.
On February 1, 2008,
the Company completed the sale of 2,500,000 shares of Genmab through a block
trade. The Company received net proceeds of approximately $151.8 million from
such block trade. As a result of this transaction, the Companys ownership
percentage in Genmab was reduced to approximately 5.1%.
As of June 30, 2009,
the market value of the Companys investment in Genmab was approximately $78.6
million.
6.
Collaboration
Agreements
Bristol-Myers
Squibb Collaboration
In January 2005, the Company entered
into a collaboration and co-promotion agreement and a related securities
purchase agreement with Bristol-Myers Squibb Company (BMS), pursuant to which
the Company and BMS each granted the other certain intellectual property
licenses and product rights on a worldwide basis to enable the parties to
collaborate in research and development of certain antibody-based product
candidates for the treatment of cancer and other diseases, and, in the event
that further development work is successful, to commercialize any resulting
products. In particular, the collaboration includes a grant by the Company to
BMS of a license to commercialize ipilimumab, a fully human antibody product
developed using the Companys UltiMAb
®
technology, that is antagonistic to cytotoxic
T-lymphocyte antigen 4 (CTLA-4). Ipilimumab is currently under investigation
for the treatment of a broad range of cancers and other diseases.
As part of the collaboration, BMS is responsible
for 65% of all development costs related to clinical trials intended to support
regulatory approval in both the United States and the European Union, with the
remaining 35% to be paid by the Company. The parties will share equally the
costs of any clinical trials of products intended solely for regulatory
approval in the United States, and BMS will be fully responsible for all
20
Table of Contents
MEDAREX,
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars
in thousands, unless otherwise indicated, except per share data)
development efforts that relate solely to
regulatory approval in the European Union and other parts of the world.
Approximately $
2.6 million and $3.2
million of the Companys revenue for the three month periods ended June 30,
2009 and 2008, respectively, and approximately $4.7 million and $6.6 million of
the Companys revenue for the six month periods ended June 30, 2009 and
2008, respectively,
represented
the reimbursement of 65% of the Companys costs associated with the development
of ipilimumab recorded in accordance with EITF 99-19. The Companys share of the BMS development
costs for the three month periods ended June 30, 2009 and 2008 was
approximately $
11.1 million and $6.7
million, respectively
,
and the Companys share of BMS development costs for the six month periods
ended June 30, 2009 and 2008 was approximately $
20.3
million and $13.1 million, respectively.
Under
the terms of the collaboration, the Company has the option to co-promote any
product in the U.S. If the Company exercises a co-promotion option with
respect to a product for use in
the first cancer indication for which an
initial regulatory approval filing is accepted by the U.S. Food and Drug Administration (FDA),
the Company will have the right and obligation to co-promote such product for
use in all cancer indications, even if such indications are the subject of
additional filings or approvals, and even if the Company opted-out of the
development of any such indication. Even if the Company elects to co-promote a product for cancer
indications, however, the
Company would need to exercise a
separate option to
co-promote that product with respect to any indication other than cancer. If the Company does not
exercise its co-promotion option with respect to a product for use in the first cancer indication for which an initial regulatory approval
filing is accepted by the
FDA, then the Company will not have the right or obligation to
co-promote such product for any cancer indications, unless the filing for that first cancer indication is not
approved by the FDA.
Under
the terms of the collaboration, the Company could receive up to $205.0 million
from BMS if all regulatory milestones are met, plus up to an additional $275.0
million in sales-related milestones. In addition,
if
the Company exercises its co-promotion option with respect to ipilimumab for
the metastatic melanoma indication, and regulatory approval is obtained, the
Company would receive 45% of any profits and bear 45% of all losses from
commercial sales of such product in the U.S.
In the event the Company chooses not to exercise its co-promotion rights
with respect to a product, BMS will have exclusive commercial rights in the
U.S. and will pay the Company royalties on commercial sales. Regardless of
whether or not the Company exercises its co-promotion option outside the U.S.,
BMS will have exclusive commercial rights for products and will pay the Company
royalties on commercial sales.
As part of the collaboration, BMS made a cash
payment to the Company on January 21, 2005 of $25.0 million and also
purchased 2,879,223 shares of the Companys common stock at a purchase price
equal to $8.6829 per share for an aggregate purchase price of $25.0 million.
The Company determined that all elements under
the collaboration and co-promotion agreement should be accounted for as a
single unit of accounting under EITF 00-21,
Accounting
for Revenue Arrangements with Multiple Deliverables
(EITF 00-21).
In accordance with SAB No. 104 (Topic 13,
Revenue
Recognition
), deferral of revenue
is appropriate regarding nonrefundable, upfront fees received in single unit of
accounting arrangements. As the Company has continuing obligations under
the collaboration and co-promotion agreement, and as significant development
risk remains, the Company recorded the $25.0 million upfront fee as deferred
revenue and the Company is recognizing this amount over the enforceable term of
the technology sublicensed to BMS under the collaboration and co-promotion
agreement of approximately 11 years, as well as the technology and know-how to
be delivered in connection therewith.
21
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MEDAREX,
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars
in thousands, unless otherwise indicated, except per share data)
The BMS collaboration became effective in
January 2005, and unless terminated earlier, will continue with respect to
each product until the expiration of the last profit sharing or royalty
obligation with respect to such product.
BMS, however, may terminate the collaboration under certain conditions,
in its entirety, on a country-by-country basis or on a product-by-product
basis, resulting in the return of all rights to Medarex with respect to such
country and/or product. In addition,
either party may terminate the other partys co-promotion rights in the U.S. in
the event that such other party fails to satisfy certain performance
criteria. Either party may terminate the
collaboration in the event of certain specified material breaches by the other
party.
Merck License Agreement
On
April 20, 2009 Merck & Co., Inc. (Merck), Medarex and
Massachusetts Biologic Laboratories (MBL) announced that they had signed an
exclusive worldwide license agreement for MDX-066/MDX-1388, an investigational
fully human monoclonal antibody combination developed to target and neutralize
Clostridium difficile
toxins A and B, for use with respect
to
C. difficile
infection. MDX-066 and MDX-1388 were co-developed by the
Company and MBL.
Under
the terms of the agreement, Merck gains worldwide rights to develop and
commercialize MDX-066 and MDX-1388. The
Company and MBL each received an upfront payment of $30.0 million and are
potentially eligible to each receive additional cash payments up to $82.5 million
upon the achievement of certain events associated with the development and
approval of a drug candidate covered by the license agreement.
These payments are dependent upon completion of
certain clinical and regulatory milestones as defined in the Merck License
Agreement. There can be no assurance
that these clinical and regulatory achievements will be met and therefore there
can be no assurance that the Company will receive such future payments.
Upon commercialization, the Company and MBL
will also be eligible to receive double digit royalties on product sales and
milestone payments if certain sales targets are met. In accordance with the pre-existing
collaboration agreement between the Company and MBL, all payments will be
divided equally.
The Company determined that all elements
under the Merck License Agreement should be accounted for as a single unit of
accounting under EITF 00-21. Accordingly
deferral of revenue is appropriate regarding nonrefundable upfront fees
received in single unit of accounting arrangements. Due to the Companys continuing obligations
under the Merck License Agreement, the Company has recorded the $30.0 million
nonrefundable payment as deferred revenue.
The Company is not currently able to determine the obligation period
under the Merck License Agreement. The
Company will continue to defer the revenue from the upfront fee until the
Company can determine the obligation period.
7
.
Contingencies
Kirin Collaboration
In 2002, the Company entered into a
collaboration and license agreement with Kirin Brewery Co., Ltd. (Kirin)
which cross-licenses certain of the Companys and Kirins technologies for the
development and commercialization of human antibody products. Under the
collaboration and license agreement, the Company and Kirin developed the
KM-Mouse
®
, a unique crossbred mouse which combines the
traits of the Companys
22
Table of Contents
MEDAREX,
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars
in thousands, unless otherwise indicated, except per share data)
HuMAb-Mouse
®
with Kirins TC Mouse
and exchanged cross-licenses with respect to
the KM-Mouse and other antibody-generating mice. In addition, each of the
cross-licenses granted under the collaboration and license agreement are
subject to certain license, milestone and royalty payments by each party to the
other.
Through June 30, 2009, the Company
has not made any milestone payments to Kirin. However, approximately $3.0
million has been paid to Kirin through June 30, 2009 primarily
representing a payment due Kirin as a result of the Companys collaboration
with Pfizer, Inc. Based on products the Company is developing, which use
or the Company believes may use Kirin technology and that (i) are
currently in clinical trials, or (ii) the Company anticipates may enter
clinical trials by the end of 2010, the Company may be required to make
milestone payments to Kirin aggregating up to approximately $4.25 million per
product with respect to such products. The Companys future milestone payment
obligations to Kirin may or may not be triggered, and may vary in size,
depending on a number of variables, almost all of which are currently unknown,
including the following:
·
whether or not a decision is made to
request a license from Kirin;
·
the type of license requested (research
or commercial);
·
the success and timing of development
efforts and clinical trials of product candidates covered by any such licenses;
·
the type of product developed (payment obligations differ depending
on whether a product is an
ex vivo
therapeutic,
in vivo
therapeutic,
research reagent or diagnostic);
and
·
other financial provisions of the Kirin
agreement that provide for variations in fee levels and netting of certain
payments over specified periods of time that may impact the total amount
potentially payable to Kirin for any particular license fee or milestone
payment.
Whether the Company may be obligated to make
milestone payments to Kirin in the future is subject to the success of its
efforts with respect to products the Company or its partners are developing
that utilize the Kirin technology and, accordingly, is inherently uncertain.
Unless terminated earlier, the collaboration and
license agreement expires on December 31, 2014. The collaboration and
license agreement can be terminated by either party in the event of a material
breach by the other party if the breach is not cured during a specified cure
period. In addition, either party may terminate any commercial license with
respect to a specific biologic target granted to it by the other party under
the agreement at any time.
Other Contingent Arrangements
The Company has entered into a number of
other agreements that contain in-licenses of third-party technology (in
addition to Kirin) which may be used together with the Companys own platform
technologies for the generation, development and/or manufacture of its antibody
products. In addition, the Company has entered into other third-party
agreements that contain in-licenses associated with antibody products that
target specific antigens. Many of these agreements contain milestones payments
that are due with respect to products using/targeting the licensed
technology/antigen only if and when certain specified pre-commercialization
events occur. Not all of the Companys products currently under development
trigger such milestone payments. Through June 30, 2009, the Company has
made milestone payments under these agreements of approximately $2.2 million.
In addition, under the agreements the Company currently has in place (other
than with Kirin),
23
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MEDAREX,
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars
in thousands, unless otherwise indicated, except per share data)
based on a total of ten products the Company
is developing for which milestones are potentially due and that (i) are
now in clinical trials or (ii) which the Company anticipates may enter
clinical trials before the end of 2010, the Company may be obligated to make
future milestone payments aggregating up to approximately $57.5 million with
respect to such products. In general, potential milestone payments for antibody
product candidates may or may not be triggered under these licenses, and may
vary in size, depending on a number of variables, almost all of which are
currently uncertain. Typically, the events that trigger these milestone
payments per product include:
·
submission of IND(s) or foreign
equivalents;
·
commencement of Phase 1, Phase 2 and/or
Phase 3 clinical trials or foreign equivalents;
·
submission of BLA(s) or foreign
equivalents; and
·
receipt of marketing approval(s) to
sell products in a particular country or region.
In addition, the licenses
above may trigger royalty payments in connection with the commercialization of
certain of the Companys products. Whether the Company will be obligated to
make milestone or royalty payments in the future is subject to the success of
its product development efforts and, accordingly, is inherently uncertain.
Stock Option Grant Practices
The
SEC is conducting an informal inquiry into the Companys historical stock
option granting practices and related accounting and disclosures. In addition, the United States Attorneys
Office for the District of New Jersey is conducting a grand jury investigation
relating to the same matters. At the
conclusion of the SECs informal inquiry and the U.S. Attorneys Office investigation,
the Company could be subject to criminal or civil charges and fines or
penalties or other contingent liabilities; however, no outcome is determinable
at this time.
The
Company is unable to reasonably estimate any possible range of loss or liability
associated with the stock option inquiry due to its uncertain resolution.
In
conjunction with the review of the Companys stock option grant practices, the
Company has also evaluated the related tax issues to determine if the Company
may be subject to additional tax liability as a result of the matters under
review. In addition, due to revision of
measurement dates, certain stock options that were previously treated as
incentive stock options may not actually qualify for such treatment and may be
treated as non-statutory stock options.
Accordingly, the Company may be subject to fines, penalties or both
relating to the tax treatment of such stock options. While the Company believes that its accrual
for additional tax liabilities associated with the matters under review is
appropriate under the circumstances, it is possible that additional liabilities
exist and the amount of such additional liabilities could be material.
Legal Proceedings
In
the ordinary course of its business, the Company is at times subject to various
legal proceedings. The Company does not
believe that any of the currently pending ordinary course legal proceedings,
individually or in the aggregate, will have a material adverse effect on its
operations or financial condition.
24
Table of
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MEDAREX,
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars
in thousands, unless otherwise indicated, except per share data)
8.
Comprehensive Income (Loss)
Comprehensive income (loss)
is comprised of net income (loss) and other comprehensive income (loss). Other
comprehensive income (loss) includes changes in the fair value of the Companys
marketable securities and foreign exchange translation adjustments. The
following table sets forth the components of comprehensive income (loss):
|
|
Three Months
Ended
June 30,
|
|
Six Months
Ended
June 30,
|
|
|
|
2009
|
|
2008
|
|
2009
|
|
2008
|
|
Net income (loss)
|
|
$
|
(29,247
|
)
|
$
|
(53,099
|
)
|
$
|
(77,850
|
)
|
$
|
50,213
|
|
Unrealized gain (loss) on securities
|
|
19,665
|
|
(31,544
|
)
|
18,326
|
|
(50,156
|
)
|
Unrealized loss on foreign exchange
|
|
|
|
|
|
|
|
(2,572
|
)
|
Total comprehensive loss
|
|
$
|
(9,582
|
)
|
$
|
(84,643
|
)
|
$
|
(59,524
|
)
|
$
|
(2,515
|
)
|
9.
Segment Information
The Company is an integrated
monoclonal antibody-based company with antibody discovery, development and
clinical manufacturing capabilities. The operations of the Company and its
subsidiaries constitute one business segment.
Revenue from partners
representing 10% or more of total revenues is as follows:
|
|
Three Months
Ended
June 30,
|
|
Six Months
Ended
June 30,
|
|
Partner
|
|
2009
|
|
2008
|
|
2009
|
|
2008
|
|
Bristol-Myers Squibb
|
|
18
|
%
|
40
|
%
|
21
|
%
|
38
|
%
|
Centocor
|
|
32
|
%
|
|
%
|
21
|
%
|
|
%
|
Novartis
|
|
16
|
%
|
2
|
%
|
11
|
%
|
2
|
%
|
Pfizer
|
|
15
|
%
|
28
|
%
|
20
|
%
|
26
|
%
|
10.
Subsequent Events
BMS Merger Agreement
On
July 22, 2009, BMS and the Company announced that the companies have
signed a definitive merger agreement providing for the acquisition of the
Company by BMS for $16.00 per share in cash.
The transaction has been approved by the boards of directors of both
companies.
Under
the terms of the definitive merger agreement, BMS commenced a cash tender offer
on July 28, 2009 to purchase all of the outstanding shares of the Company
for $16.00 per share in cash. The
closing of the
25
Table of
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MEDAREX,
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars
in thousands, unless otherwise indicated, except per share data)
tender
offer is subject to customary terms and conditions, including the tender of a
number of shares that, together with the number of shares already owned by BMS,
constitutes at least a majority of the Companys outstanding shares of common
stock (on a fully diluted basis) and expiration or termination of the waiting
period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976. The
merger agreement also provides that, in connection with the termination of the
merger agreement under specified circumstances involving competing transactions
or a change in the Companys Board of Directors recommendation, then the
Company may be required to pay BMS a termination fee of $70.80 million,
representing 2.95% of the aggregate offer price.
Litigation
On
July 22, 2009, the Company and Bristol-Myers Squibb Company (BMS)
announced the signing of a merger agreement providing for the acquisition of the
Company by BMS, through a tender offer, for $16.00 per share in cash. Following that announcement, certain Company
shareholders filed similar lawsuits relating to this transaction against the
Company, the members of the Companys board of directors, and BMS. Those lawsuits include:
Blevins v. Medarex, Inc.
et al.
, U.S. District Court, District of New Jersey, Case No. 3:09-cv-03778-AET-DEA
(filed July 30, 2009);
Blumberg v. Pien et al.
,
U.S. District Court, District of New Jersey, Case No. 3:09-cv-03615-AET-DEA
(filed July 23, 2009);
Dessoye v. Pien et al.
,
Superior Court of New Jersey, Law Division, Mercer County, (filed July 29,
2009);
Gordon v. Medarex, Inc. et al.
,
Superior Court of New Jersey, Chancery Division, Mercer County, Docket No. C-73-09
(filed July 24, 2009);
Halegoua v. Medarex, Inc.
et al.
, Superior Court of New Jersey, Chancery Division, Mercer
County, Docket No. C-72-09 (filed July 23, 2009);
Halegoua v. Medarex, Inc. et al.,
U.S. District Court of New
Jersey, Case No. 3:09-cv-03824-FLW-DEA (filed July 31, 2009);
Hersh v. Pien et al.
, Superior Court of New Jersey, Chancery
Division, Mercer County, Docket No. C-71-09 (filed July 23, 2009);
Jerjian v. Pien et al.
, Superior Court of New Jersey,
Chancery Division, Mercer County (filed July 23, 2009);
Roelofsz v. Pien et al.
, Superior Court of New Jersey,
Chancery Division, Mercer County;
Sargent v. Pien et al.
,
Superior Court of New Jersey, Law Division, Middlesex County, Docket No. L-6438-09
(filed July 28, 2009); and
Roth v. Rubin et al.
,
Superior Court of New Jersey, Chancery Division, Mercer County, Docket No. C-75-09
(filed July 24, 2009).
The plaintiffs in these cases generally assert that
the Companys directors breached fiduciary duties owed to shareholders. The plaintiffs generally allege that the
price offered by BMS in the tender offer is inadequate, and that the Companys
directors did not take sufficient steps to maximize shareholder value in
connection with the decision to enter into an agreement with BMS. The plaintiffs allege that the Company and
BMS aided and abetted the purported breaches of fiduciary duties by the
directors. In addition, the plaintiff in
the federal version of the
Halegoua
lawsuit asserts a similar claim based on Section 14(e) of the
Securities Exchange Act of 1934. These
complaints seek to enjoin the proposed tender offer, in addition to seeking
other relief. The Company believes the plaintiffs claims lack
merit, and intends to defend these cases vigorously.
The Company has evaluated all subsequent events and
transactions through July 31, 2009.
26
Table of
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Item 2. Managements Discussion and
Analysis of Financial Condition and Results of Operations
Certain statements made in this Quarterly Report on Form 10-Q are forward-looking
statements that are subject to risks and uncertainties that may cause our
actual results, performance or achievements to be materially different from any
future results, performance or achievements expressed or implied by these
forward-looking statements. Forward-looking statements include information
concerning our future financial performance, business strategy, plans, goals
and objectives. Statements preceded by, followed by or that otherwise include
the words believes, expects, anticipates, intends, estimates, plans,
forecasts, is likely to, projected and similar expressions or future
conditional verbs such as should, would, may, and could are generally
forward-looking in nature and not historical facts. You should not place undue
reliance on any such forward-looking statements as such statements speak only
as of the date on which they are made, and we undertake no duty to update them to reflect changes that occur
after the date they are made.
Overview
We
are a biopharmaceutical company focused on the discovery, development and
commercialization of fully human antibody-based therapeutic products to address
major unmet healthcare needs in the areas of oncology, inflammation, autoimmune
disorders and infectious diseases. We and our partners are developing fully
human antibody therapeutics for a wide range of diseases through the use of our
UltiMAb® technology platform for generating antibodies. In addition, we have
enhanced our core UltiMAb® platform with a suite of technologies that optimize
or augment the therapeutic activity of antibodies, including one important
technology expansion for developing antibodies that can deliver a cytotoxic
agent to disease sites, which is our proprietary Antibody-Drug Conjugate, or
ADC, technology platform.
Our
UltiMAb® and ADC technologies provide the foundation for our pipeline of
innovative antibody-based therapeutics. Through the application of our
technology platform assets, we are advancing a strong portfolio of strategic assetsthose
antibody-based product candidates with direct commercial opportunity for
Medarexthrough research, manufacturing and clinical development (the Strategic
Assets). Our Strategic Assets provide us with the strategic options to either
retain full economic rights to innovative antibody therapeutics or seek
favorable economic terms through advantageous commercial partnerships. The most
advanced of our Strategic Assets are in Phase 3 or Phase 2 clinical trials.
Beyond
our Strategic Assets, a number of fully human antibody product candidates have
been generated from Medarex technology and are being developed separately by
licensing partners, including companies such as Amgen, Inc., Bristol-Myers
Squibb Company, Centocor, Inc., Eli Lilly and Company, Genmab A/S, ImClone
Systems Incorporated, MedImmune, Inc., Novartis Pharma AG and Pfizer Inc.
(the Financial Assets). In general, the Financial Assets potentially generate
development milestone payments and royalties upon commercialization. The most
advanced of these products have received marketing approval or are the subject
of regulatory applications for marketing authorization.
Our
product development efforts, including those of our licensing partners, cover a
wide range of medical conditions. The following table summarizes potential
therapeutic indications and development stages for our most advanced Strategic
Assets (the antibody products in which Medarex has direct commercial
opportunity).
27
Table of
Contents
PRODUCT
|
|
INDICATION
|
|
CLINICAL STATUS
|
|
PARTNER/LICENSEE
|
ipilimumab
(anti-CTLA-4)
|
|
Melanoma and other Cancers
|
|
Phase 3 and earlier
|
|
Co-developing with BMS
|
|
|
|
|
|
|
|
MDX-1100
(anti-IP10)
|
|
Ulcerative Colitis,
Rheumatoid Arthritis
|
|
Phase 2
|
|
Wholly-owned
|
|
|
|
|
|
|
|
MDX-1342
(anti-CD19)
|
|
Chronic Lymphocytic
Leukemia,Rheumatoid Arthritis
|
|
Phase 1
|
|
Wholly-owned
|
|
|
|
|
|
|
|
MDX-1106
(anti-PD-1)
|
|
Cancer, Hepatitis C
|
|
Phase 1
|
|
Co-developing with Ono
Pharmaceutical Co. Ltd.
|
|
|
|
|
|
|
|
MDX-1203
(anti-CD70 ADC)
|
|
Cancer
|
|
Phase 1
|
|
Wholly-owned
|
In addition, we are currently engaging in
preclinical and research activities with respect to a number of additional
product candidates.
A
portion of our revenue is derived from licensing our fully human antibody
technology to pharmaceutical and biotechnology companies. The terms of these
license agreements typically include potential license fees and a series of
potential milestone payments commencing upon the initiation of clinical trials
and continuing through commercialization. In general, we are also entitled to
receive royalties on product sales. Additional revenue may be earned from the
sales to, and in some cases, the manufacturing of antibodies for, our partners,
as well as from government grants.
Our most significant costs on an annual basis are
research and development expenses and general and administrative expenses.
Research and development expenses represent those costs that support the advancement
of our product pipeline and primarily consist of personnel costs, facilities
(including depreciation), research and laboratory supplies, funding of outside
research, license and technology access fees, expenses related to antibody
manufacturing and clinical trial expenses. We believe that continued investment
in research and development is critical to attaining our strategic objectives.
General and administrative expenses consist primarily of personnel expenses for
executive, finance, legal and administrative personnel, professional fees and
other general corporate expenses. We may be required to add personnel in the
future and incur additional costs as we expand our business activities.
We have a history of operating losses and may not
achieve profitability. As of June 30, 2009, we had an accumulated deficit
of approximately $1.1 billion. Over the next several years, we expect to incur
substantial expenses as we continue to identify, develop and manufacture our
potential products, invest in research, move forward with our product
development and prepare to commercialize our product(s). Our commitment of
resources to research and the continued development and potential
commercialization of our product candidates will require substantial additional
funds. Our operating expenses may also increase as we invest in research or
acquire additional technologies, as additional potential product candidates are
selected for clinical development and as some of our earlier stage product
candidates move into later stage clinical development. In addition, we may
incur significant milestone payment obligations as our products progress
towards commercialization. In the absence of substantial revenues from new
corporate collaborations or other sources, we will incur substantial operating
losses and may be required to raise additional funds through debt or equity
financings or sales of
28
Table of Contents
stock
of partners in which we have an equity ownership or delay, reduce or eliminate
certain of our research and development programs.
Recent Events
On
July 22, 2009, BMS and us announced that the companies have signed a
definitive merger agreement providing for the acquisition of us by BMS for
$16.00 per share in cash. The
transaction has been unanimously approved by the board of directors of both
companies.
Under the terms of the definitive merger agreement,
BMS commenced a cash tender offer on July 28, 2009 to purchase all of our
outstanding shares for $16.00 per share in cash. The closing of the tender offer is subject to
customary terms and conditions, including the tender of a number of shares
that, together with the number of shares already owned by BMS, constitutes at
least a majority of our outstanding shares of common stock (on a fully diluted
basis) and expiration or termination of the waiting period under the
Hart-Scott-Rodino Antitrust Improvements Act of 1976.
Critical Accounting Policies
The methods, estimates and judgments we use in
applying our most critical accounting policies have a significant impact on the
results we report in our consolidated financial statements. We evaluate our
estimates and judgments on an on-going basis. We base our estimates on
historical experience and on assumptions that we believe to be reasonable under
the circumstances. Our experience and assumptions form the basis for our
judgments about the carrying value of assets and liabilities that are not readily
apparent from other sources. Actual results may vary from what we anticipate
and different assumptions or estimates about the future could materially change
our reported results. We believe the following accounting policies are the most
critical to us, in that they are important to the portrayal of our financial
statements and they require our most difficult, subjective or complex judgments
in the preparation of our consolidated financial statements.
Revenue Recognition
We receive payments from our customers and partners
for the sale of antibodies, for licenses to our proprietary technology, for
product development services and from the achievement of product development
milestones. These payments are generally non-refundable and are reported as deferred
revenue until they are recognizable as revenue. We follow the following
principles in recognizing revenue:
·
We receive
research fees from the licensing of our proprietary technologies for research
and development performed by our customers and partners. Revenue from these
research fees is recognized generally on a straight-line basis over the term of
the respective license period beginning only after both the license period has
begun and the technology has been delivered.
·
We receive fees
for product development services (including manufacturing) we perform for our
customers and partners. These fees are recognized ratably over the entire
period during which the services are performed.
·
Revenue from
milestone payments is recognized when each milestone is achieved, when
collectibility of such milestone payment is assured and we have no future
performance obligations relating to that event. Milestone payments are
triggered either by the results of our research efforts or by the efforts of
our partners and include such events as submission of an IND, commencement of
Phase 1, 2 or 3
29
Table of
Contents
clinical
trials, submission of a BLA, and regulatory approval of a product. Milestone
payments are substantially at risk at the inception of an agreement.
·
Revenue arrangements that include
multiple deliverables are divided into separate units of accounting if the
deliverables meet certain criteria, including whether the fair value of the
delivered items can be determined and whether there is evidence of fair value
of the undelivered items. In addition, the consideration is allocated among the
separate units of accounting based on their relative fair values, and the
applicable revenue recognition criteria are considered separately for each of
the separate units of accounting.
·
Revenues
derived from reimbursements of costs associated with the development of product
candidates are recorded in compliance with EITF Issue 99-19,
Reporting Revenue Gross as a Principal Versus Net as an Agent
(EITF 99-19). According to the
criteria established by EITF 99-19, in transactions where we act as a
principal, with discretion to choose suppliers, bear the credit risk and
perform part of the services required in the transaction, we believe we have
met the criteria to record revenue for the gross amount of the reimbursements.
·
We sell
antibodies primarily to partners in the United States and overseas. Revenue
from these sales is recognized when the antibodies are shipped and we have no
further obligations related to the development of the antibodies.
·
Grant revenues
are recognized as we provide the services stipulated in the underlying grant
based on the time and materials incurred. Amounts received in advance of
services provided are recorded as deferred revenue and amortized as revenue
when the services are provided.
Investments
Our investment policy calls for investments in fixed
income high grade securities such as U.S. corporate debt securities, U.S.
treasury obligations and money market funds for which we believe there is not a
significant risk of loss. Our primary objectives for our investment portfolio
are liquidity and safety of principal. Investments are made to achieve the
highest rate of return consistent with these two objectives. However, in the
course of our business, we have made and may continue to make investments in
companies (both public and private) as part of our strategic collaborations.
Investments in companies whose securities are publicly traded (other than
Genmab) are classified as marketable securities on our consolidated balance
sheets. The fair market value of investments in our partners whose securities
are publicly traded (other than Genmab and Celldex Therapeutics) represented
approximately 0.1% and 1.2% of our total marketable securities as of June 30,
2009 and December 31, 2008.
Under SFAS No. 115,
Accounting for Certain Investments in Debt and Equity Securities,
our
marketable securities are classified as available-for-sale securities and are
carried at fair value. Marketable securities will include those securities of
debt and publicly traded equity securities accounted for under the fair value
method. These securities trade on listed exchanges; therefore, fair value is
readily available. These securities are also subject to an impairment charge
when we believe an investment has experienced a decline in value that is other
than temporary. Under our accounting policy, a decline in the value of our
equity securities is deemed to be other than temporary and such equity
securities are generally considered to be impaired if their value is less than
our cost basis for more than six (6) months, or some other applicable
period in light of the facts and circumstances surrounding the equity
securities.
30
Table of
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In addition, in connection with our collaborative
partnering business, we sometimes make strategic investments in the securities
of companies that are privately held. Investments in our partners whose equity
is not publicly traded are classified in a separate line item in our
consolidated balance sheet entitled Investments in, and advances to, other
partners and were approximately $0.8 million as of June 30, 2009. These
securities are carried at original investment cost and adjusted for other than
temporary impairment charges, if any. Because these securities are not listed
on a financial exchange, the value of these investments is inherently more
difficult to estimate than investments in public companies. We value these
investments by using information acquired from industry trends, management of
these companies, financial statements, and other external sources. Specifically, our determination of any
potential impairment of the value of privately-held securities includes an
analysis of the following for each company on a periodic basis: review of interim and year-end financial
statements, cash position and overall rate of cash used to support operations,
the progress and development of technology and product platform, the per share
value of subsequent financings and potential strategic alternatives. Based on the information acquired through
these sources, we record an investment impairment charge when we believe an
investment has experienced a decline in value that is other than temporary.
Future adverse changes in market conditions or
adverse changes in financial condition and/or operating results of the
companies in which we invest that may not be reflected in an investments
current carrying value may also require an impairment charge in the future.
On
January 1, 2008, we adopted SFAS No. 157,
Fair Value
Measurements
(Statement No. 157). Statement No. 157 defines and
establishes a framework for measuring fair value and expands disclosures about
fair value instruments. In accordance
with Statement No. 157, we have categorized our financial assets, based on
the priority of the inputs to the valuation technique, into a three-level fair
value hierarchy. We do not have any
financial liabilities that are required to be measured at fair value on a
recurring basis. If the inputs used to
measure the financial instruments fall within different levels of the
hierarchy, the categorization is based on the lowest level input that is
significant to the fair value measurement of the instrument.
Financial
assets recorded on the consolidated balance sheets are categorized based on the
inputs to the valuation techniques as follows:
·
Level 1
Financial
assets whose values are based on unadjusted quoted prices for identical assets
or liabilities in an active market which we have the ability to access at the
measurement date (examples include active exchange-traded equity securities and
most U.S. Government and agency securities).
·
Level 2
Financial
assets whose values are based on quoted market prices in markets where trading
occurs infrequently or whose values are based on quoted prices of instruments
with similar attributes in active markets.
·
Level 3
Financial
assets whose values are based on prices or valuation techniques that require
inputs that are both unobservable and significant to the overall fair value
measurement. These inputs reflect
managements own assumptions about the assumptions a market participant would
use in pricing the asset. We do not
currently have any Level 3 financial assets.
Stock-Based Compensation Expense
Effective
January 1, 2006, we adopted the fair value recognition provisions of FASB
Statement No. 123(R),
Share-Based Payment
,
or Statement No. 123(R), using the modified prospective transition
method. Under the modified prospective
transition method, compensation expense is recognized in the financial
statements on a prospective basis for (i) all share based payments granted
prior to, but not vested as of
31
Table of Contents
January 1, 2006,
based upon the grant date fair value estimated in accordance with the original
provisions of Statement No. 123,
and (ii) share based payments granted on or subsequent to January 1,
2006, based upon the grant date fair value estimated in accordance with the
provisions of Statement No. 123(R).
The grant date fair value of awards expected to vest is expensed on a
straight line basis over the vesting periods of the related awards. Under the modified prospective transition
method, results for prior periods are not restated.
The
fair value of each option grant is estimated using the Black-Scholes option
pricing method. The fair value is then
amortized on a straight-line basis over the requisite service periods of the
awards, which is generally the vesting period (generally 4 years). Use of a valuation model requires management
to make certain assumptions with respect to selected model inputs. In order to estimate the grant date fair
value, option pricing models require the use of estimates and assumptions as to
(i) the expected term of the option, (ii) the expected volatility of
the price of the underlying stock, (iii) the risk free interest rate for
the expected term of the option and (iv) pre-vesting forfeiture
rates. The expected term of the option
is based upon the contractual term, taking into account expected employee
exercise and expected post-vesting termination behavior. The expected volatility of the price of the
underlying stock is based on the historical volatility of our common stock. The risk free interest rate is based on U.S.
Treasury zero-coupon issues with a remaining term equal to the expected life
assumed on the date of grant.
Pre-vesting forfeiture rates are estimated based on past voluntary
termination behavior, as well as an analysis of actual option forfeitures. The following table sets forth the assumptions
used to calculate the fair value of options granted for the three and six month
periods ended June 30, 2009 and 2008:
|
|
Three Months
Ended
June 30,
|
|
Six Months
Ended
June 30,
|
|
|
|
2009
|
|
2008
|
|
2009
|
|
2008
|
|
Expected dividend yield
|
|
0
|
%
|
0
|
%
|
0
|
%
|
0
|
%
|
Expected stock price volatility
|
|
81.5%-81.8
|
%
|
81.8
|
%
|
80.1%-81.8
|
%
|
81.5%-81.9
|
%
|
Weighted average expected volatility
|
|
81.6
|
%
|
81.9
|
%
|
81.7
|
%
|
81.5
|
%
|
Risk free interest rate
|
|
2.03%-2.57
|
%
|
3.32
|
%
|
1.66%-2.57
|
%
|
2.57%-3.50
|
%
|
Expected life of options (years)
|
|
6.3
|
|
6.4
|
|
6.4
|
|
6.4
|
|
Our results of operations
for the three month periods ended June 30, 2009 and 2008 include share
based compensation expense of approximately $4.7 million and $6.2 million,
respectively. Our results of operations
for the six month periods ended June 30, 2009 and 2008 include share based
compensation expense of approximately $9.6 million and $11.5 million,
respectively. As of June 30, 2009, the total unrecognized compensation cost
related to non-vested stock options was approximately $28.2 million.
This cost is expected to be recognized over a weighted average period of
2.2 years.
However,
any significant awards granted during the remainder of the year, required
changes in the estimated forfeiture rates, or significant changes in the market
price of our stock could have an impact on this estimate.
Valuation of Long-Lived and
Intangible Assets
We assess the impairment of long-lived assets and
identifiable intangible assets whenever events or changes in circumstances
indicate that the carrying value may not be recoverable. Factors we consider
important that could trigger an impairment review include the following:
·
a significant
underperformance relative to expected historical or projected future operating
results;
32
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·
a significant
change in the manner of our use of the acquired asset or the strategy for our
overall business; and/or
·
a significant
negative industry or economic trend.
When we determine that the carrying value of
long-lived assets or of intangible assets are not recoverable based upon the
existence of one or more of the above indicators of impairment, we may be
required to record impairment charges for these assets that have not been
previously recorded.
Loss Contingencies and Litigation Reserves
We
assess potential losses in relation to legal proceedings and other pending or
threatened legal or tax matters based upon the application of Statement of
Financial Accounting Standards No. 5,
Accounting for
Contingencies
. If a loss is
considered probable and the amount can be reasonably estimated, we recognize an
expense for the estimated loss. If a
loss is considered possible and the amount can be reasonably estimated, we
disclose such loss if material.
Litigation by its nature is uncertain and the determination of whether
any particular case involves a probable loss or the amount thereof requires the
exercise of considerable judgment, which is applied as of a certain date. Required reserves and estimates may change in
the future due to new matters, developments in existing matters or if we
determine to change our strategy with respect to any particular matter.
Results of Operations
Three Months Ended June 30, 2009 and
2008
Contract and License Revenues
Contract and license revenues totaled $15.5 million and $5.5 million
for the three month periods ended June 30, 2009 and 2008, respectively, an
increase of $10.0 million, or 181%. The
increase relates principally to $8.5 million in milestone payments received
from our contracting and licensing business.
Because contract and license revenues depend to a large extent on the
product development efforts of our partners and licensees, our period-to-period
contract and license revenues can fluctuate significantly and are inherently
difficult to predict.
Contract and License Revenues from Genmab
Contract and license revenues from Genmab were $0.2 million
and $0.4 million for the three month periods ended June 30, 2009 and 2008,
respectively, a decrease of $0.2 million, or 52%. The decrease is primarily the result of a
decrease in antibody exclusive licenses granted to Genmab in 2009 as compared
to 2008.
Reimbursement of Development Costs
Revenues
derived from the reimbursement of costs associated with the development of our
product candidates are recorded in compliance with EITF Issue 99-19. Reimbursement of development costs totaled
$3.8 million and $4.1 million for the three month periods ended June 30,
2009 and 2008, respectively, a decrease of $0.3 million, or 6%. These costs related primarily to the
development of ipilimumab with Bristol-Myers Squibb Company or BMS.
33
Table of Contents
Research and Development Expenses
Our research and development
activities include research, pre-clinical development, manufacturing and
clinical development, which generally includes clinical operations, safety,
medical writing, regulatory and compliance. Research and development expenses
consist primarily of costs of personnel to support these research and
development activities, as well as technology licensing fees, costs of
preclinical studies, costs of conducting our clinical trials, such as fees to
Contract Research Organizations, or CROs, and clinical investigators,
monitoring costs, data management and drug supply costs, research and
development funding provided to third parties, stock-based compensation expense
accounted for under Statement No. 123(R) and related facility,
overhead and information technology costs.
Research and development expenses for our products
in development were $50.8 million and $52.6 million for the three month periods
ended June 30, 2009 and 2008, respectively, a decrease of $1.8 million, or
3%.
Our research costs consist of costs associated with
the breeding, care and continued development of the HuMAb-Mouse
®
and KM-Mouse
®
, as well as costs associated with research and
testing of our product candidates prior to reaching the clinical stage. Such
research costs primarily include personnel costs, facilities (including
depreciation), research supplies, funding of outside research and license and
technology access fees.
Our product development costs consist of costs of
preclinical development (including manufacturing) and conducting and
administering clinical trials (including manufacturing). Such product
development costs also include personnel costs, facilities (including
depreciation), supply expense related to antibody manufacturing and clinical
trial expenses.
The following table sets forth a breakdown of our
research and development expenses by those associated with research and those
associated with product development for the periods indicated.
|
|
Three Months
Ended
June 30,
|
|
(Dollars in thousands)
|
|
2009
|
|
2008
|
|
Research
|
|
$
|
13,346
|
|
$
|
14,909
|
|
Product Development
|
|
37,413
|
|
37,665
|
|
Total
|
|
$
|
50,759
|
|
$
|
52,574
|
|
Research Costs
Research costs for the three month period ended June 30,
2009 decreased by $1.6 million, or 10%, as compared to the three month period
ended June 30, 2008. The decrease in research costs primarily relates to
the following:
·
Outside funding of research
expenses includes funds paid to certain partners for research services. Third
party research costs for the three month period ended June 30, 2009 were
zero, a decrease of $0.8 million as compared to the three month period ended June 30,
2008. This decrease reflects the
expiration and our non-renewal of one of our third party research agreements
near the end of the second quarter of 2008.
·
License and technology
access fees for the three month period ended June 30, 2009 were $0.7
million, a decrease of $0.3 million or 31% as compared to the three month
period ended June 30, 2008.
Increases
34
Table
of Contents
and decreases in license and
technology access fees are related to the development of our pipeline and the
related timing of payments due under license agreements. These costs represent fees paid to certain
partners and research organizations in connection with certain of our
collaboration and license agreements.
Included in the costs for 2009 and 2008 are payments to certain
companies and academic institutions and other entities for licenses of certain
technologies.
·
Personnel costs for the
three month period ended June 30, 2009 were $6.0 million, a decrease of
$0.3 million or 5% as compared to the three month period ended June 30,
2008. Personnel costs include primarily
salary, benefits, payroll taxes, stock option compensation and recruiting
costs.
Product Development Costs
Product development costs for the three month period
ended June 30, 2009 decreased by $0.3 million, or 1%, as compared to the
three month period ended June 30, 2008.
The decrease in product development costs primarily relates to the
following:
·
Our share of partners
product development costs for the three month period ended June 30, 2009
was $11.4 million, an increase of $1.0 million, or 10%, as compared to the
three month period ended June 30, 2008. These costs primarily represent
our share (35%) of the BMS costs for the development of ipilimumab. We expect our 35% share of BMSs costs
related to the development of ipilimumab may increase in the future as BMS
continues to increase its development activities related to ipilimumab.
·
Outside laboratory costs for
the three month period ended June 30, 2009 were $1.1 million, a decrease
of $1.2 million, or 51%, as compared to the three month period ended June 30,
2008. This decrease primarily reflects the cost of various toxicology studies
which occurred during the three month period ended June 30, 2008 related
to our antibody drug conjugate projects for which there were no comparable
costs in the second quarter of 2009.
The following table reflects
research and development costs recognized for our most advanced product
candidates currently in development for the three and six month periods ended June 30,
2009 and 2008. Costs for the product candidates identified in the following
table include, among other things, labor, preclinical study support, contract
manufacturing, clinical trial services and partner expense, where
applicable. The project costs listed in
the following table may fluctuate from period to period depending on the stage
of development as well as other factors discussed below which can also impact
the timing of costs incurred.
|
|
Three Months
Ended
June 30,
|
|
Six Months
Ended
June 30,
|
|
(Dollars in thousands)
|
|
2009
|
|
2008
|
|
2009
|
|
2008
|
|
Ipilimumab (MDX-010)(1)
|
|
$
|
14,382
|
|
$
|
13,999
|
|
$
|
26,601
|
|
$
|
24,237
|
|
MDX-1100
|
|
2,674
|
|
2,978
|
|
6,093
|
|
5,800
|
|
MDX-1203/ADC
|
|
1,222
|
|
2,821
|
|
2,483
|
|
6,444
|
|
MDX-1106
|
|
2,779
|
|
1,887
|
|
4,627
|
|
3,830
|
|
MDX-1342
|
|
3,656
|
|
1,930
|
|
6,179
|
|
3,903
|
|
MDX-060
|
|
536
|
|
749
|
|
951
|
|
1,488
|
|
Other research and development projects(2)
|
|
9,096
|
|
12,102
|
|
19,834
|
|
22,307
|
|
Non-project related costs(3)
|
|
13,856
|
|
13,425
|
|
25,848
|
|
27,750
|
|
Stock-based compensation expense
|
|
2,558
|
|
2,683
|
|
5,212
|
|
4,861
|
|
Celldex research and development expenses(4)
|
|
|
|
|
|
|
|
1,246
|
|
Total research and development expenses
|
|
$
|
50,759
|
|
$
|
52,574
|
|
$
|
97,828
|
|
$
|
101,866
|
|
35
Table of Contents
(1)
Represents
100% of our development costs and our 35% of BMS development costs for
ipilimumab for each of the years identified. We are reimbursed (by BMS) for 65%
of our development costs. Such reimbursements are recognized as revenue. See
Note 6 to the consolidated financial statements for further explanation of the
cost sharing arrangement between us and BMS.
(2)
Other
research and development projects consist of the total research and development
expenses for projects that do not individually constitute more than 3% of the
total research and development expenses for the periods presented. Such
projects are primarily in the early research, pre-clinical and Phase 1 stages
of development.
(3)
Non-project
related costs consist of the total research and development expenses that are
not associated with any particular project, but rather support our broader research
and development efforts. Such expenses include costs associated with the
breeding, care and continued development of the HuMAb-Mouse
®
and KM-Mouse
®
, and costs related to the discovery of new antibody
candidates and facility, information technology and overhead charges.
(4)
Represents
100% of Celldex research and development expenses for the period from January 1,
2008 through March 7, 2008 which were consolidated for accounting purposes
prior to Celldexs merger with AVANT Immunotherapeutics, Inc. on March 7,
2008 (see Note 3 to the consolidated financial statements for further
explanation).
Our expenditures on current
and future product candidates are subject to numerous uncertainties in timing
and cost of completion. In addition, we may be obligated to make milestone
payments on certain of our product candidates as they progress through the
clinical trial process. We expect
product development costs to increase in the future as more of our product
candidates enter clinical trials and should our existing product candidates
continue to progress to more advanced clinical trials. Completion of clinical trials may take
several years or more. The length of time varies according to the type,
complexity and intended use of the product candidate. We estimate that clinical
trials of the type we generally conduct are typically completed over the
following periods:
Clinical Phase
|
|
Estimated
Completion Period
|
Phase
1
|
|
1-2 Years
|
Phase
2
|
|
1-2 Years
|
Phase
3
|
|
2-4 Years
|
The duration and cost of clinical trials may vary
significantly over the life of a particular project as a result of, among other
things, the following factors:
·
the length of
time required to recruit qualified patients for clinical trials;
·
the duration of
patient dosing and follow-up in light of trial results;
·
the number of
clinical sites required for trials; and
·
the number of
patients that ultimately participate.
We continue to explore new collaborative
arrangements that may affect future spending for research and development. As
part of our partnering strategy, a significant portion of the research and
development expenses incurred in connection with products using our technology
is expected to be borne by our partners. We believe this allows us to
participate in the research and development of substantially more potential
product candidates than we could develop on our own if we bore the entire cost
of development. Products using our technology are currently in various stages
of development from preclinical to Phase 3. The successful development of these
product candidates is dependent on many factors, including among other things,
the efforts of our partners,
36
Table of
Contents
unforeseen
delays in, or expenditures relating to, preclinical development, clinical
testing, manufacturing or regulatory approval, failure to receive regulatory
approval, failure to receive market acceptance, the emergence of competitive
products and the inability to produce or market our products due to third-party
proprietary rights.
We cannot forecast with any degree of certainty
which of our product candidates will be subject to future collaborations or how
such arrangements, if any, would affect our development plans or capital
requirements. In addition, we anticipate
that our research and development expenses may continue to grow in the
foreseeable future as we continue our discovery and preclinical activities and
advance new product candidates into clinical trials. These expenses may fluctuate based upon many
factors including the degree of collaborative activities, timing of
manufacturing runs, numbers of patients enrolled in our clinical trials and the
outcome of each clinical trial.
General and Administrative Expenses
General and administrative expenses include
compensation, professional services, consulting, travel and facilities
(including depreciation) and other expenses related to legal, business
development, finance, information systems and investor relations. General and
administrative expenses totaled $10.5 million and $12.4 million for the three
month periods ended June 30, 2009 and 2008, respectively, a decrease of
$1.9 million, or 15%. The decrease is
primarily attributable to approximately $1.3 million of lower stock-based
compensation expense.
Equity in Net Loss of Affiliate
Equity in net loss of affiliate represents our share
of the net loss of Celldex Therapeutics. Equity in net loss of affiliate
totaled $2.5 million and $3.5 million for the three month periods ended June 30,
2009 and 2008, respectively, a decrease of $1.0 million, or 30%. Beginning on March 7, 2008, we began to
account for our investment in Celldex Therapeutics under the equity method of
accounting in accordance with APB No. 18,
The Equity
Method of Accounting for Investments in Common Stock
(see Note 2 to
the consolidated financial statements for further information). On June 24, 2009, the Company sold
2,000,000 shares of Celldex Therapeutics for $7.15 per share resulting in net
proceeds of approximately $14.3 million.
As a result of this sale of common stock, the Companys ownership
percentage in Celldex Therapeutics was reduced to approximately 18.7%. As a result of the decrease in the Companys
ownership below 20%, on June 25, 2009 the Company began accounting for its
investment in Celldex Therapeutics as a marketable security in accordance with
SFAS No. 115.
Interest and Dividend Income and Realized
Gains
Interest and dividend income and realized gains
consist primarily of interest earned from our cash, cash equivalents and
marketable securities. Interest and dividend income and realized gains were
$2.2 million and $3.7 million for the three month periods ended June 30,
2009 and 2008, respectively, a decrease of $1.5 million, or 42%. This decrease primarily reflects lower
interest rates earned on our investment portfolio.
Gain on Sale of Celldex
Therapeutics Stock
In June 2009, we completed the sale of 2.0
million shares of Celldex Therapeutics through a block trade for $7.15 per
share resulting in net proceeds of approximately $14.3 million. The Company realized a gain of approximately
$14.3 million from this transaction for the three month period ended June 30,
2009. As a result of this sale of common
stock, our ownership percentage in Celldex Therapeutics was reduced to
approximately 18.7%.
37
Table of
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In June 2008, we sold 351,691 shares of Celldex
Therapeutics for $12.35 per share resulting in net proceeds of approximately
$4.3 million. We realized a gain of
approximately $3.3 million from this transaction for the three month period
ended June 30, 2008. As a result of
this sale of common stock, our ownership percentage in Celldex Therapeutics was
reduced to approximately 31.6%.
Interest Expense
Interest expense for the
three month periods ended June 30, 2009 and 2008 relates primarily to
interest and amortization of issuance costs on our 2.25% Convertible Senior
Notes issued in May 2004, or the 2.25% notes. Interest expense was $1.5
million and $1.5 million for the three month periods ended June 30, 2009
and 2008, respectively.
Provision (Benefit) for Income Taxes
Our provision (benefit) for income taxes was $(0.1)
million and zero for the three month periods ended June 30, 2009 and 2008,
respectively. The benefit for income
taxes for the three month period ended June 30, 2009 is the result of
recently enacted legislation which provides certain companies the opportunity
to receive tax refunds for certain research credit carryovers.
Six Months Ended June 30,
2009 and 2008
Contract and License Revenues
Contract
and license revenues totaled $22.5 million and $12.6 million for the six month
periods ended June 30, 2009 and 2008, respectively, an increase of $9.9
million, or 78%. The increase relates
principally to $8.5 million in milestone payments received from our contracting
and licensing business. Because contract and license revenues depend to a
large extent on the product development efforts of our partners and licensees,
our period-to-period contract and license revenues can fluctuate significantly
and are inherently difficult to predict.
Contract and License Revenues from Genmab
Contract and license revenues from Genmab were $0.7
million and $1.2 million for the six month periods ended June 30, 2009 and
2008, respectively, a decrease of $0.5 million, or 42%. This decrease is
primarily the result of a decrease in antibody exclusive licenses granted to
Genmab in the first half of 2009 as compared to the first half of 2008.
Reimbursement of
Development Costs
Revenues derived from the reimbursement of costs
associated with the development of our product candidates are recorded in
compliance with EITF Issue 99-19. Reimbursement of development costs
totaled $7.1 million and $8.1 million for the six month periods ended June 30,
2009 and 2008, respectively, a decrease of $1.0 million, or 12%. These costs related primarily to the
development of ipilimumab with BMS.
Research and Development Expenses
Research and development expenses for our products
in development were $97.8 million and $101.9 million for the six month periods
ended June 30, 2009 and 2008, respectively, a decrease of $4.1 million, or
4%.
38
Table of
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The following table sets forth a breakdown of our
research and development expenses by those associated with research and those
associated with product development for the periods indicated.
|
|
Six Months Ended
June 30,
|
|
(Dollars in thousands)
|
|
2009
|
|
2008
|
|
Research
|
|
$
|
26,647
|
|
$
|
28,827
|
|
Product Development
|
|
71,181
|
|
73,039
|
|
Total
|
|
$
|
97,828
|
|
$
|
101,866
|
|
Research Costs
Research costs for the six month period ended June 30,
2009 decreased by $2.2 million, or 8%, as compared to the six month period
ended June 30, 2008.
·
Outside funding
of research expenses includes funds paid to certain partners for research
services. Third party research costs for the six month period ended June 30,
2009 were $25 thousand, a decrease of $1.6 million as compared to the six month
period ended June 30, 2008. This decrease reflects the expiration
and our non-renewal of one of our third party research agreements near the end
of the second quarter of 2008.
Product Development Costs
Product development costs for the six month period
ended June 30, 2009 decreased by $1.9 million, or 3%, as compared to the
six month period ended June 30, 2008. The decrease in product
development costs primarily relates to the following:
·
Our share of
partners product development costs for the six month period ended June 30,
2009 was $21.6 million, an increase of $4.9 million, or 29%, as compared to the
six month period ended June 30, 2008. These costs primarily represent our
share (35%) of the BMS costs for the development of ipilimumab. We expect
our 35% share of BMSs costs related to the development of ipilimumab to
increase in the future as BMS continues to increase its development activities
related to ipilimumab.
·
Outside laboratory
costs for the six month period ended June 30, 2009 were $1.8 million, a
decrease of $3.2 million, or 64%, as compared to the six month period ended June 30,
2008. This decrease primarily reflects the cost of various toxicology studies
which occurred during the first six months of 2008 related to our antibody drug
conjugate projects for which there were no comparable costs during the first
six months of 2009.
·
Clinical
research fees for the six month period ended June 30, 2009 were $9.3
million, a decrease of $2.0 million, or 18%, as compared to the six month
period ended June 30, 2008. This decrease resulted primarily from
decreased Phase 3 clinical trial activity (managed by us) related to
ipilimumab. Clinical research fees include clinical investigator site fees,
external trial monitoring costs and data accumulation costs. We expect expenses
related to clinical trials to increase in the future as we continue to develop
our therapeutic product pipeline.
39
Table of Contents
General and Administrative Expenses
General and administrative expenses include
compensation, professional services, consulting, travel and facilities
(including depreciation) and other expenses related to legal, business
development, finance, information systems and investor relations. General and
administrative expenses totaled $21.0 million and $24.8 million for the six
month periods ended June 30, 2009 and 2008, respectively, a decrease of
$3.8 million, or 15%. The decrease is primarily attributable to
approximately $1.8 million in lower stock compensation expense and
approximately $1.7 million of Celldex general and administrative expenses for
the period from January 1, 2008 through March 6, 2008 which were
consolidated in our results of operations prior to Celldexs merger with AVANT.
Equity in Net Loss of Affiliate
Equity in net loss of affiliate represents our share
of the net loss of Celldex Therapeutics. Equity in net loss of affiliate
totaled $4.9 million and $5.3 million for the six month periods ended June 30,
2009 and 2008, respectively, a decrease of $0.4 million, or 8%. Beginning on March 7,
2008 we began to account for our investment in Celldex Therapeutics under the
equity method of accounting in accordance with APB No. 18,
The Equity Method of Accounting for Investments in
Common Stock
(see Note 3 to the consolidated financial statements
for further information). The recognition of our share of the net losses
of Celldex Therapeutics reduces the carrying value, or basis, of our investment
in Celldex Therapeutics.
Interest and Dividend Income and Realized
Gains
Interest and dividend income and realized gains
consist primarily of interest earned from our cash, cash equivalents and
marketable securities. Interest and dividend income and realized gains were
$4.2 million and $8.2 million for the six month periods ended June 30,
2009 and 2008, respectively, a decrease of $4.0 million, or 49%. This
decrease primarily reflects lower interest rates earned on our investment
portfolio.
Gain on Sale of Genmab
Stock
In February 2008, we completed the sale of 2.5
million shares of Genmab through a block trade. We received net proceeds of
approximately $151.8 million from such block trade resulting in a realized gain
of approximately $151.8 million as our cost basis for these shares was zero. As
a result of this transaction, our ownership percentage in Genmab was reduced to
approximately 5.1%. There was no comparable sale of Genmab shares for the six
month period ended June 30, 2009.
Gain on Sale of Celldex
Therapeutics Stock
In June 2009, we completed the sale of 2.0
million shares of Celldex Therapeutics through a block trade for $7.15 per
share resulting in net proceeds of approximately $14.3 million. The Company realized a gain of approximately
$14.3 million from this transaction for the six month period ended June 30,
2009. As a result of this sale of common
stock, our ownership percentage in Celldex Therapeutics was reduced to
approximately 18.7%.
In June 2008, we sold 351,691 shares of Celldex
Therapeutics for $12.35 per share resulting in net proceeds of approximately
$4.3 million. We realized a gain of
approximately $3.3 million from this transaction for the six month period ended
June 30, 2008. As a result of this
sale of common stock, our ownership percentage in Celldex Therapeutics was
reduced to approximately 31.6%.
40
Table of Contents
Interest Expense
Interest expense for the six month periods ended June 30,
2009 and 2008 relates primarily to interest and amortization of issuance costs
on our 2.25% notes. Interest expense was $3.0 million and $3.1 million for the
six month periods ended June 30, 2009 and 2008, respectively.
Liquidity
and Capital Resources
We require cash to fund our
operations, to make capital expenditures and strategic investments, and to pay
debt service on our convertible notes. Since inception, we have financed our
operations through the sale of our securities in public and private placements,
sales of our products for research purposes, development and manufacturing
services, technology transfer and license fees, milestone payments and sales of
our marketable securities (such as Genmab and Celldex Therapeutics). We expect
to continue to fund our cash requirements from these sources in the future.
Liquidity and Capital Resources
|
|
June 30,
|
|
December 31,
|
|
(Dollars in thousands)
|
|
2009
|
|
2008
|
|
Cash, cash equivalents and marketable securities
(other than Genmab and Celldex Therapeutics)
|
|
$
|
340,648
|
|
$
|
353,668
|
|
Marketable securities Genmab
|
|
$
|
78,596
|
|
$
|
87,428
|
|
Marketable securities Celldex Therapeutics
|
|
$
|
23,154
|
|
|
|
We primarily invest our cash
equivalents and marketable securities in highly liquid, interest-bearing,
investment grade and government securities to preserve principal.
Statement of Cash Flows
|
|
Six Months Ended
June 30,
|
|
(Dollars in thousands)
|
|
2009
|
|
2008
|
|
Cash provided by (used in):
|
|
|
|
|
|
Operating activities
|
|
$
|
(30,699
|
)
|
$
|
(85,403
|
)
|
Investing activities
|
|
$
|
36,103
|
|
$
|
170,342
|
|
Financing activities
|
|
$
|
1,090
|
|
$
|
3,171
|
|
Cash Used in Operating Activities
Cash
used in operating activities was $30.7 million and $85.4 million for the six
month periods ended June 30, 2009 and 2008, respectively. This reflects a
decrease of $54.7 million in 2009 as compared to the same period in 2008 and
was primarily the result of an increase in deferred contract revenue of $23.3
million and an increase in accrued liabilities of $13.2 million. The increase in deferred revenue was
primarily due to the receipt of $30 million from the Merck license agreement
(see further discussion below) and the increase in accrued liabilities was
primarily the result of an increase in due to corporate partners.
We
have incurred and will continue to incur significant costs in the area of
research and development, including preclinical and clinical trials, as our
products are developed. We plan to spend significant amounts to progress our
current products through the clinical trial and the commercialization process
as well as to develop additional product candidates on our own or with our
partners. As our products progress through the clinical trial process, we may
be obligated to make significant milestone payments on certain of our products.
Furthermore, we expect our investment income to decrease as we fund our future
operations and capital
41
Table of Contents
expenditures
from our cash reserves. We anticipate that our operating expenditures may be
partially offset by revenues from partners for license fees, milestone
payments, and development and manufacturing services.
42
Table of
Contents
Cash Provided by Investing Activities
Net cash provided by
investing activities was $36.1 million and $170.3 million for the six month
periods ended June 30, 2009 and 2008, respectively. The decrease in cash provided by investing
activities was $134.2 million and was primarily the result of the following
factors:
·
Proceeds from the sale of Genmab stock were
$0 and $151.8 million for the six month periods ended June 30, 2009 and
2008, respectively.
·
Purchases of marketable securities totaled $0
and $60.2 million for the six month periods ended June 30, 2009 and 2008,
respectively. The 2008 purchase was made with a portion of the proceeds
received from the sale of our Genmab stock.
·
Sales and maturities of marketable securities
were $23.1 million and $77.3 million for the six month periods ended June 30,
2009 and 2008, respectively. Proceeds from sales and maturities of
marketable securities in 2009 and 2008 were primarily used to fund operations
and capital expenditures.
Cash Provided by Financing Activities
Cash
provided by financing activities was $1.1 million and $3.2 million for the six
month periods ended June 30, 2009 and 2008, respectively. Cash provided by financing activities for the
six month periods ended June 30, 2009 and 2008 primarily represents cash
received from the exercise of stock options.
Other Liquidity Matters
Merck License Agreement
On
April 20, 2009 Merck & Co., Inc. (Merck), Medarex and
Massachusetts Biologic Laboratories (MBL) announced that they had signed an
exclusive worldwide license agreement for MDX-066/MDX-1388, an investigational
fully human monoclonal antibody combination developed to target and neutralize
Clostridium difficile
toxins A and B, for use with respect
to
C. difficile
infection. MDX-066 and MDX-1388 were co-developed by us
and MBL.
Under
the terms of the agreement, Merck gains worldwide rights to develop and
commercialize MDX-066 and MDX-1388. We
and MBL each received an upfront payment of $30.0 million and are potentially
eligible to each receive additional cash payments up to $82.5 million upon the
achievement of certain events associated with the development and approval of a
drug candidate covered by the license agreement. Upon commercialization, we and MBL will also
be eligible to receive double digit royalties on product sales and milestone
payments if certain sales targets are met.
In accordance with the pre-existing collaboration agreement between us
and MBL, all payments will be divided equally.
BMS Collaboration
In January 2005, we entered into a
collaboration and co-promotion agreement and a related securities purchase
agreement with BMS. Under the terms of the collaboration, we and BMS each
granted the other certain intellectual property licenses and product rights on
a worldwide basis in order to enable us to collaborate in research and development
of certain therapeutic antibody-based products for the treatment of cancer and
other diseases, and, in the event that further development work is successful,
to commercialize any resulting products. In particular, the collaboration
includes a grant by us to BMS of a license to commercialize
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ipilimumab,
a fully human antibody product candidate developed using our UltiMAb
®
technology. Ipilimumab is currently under
investigation for the treatment of a broad range of cancers and other diseases.
As part of the collaboration, BMS is responsible
for 65% of all development costs related to clinical trials intended to support
regulatory approval in both the U.S. and the European Union, with the remaining
35% to be paid by us. We and BMS will share equally the costs of any clinical
trials of products intended solely for regulatory approval in the U.S., and BMS
will be fully responsible for all development costs that relate solely to
regulatory approval in the European Union and other parts of the world.
Under
the terms of the collaboration, we have the option to co-promote any product in
the U.S. If we exercise a co-promotion option with respect to a product for use in the first cancer
indication for which an initial
regulatory approval filing is accepted by the FDA, we will have the right and obligation to co-promote
such product for use in all cancer indications, even if such indications are
the subject of additional filings or approvals, and even if we opted-out of the
development of any such indication. Even if we elect to co-promote a product for cancer indications, however, we would need to
exercise a separate option
to co-promote that product with
respect to any indication other
than cancer. If we do not exercise our co-promotion option with respect
to a product for use in the first
cancer indication for which an initial
regulatory approval filing is accepted by the FDA, then we will not have the right or obligation to
co-promote such product for any cancer indications, unless the filing for that first cancer indication is not
approved by FDA.
Under
the terms of the collaboration, we could receive up to $205.0 million from BMS
if all regulatory milestones are met, plus up to an additional $275.0 million
in sales-related milestones. In addition,
if
we exercise our co-promotion option with respect to ipilimumab for the
metastatic melanoma indication, and regulatory approval is obtained, we would
receive 45% of any profits and bear 45% of all losses from commercial sales of
such product in the U.S. In the event we
choose not to exercise our co-promotion rights with respect to a product, BMS
will have exclusive commercial rights in the U.S. and will pay us royalties on
commercial sales. Regardless of whether or not we exercise our co-promotion
option outside the U.S., BMS will have exclusive commercial rights for products
and will pay us royalties on commercial sales.
As
part of the collaboration, BMS made a cash payment to us on January 21,
2005 of $25.0 million and also purchased 2,879,223 shares of our common stock
at a purchase price equal to $8.6829 per share for an aggregate purchase price
of $25.0 million.
Convertible Senior Notes
In May 2004, we sold $150.0 million in
aggregate principal amount of our 2.25% notes to qualified institutional
investors. The 2.25% notes are initially convertible into shares of our common
stock at the rate of 72.9129 shares per each $1,000 principal amount of notes,
which is equivalent to an initial conversion price of approximately $13.72 per
share, subject to anti-dilution adjustments. Interest is payable on May 15
and November 15 of each year. The first interest payment was made on November 15,
2004.
The
2.25% notes mature on May 15, 2011 and are redeemable at our option on or
after May 15, 2010. Holders of the 2.25% notes may require us to
repurchase the notes if we undergo a change in control as defined in the
indenture. (See Note 10 to the
consolidated financial statements for a description of a pending tender offer
which could result in a change of control). We received net proceeds from the
offering of the 2.25% notes of approximately $145.2 million (after
deducting the initial purchasers discounts and offering expenses). The costs
of issuance of the 2.25% notes of approximately $4.8 million have been
deferred and are being amortized over the term of the 2.25% notes. In May 2011,
or earlier if we undergo a change in control, we may be required to use a
significant portion of our cash to repay the remaining balance
($150.0 million) of the 2.25%
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notes.
If our cash is not sufficient to meet our obligations under the 2.25% notes, we
would be required to seek additional financing.
Financial Uncertainties Related to
Potential Future Milestone Payments
In
2002, we entered into a collaboration and license agreement with Kirin, which
cross-licenses certain of each others technologies for the development and
commercialization of human antibody products. Under the collaboration and
license agreement, we and Kirin developed the KM-Mouse
®
, a unique crossbred mouse
that combines the traits of our HuMAb-Mouse
®
with Kirins
TC Mouse
and exchanged cross-licenses with respect to
the KM-Mouse
®
and other antibody-generating mice. In
addition, certain of the cross-licenses granted under the collaboration and
license agreement are subject to license, milestone and royalty payments by one
party to the other.
Through June 30, 2009,
we have not made any milestone payments to Kirin although approximately $3.0
million has been paid to Kirin through June 30, 2009 primarily
representing a payment due Kirin as a result of our collaboration with Pfizer.
Based on products we are developing which use or, we believe may use, Kirin
technology that (i) are currently in clinical trials or (ii) we
anticipate may enter clinical trials by the end of 2010, we may be required to
make milestone payments to Kirin aggregating up to approximately $4.25 million
per product with respect to such products. Our future milestone payment
obligations to Kirin may or may not be triggered, and may vary in size,
depending on a number of variables, almost all of which are currently unknown,
including the following:
·
whether or not
a decision is made to request a license from Kirin;
·
the type of
license requested (research or commercial);
·
the success and
timing of development efforts and clinical trials of product candidates covered
by any such licenses;
·
the type of
product developed (payment obligations differ depending on whether a product is
an
ex vivo
therapeutic,
in vivo
therapeutic, research reagent or diagnostic); and
·
other financial
provisions of the Kirin agreement that provide for variations in fee levels and
netting of certain payments over specified periods of time that may impact the
total amount potentially payable to Kirin for any particular license fee or
milestone payment.
We have also entered into a
number of other agreements that contain licenses of third-party technology
which may be used together with our own platform technologies for the
generation, development and/or manufacture of our antibody products. In
addition, we have entered into other third-party agreements that contain
licenses associated with antibody products that target specific antigens. Many
of these agreements contain milestone payments that are due with respect to
products using/targeting the licensed technology/antigen only if and when
certain specified pre-commercialization events occur. Not all of our products
currently under development trigger such milestone payments. Through June 30,
2009, we have made milestone payments of approximately $2.2 million under these
agreements. In addition, under the agreements we currently have in place (other
than with Kirin), based on a total of ten products we are developing for which
milestones are potentially due and that (i) are now in clinical trials or (ii) which
we anticipate may enter clinical trials before the end of 2010, we may be
obligated to make future milestone payments aggregating up to approximately
$57.5 million with respect to such products. In general, potential milestone
payments for our antibody products may or may not be triggered under these
licenses, and may vary in size, depending on a number of variables, almost all
of which are currently uncertain. Typically, the events that trigger these
payments per product include:
·
submission of
IND(s) or foreign equivalents;
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·
commencement of
Phase 1, Phase 2 and/or Phase 3 clinical trials or foreign equivalents;
·
submission of
BLA(s) or foreign equivalents; and
·
receipt of marketing
approval(s) to sell products in a particular country or region.
In addition, the licenses
above may trigger royalty payments in connection with the commercialization of
certain of our products. To date, we have not made any royalty payments on sales
of our products and believe we are at least a year away from selling any
products that would require us to make any such royalty payments. Whether we
will be obligated to make milestone or royalty payments in the future is
subject to the success of our product development efforts and, accordingly, is
inherently uncertain.
Future Liquidity Resources
Our
current sources of liquidity are our cash, cash equivalents and marketable
securities, interest and dividends earned on such cash, cash equivalents and marketable
securities, contract and licensing revenue and sales of our products for
research. We believe that such sources of liquidity, including the proceeds
received from the sale of our 2.25% convertible senior notes, will be
sufficient to meet our operating, debt service, and capital requirements for at
least the next 24 months. To the extent our 2.25% notes are not converted into
shares of our common stock on or before their maturity date, we will have to
either refinance the principal amount due or repay the principal amount of the
notes. In any event, we may require additional financing within this time frame
and may raise funds through public or private financings, sales of stock of
partners in which we have an equity ownership, line of credit arrangements,
collaborative relationships and/or other methods. The use of cash on hand or
other financial alternatives will depend on several factors including, but not
limited to, the future success of our products in clinical development, the
prevailing interest rate environment, and access to the capital markets. We
cannot assure you that we will be able to raise such additional funds. We may
be unable to raise sufficient funds to complete development of any of our
product candidates or to continue operations. As a result, we may face delay,
reduction or elimination of research and development programs or preclinical or
clinical trials, in which case our business, financial condition or results of
operations may be materially harmed.
Recently Adopted Accounting Pronouncements
In December 2007, the
EITF reached a consensus on Issue No. 07-1,
Accounting for Collaborative Arrangements
(EITF 07-1). The
EITF concluded on the definition of a collaborative arrangement and that
revenues and costs incurred with third parties in connection with collaborative
arrangements would be presented gross or net based on the criteria in EITF
99-19 and other accounting literature. Based on the nature of the arrangement,
payments to or from collaborators would be evaluated and the terms, the nature
of the entitys business, and whether those payments are within the scope of
other accounting literature would be presented. Companies are also required to
disclose the nature and purpose of collaborative arrangements along with the
accounting policies and the classification and amounts of significant financial
statement amounts related to the arrangements. Activities in the arrangement
conducted in a separate legal entity should be accounted for under other
accounting literature; however required disclosure under EITF 07-1 applies to
the entire collaborative agreement. EITF 07-1 is effective for financial
statements issued for fiscal years beginning after December 15, 2008, and
interim periods within those fiscal years, and is to be applied retrospectively
to all periods presented for all collaborative arrangements existing as of the
effective date. We adopted EITF 07-1 effective January 1, 2009 and its
adoption did not have a significant impact on our consolidated financial
statements.
In December 2007, the
FASB issued SFAS No. 141 (R),
Business
Combinations
(Statement No. 141 (R)), which replaces SFAS No. 141,
Business Combinations
, and
requires an acquirer to recognize the assets acquired, the liabilities assumed
and any non-controlling interest in the acquiree at the acquisition date,
measured at their fair values as of that date, with limited exceptions.
Statement No. 141 (R) also requires the
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acquirer in a business
combination achieved in stages to recognize the identifiable assets and
liabilities, as well as the non-controlling interest in the acquiree, at the
full amounts of their fair values. Statement No. 141 (R) makes
various other amendments to authoritative literature intended to provide
additional guidance or conform the guidance in that literature to that provided
in Statement No. 141 (R). Statement No. 141 (R) applies
prospectively to business combinations for which the acquisition date is on or
after the beginning of the first annual reporting period beginning on or after December 15,
2008. The adoption of Statement No. 141 (R) did not have a
significant impact on our consolidated financial statements.
In December 2007, the
FASB issued SFAS No. 160,
Noncontrolling
Interests in Consolidated Financial Statements
(Statement No. 160),
which amends Accounting Research Bulletin No. 51,
Consolidated Financial Statements
, to
improve the relevance, comparability and transparency of the financial
information that a reporting entity provides in its consolidated financial
statements. Statement No. 160 establishes accounting and reporting
standards that require the ownership interests in subsidiaries not held by the
parent to be clearly identified, labeled and presented in the consolidated
statement of financial position within equity, but separate from the parents
equity. Statement No. 160 also requires the amount of consolidated net
income attributable to the parent and to the non-controlling interest to be
clearly identified and presented on the face of the consolidated statement of
operations. Changes in a parents ownership interest while the parent retains
its controlling financial interest must be accounted for consistently, and when
a subsidiary is deconsolidated, any retained non-controlling equity investment
in the former subsidiary must be initially measured at fair value. The gain or
loss on the deconsolidation of the subsidiary is measured using the fair value
of any non-controlling equity investment. Statement No. 160 also requires
entities to provide sufficient disclosures that clearly identify and
distinguish between the interests of the parent and the interests of the
non-controlling owners. Statement No. 160 applies prospectively to all
entities that prepare consolidated financial statements and applies
prospectively for all fiscal years, and interim periods within those fiscal
years, beginning on or after December 15, 2008. We adopted Statement No. 160
effective January 1, 2009 and its adoption did not have a significant
impact on our consolidated financial statements.
In
November 2008, the FASB ratified the consensus reached in EITF Issue No. 08-6,
Equity Method Investment Accounting Considerations
(EITF
08-6). The equity method of accounting
is required for investments when the investor does not control an investee but
has the ability to exercise significant influence over its operating and
financial policies in accordance with APB Opinion No. 18,
The Equity Method of Accounting for Investments in Common Stock
. The EITF concluded that an equity method
investor shall recognize gains and losses in earnings for the issuance of
shares by the equity method investee, provided that the issuance of shares
qualifies as a sale of shares (and not a financing, as would be the case if the
shares were sold subject to a forward contract to repurchase the shares).
Prior
to the adoption of EITF 08-6, equity method investors followed the guidance of
Staff Accounting Bulletin No. 51,
Accounting for Sales of
Stock by a Subsidiary
(SAB No. 51), in accounting for the
issuance of shares by the equity method investee. SAB No. 51 precludes
gain recognition in certain situations (e.g. share issuance as part of a
broader corporate reorganization, situations where an entitys ability to exist
is in question, etc.) and otherwise permits a registrant to elect an accounting
policy of recognizing gains in the statement of operations or in equity. EITF 08-6 eliminated the SAB No. 51
exceptions to gain recognition and the accounting policy choice.
We previously accounted for
sales of stock by a subsidiary in accordance with SAB No. 51 and
accordingly, accounted for any gains as a component of equity as opposed to including
such gains in the statement of operations.
With the adoption of EITF 08-6, any gains arising out of sales of stock
by a subsidiary will be included in our statement of operations.
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In May 2008, the FASB
issued FASB Staff Position APB 14-1,
Accounting for Convertible
Debt Instruments That May Be Settled in Cash Upon Conversion
(FSP
APB 14-1). FSP APB 14-1 requires the
issuer of certain debt instruments that may be settled in cash (or other
assets) on conversion to separately account for the liability (debt) and equity
(conversion option) components of the instrument in a manner that reflects the
issuers nonconvertible debt borrowing rate.
FSP APB 14-1 is effective for financial statements issued for fiscal
years beginning after December 15, 2008 and requires retroactive
application to all periods presented and does not grandfather existing
instruments. We adopted FSP APB 14-1
effective January 1, 2009 and its adoption had no impact on our
consolidated financial statements.
Recently Issued and Adopted Accounting Pronouncements
At
its April 2009 Board meeting, the FASB issued the following:
·
Staff Position No. 115-2, FAS 124-2 and
EITF 99-20-2,
Recognition and Presentation of
Other-Than-Temporary Impairments
(FSP 115-2). FSP 115-2 provides new guidance on the
recognition of an Other Than Temporary Impairment and provides new disclosure
requirements. The recognition and
presentation provisions apply only to debt securities classified as available
for sale and held to maturity.
·
Proposed Staff Position No. FAS 107-1
and APB 28-1,
Interim Disclosures about Fair Value of
Financial Instruments; An amendment of FASB Statement No 107
(FSP
107-1). FSP 107-1 extends the disclosure
requirements of FASB Statement No. 107,
Disclosures
about Fair Value of Financial Instruments
(Statement No. 107),
to interim financial statements of publicly traded companies. Statement No. 107 requires disclosures
of the fair value of all financial instruments (recognized or unrecognized),
when practicable to do so. These fair
value disclosures must be presented together with the carrying amount of the
financial instruments in a manner that clearly distinguishes between assets and
liabilities and indicates how the carrying amounts relate to amounts reported
on the balance sheet. An entity must
also disclose the methods and significant assumptions used to estimate the fair
value of the financial instruments.
·
FASB Staff Position No. FAS 157-4,
Determining Fair Value When the Volume and Level of Activity for the
Asset or Liability has Significantly Decreased and Identifying Transactions
that are Not Orderly
(FSP 157-4).
FSP 157-4 amends FASB Statement No. 157,
Fair Value
Measurement
, to provide additional guidance on estimating fair value
when the volume and level of activity for an asset or liability has
significantly decreased in relation to normal market activity for the asset or
liability.
·
SFAS No. 165,
Subsequent
Events
(Statement No. 165)
provides
authoritative literature for a topic that was previously addressed only in the
accounting literature, AICPA AU Section 560, Subsequent Events. Statement No. 165 resulted in three
modifications to the guidance under AU Section 560: (i) the names of the two types of
subsequent events have been changed to
recognized
subsequent
events (currently referred to as Type I) and
nonrecognized
subsequent events (currently referred to as Type II), (ii) the
definition of subsequent events has been modified to refer to events or
transactions that occur after the balance sheet date, but before the issuance
of the financial statements; and (iii) establishing a requirement for all
entities to disclose the date through which the entity has evaluated subsequent
events.
We
adopted the above standards during the quarter ended June 30, 2009.
The adoption of these accounting pronouncements did not have a material
impact on our consolidated financial statements.
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In
June 2009, the FASB issued SFAS No. 168,
The FASB
Accounting Standards Codification and the Hierarchy of Generally Accepted
Accounting Principles
(Statement No. 168). Statement No. 168 will become the source
of authoritative U.S. generally accepted accounting principles (GAAP)
recognized by the FASB to be applied by nongovernmental entities. Rules and interpretive releases of the
SEC under authority of federal securities laws are also sources of
authoritative GAAP for SEC registrants. On the effective date of Statement No. 168,
the Codification will supersede all then-existing non-SEC accounting and
reporting standards. All other non-grandfathered non-SEC accounting literature
not included in the Codification will become non-authoritative. Statement No. 168
is effective for financial statements issued for interim and annual periods
ending after September 15, 2009. We
do not expect the adoption of Statement No. 168 to have an impact on our
results of operations, financial condition or cash flows.
Item 3. Quantitative and
Qualitative Disclosures about Market Risk
Consistent with our investment policy, we do not
use derivative financial instruments in our investment portfolio. The primary
objective of our investment activities is to preserve principal while at the
same time maximizing the income we receive without significantly increasing
risk. To minimize risk, we maintain our
portfolio of cash, cash equivalents and short-term investments in
interest-bearing instruments, which may include United States government and
agency securities, high-grade United States corporate bonds, commercial paper
and money market funds. We do not have exposure to market risks associated with
changes in interest rates as we have no variable interest rate debt
outstanding. We do not believe we have any material exposure to market risks
associated with interest rates, however, we may experience reinvestment risk as
fixed income securities mature and are reinvested in securities bearing lower
interest rates.
The recent and precipitous decline in the market
value of certain securities backed by residential mortgage loans has led to a
large liquidity crisis affecting the broader U.S housing market, the financial
services industry and global financial markets.
Investors holding many of these and related securities have experienced
substantial decreases in asset valuations and uncertain secondary market
liquidity. Overall liquidity for many
debt issues has declined, meaning that we may realize losses if we are required
to liquidate securities upon short notice.
Additionally, the credit quality of certain issues and issuers has
declined, causing ratings downgrades and in some cases uncertainty regarding
the ability of issuers to repay principal amounts. Credit rating authorities have, in many
cases, been slow to respond to the rapid changes in the underlying value of
certain securities and pervasive market illiquidity regarding these
securities. Also, with respect to
mortgage and asset backed securities, overall economic conditions have
generated concerns about the value of the underlying assets held as collateral
and highlighted risks associated with insurance policies used to enhance the
credit of the related debt issues. To
date, we have not experienced defaults on any of our investment securities.
As a result, this credit crisis may have a
potential impact on the determination of the fair value of financial
instruments or possibly require impairments in the future should the value of
certain investments suffer a decline in value which is determined to be other
than temporary. We currently do not believe that any change in the market value
of fixed income investments in our portfolio is material, or warrants a
determination that there was an other than temporary impairment, and we
continue to monitor our investments closely.
We may be exposed to exchange conversion differences
in translating the value of our investment in Genmab to U.S. dollars. Depending
upon the relative strengthening or weakening of the U.S. dollar, the conversion
difference could be significant
.
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Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures:
Our principal executive officer and
principal financial officer reviewed and evaluated our disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e))
as of the end of the period covered by this Quarterly Report on Form 10-Q.
Based on that evaluation, our principal executive officer and principal
financial officer have concluded that as of June 30, 2009 our disclosure
controls and procedures were effective in ensuring that all material
information required to be included in this Quarterly Report on Form 10-Q
was made known to them in a timely fashion.
Changes in Internal Control Over Financial Reporting:
Such evaluation did not identify any
significant changes in our internal control over financial reporting that
occurred during the quarter ended June 30, 2009 that have materially
affected, or are reasonably likely to materially affect, the Companys internal
control over financial reporting.
Limitations on the effectiveness of controls:
A control system, no matter how well
conceived and operated, can provide only reasonable, not absolute, assurance
that the objectives of the control system are met. Because of the inherent
limitations in all control systems, no evaluation of controls can provide
absolute assurance that all control issues, if any, within an organization have
been detected.
Part II Other Information
Item 1. Legal Proceedings
The SEC is conducting an informal inquiry into our
historical stock option granting practices and related accounting and
disclosures. In addition, we have
received subpoenas from the U.S. Attorneys Office, District of New Jersey, relating
to the same matters. At the conclusion
of this inquiry and investigation, we could be subject to criminal or civil
charges and significant fines or penalties.
On
July 22, 2009, the Company and Bristol-Myers Squibb Company (BMS) announced
the signing of a merger agreement providing for the acquisition of the Company
by BMS, through a tender offer, for $16.00 per share in cash. Following that announcement, certain Company
shareholders filed similar lawsuits relating to this transaction against the
Company, the members of the Companys board of directors, and BMS. Those lawsuits include:
Blevins v. Medarex, Inc.
et al.
, U.S. District Court, District of New Jersey, Case No.
3:09-cv-03778-AET-DEA (filed July 30, 2009);
Blumberg v.
Pien et al.
, U.S. District Court, District of New Jersey, Case No.
3:09-cv-03615-AET-DEA (filed July 23, 2009);
Dessoye v.
Pien et al.
, Superior Court of New Jersey, Law Division, Mercer
County, (filed July 29, 2009);
Gordon v. Medarex, Inc. et
al.
, Superior Court of New Jersey, Chancery Division, Mercer County,
Docket No. C-73-09 (filed July 24, 2009);
Halegoua v. Medarex, Inc.
et al.
, Superior Court of New Jersey, Chancery Division, Mercer
County, Docket No. C-72-09 (filed July 23, 2009);
Halegoua v. Medarex,
Inc. et al.,
U.S. District Court of New Jersey, Case No.
3:09-cv-03824-FLW-DEA (filed July 31, 2009);
Hersh v.
Pien et al.
, Superior Court of New Jersey, Chancery Division, Mercer
County, Docket No. C-71-09 (filed July 23, 2009);
Jerjian v.
Pien et al.
, Superior Court of New Jersey, Chancery Division, Mercer
County (filed July 23, 2009);
Roelofsz v. Pien et al.
,
Superior Court of New Jersey, Chancery Division, Mercer County;
Sargent v. Pien et al.
, Superior Court of New Jersey, Law
Division, Middlesex County, Docket No. L-6438-09 (filed July 28, 2009); and
Roth v. Rubin et al.
, Superior Court of New Jersey, Chancery
Division, Mercer County, Docket No. C-75-09 (filed July 24, 2009).
The
plaintiffs in these cases generally assert that the Companys directors
breached fiduciary duties owed to shareholders.
The plaintiffs generally allege that the price offered by BMS in the
tender offer is inadequate, and that the Companys directors did not take
sufficient steps to maximize shareholder value in connection with the decision
to enter into an agreement with BMS. The
plaintiffs allege that the Company and BMS aided and abetted the purported
breaches of fiduciary duties by the directors.
In addition, the plaintiff in the federal version of the
Halegoua
lawsuit asserts a similar claim based on Section
14(e) of the Securities Exchange Act of 1934.
These complaints seek to enjoin the proposed tender offer, in addition
to seeking other relief. The Company believes the plaintiffs
claims lack merit, and intends to defend these cases vigorously.
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The Company is unable to reasonably estimate any
possible range of loss or liability associated with the stock option inquiry
and/or lawsuits due to their uncertain resolution.
In addition to the inquiry and investigation and
litigation described above, in the ordinary course of our business, we are at
times subject to various legal proceedings. We do not believe that any of our
current ordinary course legal proceedings, individually or in the aggregate,
will have a material adverse effect on our operations or financial condition.
Item 1A. Risk Factors
We have marked with an asterisk (*) those risk factors that reflect
substantive changes from the risk factors included in our Form 10-Q filed
on May 5, 2009 with the SEC for the three month period ended March 31,
2009.
Additional factors that might affect future results
include the following:
Risks Related to Our Business and
Industry
Successful
development of our product candidates is uncertain.
Our development
of current and future product candidates is subject to the risks of failure and
delay inherent in the development of new pharmaceutical products and products
based on new technologies. These risks include, but are not limited to:
·
delays in product development, clinical
testing or manufacturing;
·
slower
than expected patient enrollment;
·
unplanned expenditures in product
development, clinical testing or manufacturing;
·
failure in clinical trials;
·
failure to receive or delay in receipt of
regulatory approvals;
·
emergence of superior or equivalent
products;
·
inability to manufacture on our own, or
through others, product candidates on a commercial scale;
·
inability to market products due to
third-party proprietary rights;
·
election by our partners not to pursue
product development;
·
failure by our partners to develop
products successfully;
·
failure to receive adequate coverage and
reimbursement for our products from health care payors;
·
changes in legal and regulatory requirements;
and
·
failure to achieve market acceptance.
Because
of these risks, our research and development efforts or those of our partners
may not result in commercially viable products. If a significant portion of
these development efforts are not successfully completed, required regulatory
approvals are not obtained or are significantly delayed, or any approved
products are not commercially successful, our business, financial condition and
results of operations may be materially harmed.
Our
revenue and profit potential are unproven.
No revenues have been generated from the commercial sale of our products
and our products may not generate commercial revenues in the future.
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Because we have not begun commercial sales of
our products, our revenue and profit potential are unproven, which makes it
difficult for an investor to evaluate our business and prospects. No revenues
have been generated from the commercial sale of our products, and our products
may not generate revenues in the future. Our business and prospects should be
considered in light of the heightened risks and unexpected expenses and
problems we may face as a company in a rapidly evolving biopharmaceutical
industry.
*We have incurred
large operating losses, and we anticipate that these losses will continue.
We
have incurred large operating losses, and we anticipate that these losses will
continue for the foreseeable future. In particular, as of June 30, 2009,
we had an accumulated deficit of approximately $
1.1
billion. Our net loss was $
77.9
million and $38.5 million for the six
month period ended June 30, 2009 and the year ended December 31,
2008, respectively. Our net loss for the
year ended December 31, 2008 included a realized gain of approximately
$151.8 million from the sale of a portion of our Genmab stock. Excluding this realized gain, our net loss
for the year ended December 31, 2008 would have been $190.3 million. Our losses have resulted principally from:
·
research and development costs relating
to the development of our technology and antibody product candidates;
·
costs associated with the establishment
of our laboratory and manufacturing facilities and manufacturing of products;
and
·
general and administrative costs relating
to our operations.
We intend to continue to make significant
investments in:
·
research and development;
·
preclinical testing and clinical trials;
·
manufacturing clinical supplies of our
antibody product candidates;
·
establishing new collaborations; and
·
new technologies.
In
addition, we may be obligated to make milestone payments with respect to
certain of our product candidates as they progress through the clinical trial
process.
We
do not know when or if we or our partners will complete any pending or future
product development efforts, receive regulatory approval or successfully
commercialize any approved products.
We may continue to incur substantial operating
losses even if our revenues increase. As a result, we cannot predict the extent
of future losses or the time required for us to achieve profitability, if at
all.
Our operating results may vary
significantly from period-to-period, which may result in a decrease in the
price of our securities.
Our future revenues and operating results are
expected to vary significantly from period-to-period due to a number of
factors. Many of these factors are outside of our control. These factors
include:
·
the timing of the commencement,
completion or termination of partnership agreements;
·
the introduction of new products and
services by us, our partners or our competitors;
·
delays in, or termination of, preclinical
testing and clinical trials;
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·
changes in regulatory requirements for
clinical trials;
·
delays in manufacturing;
·
costs and expenses associated with
preclinical testing and clinical trials;
·
the timing of regulatory approvals, if
any;
·
sales and marketing expenses; and
·
the amount and timing of operating costs
and capital expenditures relating to the expansion of our business operations
and facilities.
Period-to-period
comparisons of our results of operations may not be relied upon as an
indication of future performance.
It
is possible that in some future periods, our operating results may be below
expectations of analysts and investors. If this happens, the price of our
securities may decrease.
We
may modify our business strategy in light of developments in our business and
other factors.
We
continually evaluate our business strategy and, as a result, may modify our
strategy in the future. We may, from time to time, focus our product development
efforts on different products or may delay or cease development of various
products. In addition, as a result of changes in our business strategy, we may
also change or refocus our existing research and development activities. This
could require changes in our facilities and personnel and the restructuring of
various financial arrangements. We cannot be certain that changes that we
implement will be successful.
We are subject to an informal inquiry by the SEC and a grand
jury investigation by the United States Attorneys Office for the District of
New Jersey, relating to our stock option granting practices, and such
governmental inquiry and investigation may result in charges filed against us
and in fines or penalties.
The SEC is conducting an informal
inquiry into our historical stock option granting practices and related
accounting and disclosures. In addition,
the United States Attorneys Office for the District of New Jersey is
conducting a grand jury investigation relating to the same matters. We understand that the governmental inquiry
and investigation relate to the same subject matter underlying the
investigation (the Investigation) conducted by a special investigation
committee of our independent directors relating to our stock option grant
practices from 1996 through June 30, 2006.
Based upon the information obtained in the Investigation, through July 2002,
we had a practice, in many instances, of selecting dates for our stock option
grants and restricted stock grants as of the date when the stock price was the
lowest during the month of grant, without disclosing this practice in our
public filings and without properly measuring the compensation expense on a
date that the terms of the equity awards were finalized. Subsequent to July 2002, while this
practice of selecting dates ceased by us in response to new legal and
regulatory reporting requirements, there were two annual equity grants for rank
and file employees for which the measurement dates differed from the grant
dates recorded in our books and records, which the Investigation revealed were
primarily a result of administrative delays, with no apparent intent to achieve
favorable exercise prices. Based on the
results of the Investigation, we restated our financial statements for the
quarter ended March 31, 2006 and the years ended December 31, 2005,
2004 and 2003, respectively.
Criminal
or civil charges could be filed against us and we could be required to pay
significant fines or penalties in connection with either or both of the
governmental inquiry and investigation or other governmental
investigations. We have incurred, and
continue to incur, substantial costs related to the governmental inquiry
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and
investigation and they continue to cause a diversion of our managements time
and attention which could have a material adverse effect on our financial
condition and results of operations. Any
criminal or civil charges by the SEC or the U.S. Attorneys Office or any fines
or penalties imposed by either the SEC or the U.S. Attorneys Office or other
governmental agency could materially harm our business, results of operations,
financial position and cash flows.
We are subject to the risks of lawsuits and regulatory actions in
connection with our historical stock option granting practices, the resulting
restatements, and the remedial measures we have taken.
In addition to the possibilities that there may be
additional governmental actions or shareholder lawsuits against us, we may be
sued or taken to arbitration by current or former officers or employees in
connection with their stock options or other matters. These governmental
actions, lawsuits and arbitrations may be time consuming and expensive,
and cause further distraction from the operation of our business. The adverse
resolution of any specific action could have a material adverse effect on
our business, financial condition and results of operations.
We are
at risk for additional tax liabilities.
In
connection with the investigation of our historical stock option grant
practices, we evaluated the related tax issues to determine if we may be
subject to additional tax liabilities.
Due to revision of measurement dates for certain stock option grants,
certain stock options that were previously treated as incentive stock options
may not actually qualify for such treatment and may be treated as non-statutory
stock options. As a result, we may be
subject to fines or penalties relating to the tax treatment of such stock
options. It is possible that additional
tax liabilities exist arising out of our past stock option granting practices,
and the amount of such additional tax liabilities could be material.
We are at risk of securities class action
litigation.
In
the past, securities class action litigation has often been brought against a
company following a decline in the market price of its securities. The risk is
relevant for us because our market price has experienced a decline due, in
part, to announcements regarding top-line results and the subsequent delay of
the Biologics License Application, or BLA, for ipilimumab in December 2007
and April 2008, respectively. If we faced such litigation, while we would
vigorously contest, it could result in substantial costs and a diversion of
managements attention and resources, which could materially harm our business.
*In connection with BMS tender
offer to purchase all of our outstanding shares, lawsuits have been filed
against us and our board of directors.
Following
our announcement on July 22, 2009 that we and BMS signed a merger
agreement providing for the acquisition of the Company by BMS through a tender
offer, certain Company shareholders filed similar lawsuits relating to this
transaction against us, the members of our board of directors and BMS. The plaintiffs in these cases generally
assert that our directors breached fiduciary duties owed to shareholders, the
price offered by BMS in the tender offer is inadequate, and that our directors
did not take sufficient steps to maximize shareholder value in connection with
the decision to enter into an agreement with BMS. The plaintiffs also allege that we and BMS
aided and abetted the purported breaches of fiduciary duties by the
directors. These complaints seek to
enjoin the proposed tender offer, in addition to seeking other relief. We believe the plaintiffs claims lack merit
and we intend to defend these cases vigorously.
However, this could result in
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substantial
costs and a diversion of managements attention and resources, which could
materially harm our business.
*We
cannot assure you that all conditions to the merger with BMS will be completed
and the merger consummated.
The
merger agreement with BMS contains representations, warranties and covenants of
the parties customary for transactions of this type. We have also agreed not to solicit or
initiate discussions with third parties regarding other acquisition proposals
and to certain restrictions on our ability to respond to such proposals,
subject to the fulfillment of certain fiduciary requirements of our board of
directors. The merger agreement also
contains customary termination provisions and provides that, in connection with
the termination of the merger agreement under specified circumstances involving
competing transactions or a change in our board of directors recommendation,
we may be required to pay BMS a termination fee of $70.80 million, representing
2.95% of the aggregate offer price. We
cannot assure you that the conditions of the merger agreement will be satisfied
or waived or that the merger will close in the expected time frame or at all.
We may need substantial additional funding. We
may not be able to obtain sufficient funds to grow our business or continue our
operations.
We will continue to expend substantial resources
for research and development, including costs associated with developing our
technology platforms and conducting preclinical testing and clinical trials.
Our future capital requirements will depend on a number of factors, including,
for example:
·
the size and complexity of research and
development programs;
·
the scope and results of preclinical
testing and clinical trials;
·
the retention of existing and
establishment of further partnerships, if any;
·
continued scientific progress in our
research and development programs;
·
the time and expense involved in seeking
regulatory approvals;
·
competing technological and market
developments;
·
the time and expense of filing and
prosecuting patent applications and enforcing patent claims; and
·
the cost of establishing commercial scale
manufacturing capabilities, conducting commercialization activities and
arrangements and in-licensing products.
We
believe our current sources of liquidity, including the proceeds received from
the sale of our 2.25% convertible senior notes, will be sufficient to meet our
operating, debt service and capital requirements for at least the next 24
months. To the extent our 2.25% convertible senior notes due in 2011 are not
converted into shares of our common stock on or before their maturity date, we
will have to either refinance the principal amount due or repay the principal
amount of the notes. In any event, we may require additional financing within
this time frame and may raise funds through public or private financings, line
of credit arrangements, collaborative relationships, sale of assets, and/or
other methods. The use of cash on hand or other financial alternatives will
depend on several factors including, but not limited to, the future success of
our products in clinical development, the prevailing interest rate environment
and access to the capital markets. We may be unable to raise sufficient funds
to complete development of any of our product candidates, to continue
operations or to repay our debt obligations at maturity. As a result, we may
face delay, reduction or elimination of research and development programs or
preclinical or clinical trials, in which case our business, financial condition
or results of operations may be materially harmed.
We have a significant amount of debt and may
have insufficient cash to satisfy our debt service obligations. In addition,
the amount of our debt could impede our operations and flexibility.
We
have $150.0 million in aggregate principal amount of our 2.25% convertible
senior notes outstanding, which, unless converted to shares of our common stock
or redeemed, will mature in 2011. Generally, during the last five years, our
operating cash flows were negative and insufficient to cover our fixed charges.
Our ability to generate sufficient operating cash flow to service our
indebtedness, including the notes, and fund our operating requirements will
depend on our ability, alone or with others, to successfully develop,
manufacture, and obtain required regulatory approvals and market our product
candidates, as well as other factors, including general economic, financial,
competitive, legislative and regulatory conditions, some of which are beyond
our control.
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If
we are unable to generate sufficient operating cash flow to service our
indebtedness and fund our operating requirements, we may need to obtain
additional debt or equity financing to do so, which may not be available to us
on satisfactory terms or at all. In addition, if new indebtedness is incurred,
the risks relating to our ability to service our indebtedness that we face
could intensify.
Even if we are able to meet our debt service
obligations, the amount of debt we have could adversely affect us in a number
of ways, including by:
·
limiting our ability to obtain any
necessary financing in the future for working capital, capital expenditures,
debt service requirements or other purposes;
·
limiting our flexibility in planning for,
or reacting to, changes in our business;
·
placing us at a competitive disadvantage
relative to our competitors who have lower levels of debt;
·
making us more vulnerable to a downturn
in our business or the economy generally; and
·
requiring us to use a substantial portion
of our cash to pay principal and interest on our debt, instead of applying
those funds to other purposes such as working capital and capital expenditures.
We have
investments in financial instruments which could potentially decrease in value
as a result of the credit crisis.
Due
to recent market developments, including continued rating agency downgrades of
sub-prime U.S. mortgage-related assets and insurers of long-term debt, the value
of sub-prime-related investments and certain tax-exempt long-term debt has
declined. This recent and precipitous
decline in the market value of certain securities backed by residential
mortgage loans and long-term debt insured by these bond insurers has led to a
large liquidity crisis affecting the broader U.S. housing market, the financial
services industry and global financial markets.
As a result, investors in many industry sectors have experienced
substantial decreases in asset valuations and uncertain market liquidity for
their investments. Overall liquidity for
many debt issues has declined, meaning that we may realize losses if we are
required to liquidate securities upon short notice. To date, we have not experienced any defaults
on any of our investment securities.
As
a result, this credit crisis may have a potential impact on the determination
of the fair value of certain of our investments, or possibly require
impairments in the future, should the value of certain of our investments
suffer a decline in value which is determined to be other than temporary. We currently do not believe that any change
in the market value of fixed income investments in our portfolio is material,
nor does it warrant a determination that there was an other than temporary
impairment. We continue to monitor our
investments closely and a future decline in value of such investments which is
determined to be other than temporary may require us to record a material
impairment of the fair value of those investments.
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Clinical trials required for our product
candidates are expensive and time-consuming, and their outcome is uncertain.
To obtain FDA
approval to market a new drug product, we or our partners must demonstrate
proof of safety and efficacy in humans. To meet these requirements, we or our
partners will have to conduct extensive preclinical testing and adequate and
well-controlled clinical trials. Conducting clinical trials is a lengthy,
time-consuming and expensive process. The length of time may vary substantially
according to the type, complexity, novelty and intended use of the product
candidate, and often can be several years or more per trial. Delays associated
with product candidates for which we are directly conducting preclinical or
clinical trials may cause us to incur additional operating expenses. Moreover,
we will continue to be affected by delays associated with the preclinical
testing and clinical trials of certain product candidates conducted by our
partners over which we have no control.
We rely on third parties, including our partners, academic institutions
and clinical research organizations to conduct, supervise or monitor many of
our clinical trials. We have less
control over the timing and other aspects of these clinical trials than if we
conducted them entirely on our own.
The
commencement and rate of completion of clinical trials may be delayed by many
factors, including, for example:
·
the inability to manufacture sufficient
quantities of qualified materials in accordance with current good manufacturing
practices, or cGMPs, for use in clinical trials;
·
the need or desire to modify our
manufacturing processes;
·
slower than expected rates of patient
recruitment;
·
modification of clinical trial protocols;
·
the inability to adequately observe
patients after treatment;
·
changes in regulatory requirements for
clinical trials;
·
the lack of effectiveness during the
clinical trials;
·
unforeseen safety issues;
·
delays, suspension or termination of
clinical trials due to the institutional review board responsible for
overseeing the study at a particular study site, or for some studies due to the
data safety monitoring committee charged with overseeing the study as a whole;
and
·
government or regulatory delays or clinical
holds requiring suspension or termination of the trials.
Even
if we obtain positive results from preclinical testing or clinical trials, we
may not achieve the same success in future trials. Clinical trials may not
demonstrate statistically sufficient effectiveness and safety to obtain the
requisite regulatory approvals for our product candidates. In a number of
instances, we have terminated the development of certain product candidates in
the early stages of human clinical testing due to a lack of or modest
effectiveness.
Generally,
our clinical trials, including our cancer trials for ipilimumab and other
antibodies, are conducted in patients with serious or life-threatening diseases
for whom conventional treatments have been unsuccessful or for whom no
conventional treatment exists, and in some cases, our product candidate is used
in combination with approved therapies that themselves have significant adverse
event profiles. During the course of treatment, these patients could suffer
adverse medical events or die for reasons that may or may not be related to our
product candidates. In trials of ipilimumab, the most commonly reported
drug-specific adverse events are primarily immune-related, ranging from mild in
most cases to severe in a very few number of instances, and are consistent with
the mechanism of action of CTLA-4 blockade.
These events are organ-specific, principally involving the
gastrointestinal tract (diarrhea or colitis), the skin (severe rash or
pruritis), the endocrine glands (reduced pituitary function) and the liver
(increased liver enzymes)
.
Other than a very small number of fatalities
not directly related to disease progression or complications of the disease
being treated, representing
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approximately
1% of over 4,000 patients
treated in all previous trials of ipilimumab, which may or may not be
attributable to our product candidates, the majority of adverse events resolved
or improved with treatment and without further significant complications.
From our collective experience in treating over 4,000
patients with ipilimumab, treatment guidelines have been established to ensure
proper management and most of these adverse events are manageable and resolve
following withdrawal of ipilimumab or appropriate medical therapy, such as
corticosteroids. In addition, we and BMS
are exploring potential biomarkers that may be predictive of clinical
responses.
We
cannot assure you that additional safety issues will not arise with respect to
our products in the future.
We
have, at times, experienced slower than expected rates of patient recruitment
in certain of our clinical trials. As a result, in certain instances, we may
experience delays in our product development and clinical testing.
Clinical trials that we conduct or that third
parties conduct on our behalf may not demonstrate sufficient safety and
efficacy to obtain the requisite regulatory approvals for any of our product
candidates. We expect to commence new clinical trials from time to time in the
course of our business as our product development work continues. The failure
of clinical trials to demonstrate safety and effectiveness for our desired
indications could harm the development of that product candidate as well as
other product candidates. Any change in, or termination of, our clinical trials
could materially harm our business, financial condition and results of
operations.
Success
in early clinical trials may not be indicative of results obtained in later
trials.
Results
of our early clinical trials and those of our partners using our human antibody
technology are based on a limited number of patients and may, upon review, be
revised or negated by authorities or by later stage clinical results.
Historically, the results from preclinical testing and early clinical trials
have often not been predictive of results obtained in later clinical trials. A
number of potential new drugs and biologics have shown promising results in
initial clinical trials, but subsequently failed to establish sufficient safety
and efficacy data to obtain necessary regulatory approvals. Data obtained from
preclinical and clinical activities are subject to varying interpretations,
which may delay, limit or prevent regulatory approval.
In
addition, regulatory delays or rejections may be encountered as a result of
many factors, including changes in regulatory policy during the period of
product development.
Products
employing our antibody technology may fail to gain market acceptance.
Even if clinical trials demonstrate the safety
and efficacy of product candidates developed by us or our partners using our
technology and all regulatory approvals have been obtained, products employing
our antibody technology may not gain market acceptance among physicians,
patients, third-party payors and the medical community. For example, the
current delivery systems for antibody-based therapeutic products are
intravenous and subcutaneous injection, which are generally less well received
by patients than tablet or capsule delivery. The degree of market acceptance of
any products employing our technology will depend on a number of factors,
including, for example:
·
establishment and demonstration of
clinical efficacy and safety, especially as compared to conventional
treatments;
·
cost-effectiveness;
·
alternative treatment methods;
·
reimbursement policies of government and
third-party payors; and
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·
marketing and distribution support for
our product candidates.
In
addition, many of our activities involve genetic engineering in animals and
animal testing, controversial subjects which have generally received adverse
publicity from animal rights activists and various other interest groups. Such
adverse publicity could decrease market acceptance of products employing our
technology.
If products employing our technology do not
achieve significant market acceptance, our business, financial condition and
results of operations will be materially harmed.
The successful commercialization of our antibody
products will depend on obtaining coverage and reimbursement for use of these
products from third-party payors.
Sales
of pharmaceutical products largely depend on the reimbursement of patients
medical expenses by government health care programs and private health
insurers. Without the financial support of the government or third-party
payors, the market for products employing our human antibody technology will be
limited. These third-party payors are increasingly challenging the price and
examining the cost effectiveness of medical products and services. In addition,
significant uncertainty exists as to the reimbursement status of newly approved
healthcare products. We may need to conduct post-marketing studies to demonstrate
the cost-effectiveness of our products. Such studies may require us to dedicate
a significant amount of resources. Our product candidates may not be considered
cost-effective. Third-party payors may not reimburse sales of products
employing our human antibody technology, or enable us or our partners to sell
them at profitable prices.
The continuing efforts of
governmental and third-party payors to contain or reduce the costs of
healthcare may impair our future revenues and profitability.
The pricing of our future
products may be influenced in part by government controls and restrictions from
private payors. For example, in certain foreign markets, pricing or
profitability of prescription pharmaceuticals is subject to government control.
In the United States, measures have been put in place to attempt to reduce
expenditures under the Medicare and Medicaid programs. In addition, there have been, and we expect
that there will continue to be, a number of federal and state proposals to
implement more rigorous provisions relating to government payment levels.
Private managed care organizations in the United States also seek to restrict
the pharmaceutical products that doctors in those organizations can prescribe
through the use of formularies, the lists of drugs which physicians are
permitted to prescribe to patients in a managed care organization.
While we cannot predict
whether the government will adopt any new legislative or regulatory proposals
with respect to the pricing or reimbursement of medicines, the announcement or
adoption of these proposals could have a material adverse effect on our
business, results of operations, financial condition and cash flow. Managed care and other private payor
exclusion of our pharmaceutical products from their formularies or demands for
price concessions necessary to be included on formularies could also have a
material adverse effect on our business, results of operations, financial
condition and cash flow.
Our manufacturing facilities may not continue to
meet regulatory requirements and may have limited capacity.
Before
approving a new drug or biologic product, the FDA requires that the facilities
at which the product will be manufactured are in compliance with cGMP
requirements. To be successful, our therapeutic products must be manufactured
for development and, following approval, in commercial quantities, in
compliance with regulatory requirements and at acceptable costs. While we
believe our current facilities are adequate for the
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limited
production of product candidates for clinical trials, our facilities are not
adequate to produce sufficient quantities of any products for commercial sale.
If
we are unable to establish and maintain a manufacturing facility or secure
third-party manufacturing capacity within our planned time and cost parameters,
the development and commercialization of our products and our financial performance
may be materially harmed.
We may also encounter problems with the
following:
·
production yields;
·
quality control and assurance;
·
shortages of qualified personnel;
·
compliance with FDA regulations,
including the demonstration of purity and potency;
·
changes in FDA requirements;
·
production costs; and/or
·
development of advanced manufacturing
techniques and process controls.
We
are aware of only a limited number of companies on a worldwide basis that
operate manufacturing facilities in which our product candidates can be
manufactured under cGMP regulations, a requirement for all pharmaceutical
products. We are currently pursuing late-stage clinical and commercial supply
agreements with cGMP-compliant third-party manufacturers with available
capacity to meet our internal production timetables. We have entered into a
clinical supply agreement with Lonza with respect to ipilimumab. As part of our collaboration with BMS, we
assigned to BMS the clinical supply agreement with respect to ipilimumab. Our partner BMS is responsible for securing
commercial supply agreements for ipilimumab. BMS may not be able to
successfully consummate such arrangements. We do not currently have the
capability to manufacture our product candidates under development in large
commercial quantities and have no experience in commercial-scale manufacturing.
It would take a substantial period of time for a contract facility that has not
been producing antibodies to begin producing antibodies under cGMP regulations.
We
cannot make assurances that we will be able to contract with such companies for
clinical and/or commercial supply on acceptable terms or in a timely manner, if
at all. Moreover, even if we are able to enter into clinical and/or commercial
supply manufacturing arrangements with cGMP-compliant third-party
manufacturers, we cannot assure you that such manufacturers will be able to
produce products that are substantially equivalent to the product candidates
that we have produced in our own facilities and used in our clinical
trials. Such manufacturers may encounter
difficulties in production scale-up, including problems involving production
yields, quality control and quality assurance and shortage of qualified
personnel. Moreover, they may not
perform as agreed or may not continue to manufacture our products for the time
required by us to successfully market our products. These third parties may fail to deliver the
required quantities of our products or product candidates on a timely basis and
at commercially reasonable prices. If such companies are not able to produce
products that are substantially equivalent to our product candidates, the
progress of our clinical trials and/or commercialization of our products may be
delayed and our business, financial condition and results of operations may be
materially harmed.
In
addition, we and any third-party manufacturer will be required to register
manufacturing facilities with the FDA and other regulatory authorities, and
provide periodic product listing information on the products manufactured at
each registered facility. The facilities will be subject to inspections
confirming compliance with cGMP or other regulations. If we or any of our
third-party manufacturers fail to maintain regulatory compliance, the FDA or
other regulatory authorities can impose regulatory sanctions including, among
other
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things,
imposition of a shut down of manufacturing operations, refusal to approve a
pending application for a new drug product or biologic product, or revocation
of a pre-existing approval.
The development and commercialization of our
lead product candidate, ipilimumab, is, in large part, dependent on the actions
of BMS, which are outside of our control.
We
depend, in part, on our partners to support our business, including the
development of product candidates generated through the use of our antibody
technology. In particular, under the terms of our collaboration and
co-promotion agreement with BMS, we have granted a license to commercialize our
lead product candidate, ipilimumab, to BMS for the treatment of all diseases.
The successful development and commercialization of ipilimumab is dependent, in
large part, on the actions of BMS, which are outside of our control. The
failure of BMS to act in accordance with its obligations under the
collaboration and co-promotion agreement or to prioritize or devote sufficient
resources to ipilimumab development and commercialization, or a change of
control of BMS, may cause us to incur substantial additional costs in order to
develop and commercialize ipilimumab, which could materially harm our business.
We are, in part, dependent on our partners
willingness and ability to devote resources to the development and
commercialization of product candidates or otherwise support our business as
contemplated in our partnership agreements.
We currently, or in the future may, rely on our
partners to:
·
access proprietary antigens for the
development of product candidates;
·
access skills and information that we do
not possess;
·
fund our research and development
activities;
·
manufacture products;
·
fund and conduct preclinical testing and
clinical trials;
·
seek and obtain regulatory approvals for
product candidates; and/or
·
commercialize and market future products.
Our dependence on our partners subjects us to a
number of risks, including:
·
our partners have significant discretion
whether to pursue planned activities;
·
we cannot control the quantity and nature
of the resources our partners may devote to product candidates;
·
our partners may not develop product
candidates generated using our antibody technology as expected; and
·
business combinations or significant
changes in a partners business strategy may adversely affect that partners
willingness or ability to continue to pursue these product candidates.
If
we do not realize the contemplated benefits from our partners, our business,
financial condition and results of operations may be materially harmed.
Our existing partnerships may be terminated, and
we may not be able to establish additional partnerships.
Our
licensing partners generally have the right to terminate our partnerships at
any time. Our ability to continue our current partnerships and to enter into
additional partnerships is dependent in large part on our ability to
successfully demonstrate that our UltiMAb
®
technology is an attractive method of
developing fully
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human
antibody therapeutic products. Existing or potential partners may pursue
alternative technologies, including those of our competitors, or enter into
other transactions that could make a collaboration with us less attractive to
them. For example, if an existing partner purchases or is purchased by a
company that is one of our competitors, that company could be less willing to
continue its collaboration with us and may, instead, become one of our
competitors. In April 2006, Abgenix and Amgen completed a merger that
resulted in Amgens ownership of Abgenixs XenoMouse
®
technology.
As a result, Amgen may be less willing to continue its collaboration
with us and may, through the use of the XenoMouse
®
technology, engage in direct competition with
us in the area of generating fully human monoclonal antibodies for
antibody-based therapeutics. In addition, a company that has a strategy of
purchasing companies rather than entering into partnership arrangements might have
less incentive to enter into a collaboration agreement with us. Moreover,
disputes may arise with respect to the ownership of rights to any technology or
products developed with any current or future partner. Lengthy negotiations
with potential new partners or disagreements between us and our partners may
lead to delays or termination in the research, development or commercialization
of product candidates. If we are not able to establish additional partnerships
on terms that are favorable to us or if a significant number of our existing
partnerships are terminated and we cannot replace them, we may be required to
increase our internal product development and commercialization efforts. This
would likely:
·
limit the number of product candidates
that we will be able to develop and commercialize;
·
significantly increase our need for
capital; and/or
·
place additional strain on managements
time.
Any
of the above may materially harm our business, financial condition and results
of operations.
Our strategic equity investments in our partners
expose us to equity price risk and, in addition, investments in our partners
may be deemed impaired, which would affect our results of operations.
We
have a number of strategic investments that expose us to equity price risk.
These investments may become impaired, which would adversely affect our results
of operations.
We
are exposed to equity price risk on our strategic investments in our
publicly-traded partners, and as part of our business strategy, we may choose
to make additional similar investments in public companies in the future. Under
SFAS No. 115,
Accounting for Certain
Investments in Debt and Equity Securities
, these investments are
designated as available-for-sale and are reported at fair value on our
consolidated balance sheet. Unrealized holding gains and losses on
available-for-sale securities are generally excluded from earnings and reported
within other comprehensive income which is a separate component of shareholders
equity. Under our accounting policy, marketable equity securities are generally
considered to be impaired if their fair value is less than our cost basis in
such securities for more than six months, or some other period in light of the
particular facts and circumstances surrounding the investment. If a decline in
the fair value of available-for-sale securities is considered to be other than
temporary, the cost basis of the security is written down to fair value as a
new cost basis and the amount of the write-down is included in earnings as an
impairment charge. For the years ended December 31, 2008, 2007 and 2006,
we recorded impairment charges of $48 thousand, $0 and $5.2 million,
respectively, on investments in partners whose securities are publicly
traded. If we deem these investments to
be further impaired at the end of any future reporting period, we may incur
additional impairment charges on these investments.
In
addition, we have investments in several of our partners whose securities are
not publicly traded. The value of our investments in these companies is
inherently more difficult to estimate than our investments in publicly traded
companies. We estimate the value of these investments by using information
acquired from industry trends, management of these companies, financial
statements and other external sources. Specifically,
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our
determination of any potential impairment of the value of privately held
securities includes an analysis of the following for each company on a periodic
basis: review of interim and year-end financial statements, cash position and
overall rate of cash used to support operations, the progress and development
of technology and product platform, the per share value of subsequent financing
and potential strategic alternatives. Based on the information acquired through
these sources, we record an investment impairment charge when we believe an
investment has experienced a decline in value that is considered to be other
than temporary. For the years ended December 31, 2008, 2007 and 2006, we
recorded impairment charges of approximately $5.3 million, $2.1 million, and
$0, respectively, on our investments in privately-held companies. Future adverse changes in market conditions
or adverse changes in operating results of these companies may also require an
impairment charge in the future.
Because
competition for qualified personnel is intense, we may not be able to retain or
recruit such qualified personnel, which could impact the research, development
and commercialization of our products.
For
us to pursue product development and commercialization plans, we will need to
hire additional qualified scientific personnel to perform research and
development. We will also need to hire personnel with expertise in clinical
testing, government regulation, manufacturing, sales and marketing, relevant
law and finance. We may not be able to attract and retain personnel on
acceptable terms, given the competition for such personnel among biotechnology,
pharmaceutical and healthcare companies, universities and non-profit research
institutions. If we are not able to attract and retain qualified personnel, our
business, financial condition and results of operations may be materially
harmed.
We
have had and may continue to face product liability claims related to the use
or misuse of products developed by us or our partners.
The
administration of drugs to humans, in clinical trials or after approval and
during commercialization, may expose us to product liability claims. Consumers,
healthcare producers or persons selling products based on our technology may be
able to bring claims against us based on the use of our product candidates in
clinical trials and the sale of products based on our technology. Product
liability claims may be expensive to defend and may result in large judgments
against us. We have obtained limited product liability coverage for our
clinical trials, under which coverage limits are $20.0 million per occurrence
and $20.0 million in the aggregate. Although we believe these coverage limits
are adequate, we cannot be certain that the insurance policies will be
sufficient to cover all claims that may be made against us. We intend to
increase our coverage limits as we progress into additional late-stage clinical
trials and to expand our insurance coverage to include the sale of commercial
products if we obtain marketing approval for product candidates in development.
Product liability insurance is expensive, difficult to obtain and may not be
available in the future on acceptable terms.
We
face intense competition and rapid technological change.
The
development of biotechnology and pharmaceutical products is a highly
competitive business subject to significant and rapid technological change. We
face competition in several different forms. First, our human antibody
generation and antibody-drug conjugate activities currently face competition
from competitors with similar technology to ours as well as distinctly
different technologies. Second, product candidates being developed by us or by
our partners also face actual or potential competition. Developments by our
competitors may render our human antibody technology, our antibody-drug
conjugate technology or our products obsolete or non-competitive.
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We
are aware of several pharmaceutical and biotechnology companies that are
actively engaged in research and development in areas related to antibody
therapeutics. Some of these companies have commenced clinical trials of
antibody product candidates or have successfully commercialized antibody
products. Many of these companies are addressing the same disease indications
as are we and our partners. Also, we compete with companies that offer antibody
generation services to other companies that have disease related target
antigens. These competitors have specific expertise or technology related to
monoclonal antibody development. In the past, we competed directly with
Abgenix, which merged with Amgen in April 2006, with respect to the
generation of fully human antibodies from transgenic mice. Abgenix had offered
potential partners the use of its XenoMouse® technology to generate fully human
monoclonal antibodies. Regeneron has licensed its VelocImmune® monoclonal
antibody generation technology to AstraZeneca, Astellas Pharma Inc. and
sanofi-aventis, potentially enabling such licensees to compete with us in the
generation of therapeutic antibodies.
Regeneron may also compete with us directly in the generation of
therapeutic antibodies or may enter into additional licenses with other
companies. AstraZeneca also has access to antibody generation technologies through
its ownership of Cambridge Antibody Technology.
In addition, we have entered into agreements with each of Kirin and
Genmab, respectively, that grant these companies licenses to our proprietary
transgenic mouse technology platform, enabling them to compete with us in
offering antibody generation and development services in certain markets.
Avanir
and XTL have developed technologies that, according to Avanir and XTL, will
allow them to generate fully human monoclonal antibodies in functionally
modified mice. Numerous additional companies are developing therapeutic product
candidates comprising human antibody components. Furthermore, several companies
are developing, or have developed, technologies that do not involve
immunization of animals for creating antibodies comprising human antibody sequences. XOMA and PDL BioPharma both offer
technologies to convert mouse antibodies into antibodies closely resembling
human antibodies. In addition, phage display technology is being used by
companies, such as CAT, Dyax and MorphoSys to generate potentially therapeutic
products comprising human antibody sequences. Companies such as Johnson &
Johnson, MedImmune (a subsidiary of AstraZeneca), Amgen, Biogen Idec, Novartis,
Genentech, PDL BioPharma, Wyeth, BMS, Abbott Laboratories, Alexion
Pharmaceuticals, Inc. and GlaxoSmithKline have generated therapeutic
products that are currently in development or on the market and that are
derived from recombinant DNA that comprise human antibody components.
We
have entered into license agreements with Pfizer, designed to give each party
freedom to operate with respect to the development and commercialization of
antibodies to CTLA-4. Among other
things, these license agreements allow Pfizer to compete with us in such
development and commercialization efforts, but Pfizer is obligated to make
certain milestone and royalty payments to us based upon future sales of any
Pfizer anti-CTLA-4 antibody product. Pfizer is developing tremelimumab, a fully
human antibody generated by using transgenic mouse technology substantially similar
to our HuMAb-Mouse® technology that targets the T-cell receptor CTLA-4.
Although Pfizer announced the discontinuation of a Phase 3 clinical trial of
tremelimumab for metastatic melanoma in April 2008, it continues to
conduct clinical trials of this product candidate in several types of cancer.
Other
technologies can also be applied to the treatment of the diseases that we or
our partners are pursuing. For example, ADCs are being developed by others, as
well as by us. Companies such as
Genentech, Seattle Genetics (and its partners, including Progenics
Parmaceuticals, Inc. and Curagen Corporation), Immunogen (and its
partners, including Bayer HealthCare and sanofi-aventis), and Wyeth have
generated ADCs that are currently in development or on the market that utilize
ADC technologies other than Medarexs ADC technology, and these ADC product
candidates may compete with ADC product candidates developed using Medarexs
ADC platform technology. Other companies
are developing antibodies linked to radioactive isotopes. Companies are also
developing technologies for the creation of antibody alternatives or mimetics,
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alternative
products with properties similar to antibodies. In addition, the application of
recombinant DNA technology to develop potential products consisting of proteins
(such as growth factors, hormones, enzymes, cytokines receptor fragments and
fusion proteins) that do not occur normally in the body, or occur only in small
amounts, has been under way for some time. Included in this group are
interleukins such as IL-2 and IL-11, interferons, colony stimulating factors
such as G-CSF and GM-CSF, clotting factors, growth hormones, erythropoeitin,
DNAse, tPA, glucocerebrosidase, PDGF and a number of other similar biological
agents. Continuing development of new chemical entities and other drugs by
pharmaceutical and other biotechnology companies carries with it the potential
discovery of agents for treating disease indications also targeted by drugs
that we or our partners are developing.
Some
of our competitors have received regulatory approval or are developing or
testing product candidates that compete directly with product candidates
employing our antibody technology. Many of these companies and institutions,
either alone or together with their partners, have substantially greater
financial resources and larger research and development staffs than we or some
of our partners do. In addition, many of these competitors have significantly
greater experience than we do in:
·
developing
products;
·
undertaking
preclinical testing and clinical trials;
·
obtaining
FDA and other regulatory approvals of products; and
·
manufacturing
and commercializing products.
Accordingly,
our competitors may obtain patent or regulatory protection, receive FDA
approval or commercialize products before we or our partners do. If we or our
partners commence commercial product sales, we or our partners will be
competing against companies with greater manufacturing, marketing and sales
capabilities, areas in which we and certain of our partners have limited or no
experience.
We
also face intense competition from other pharmaceutical and biotechnology
companies to establish partnerships, as well as relationships with academic and
research institutions, and to in-license proprietary technology from these
institutions. These competitors, either alone or with their partners, may
succeed in developing or licensing technologies or products that are more
effective than ours.
Seeking
orphan drug designation for eligible products is an uncertain process, and we
may not receive any effective or competitive results from this competitive
strategy
.
Our
competitive strategy includes seeking orphan drug designation for eligible
products (i.e., certain products for diseases with small patient
populations). In the United States, the
first drug with an orphan drug designation for a given disease to receive
regulatory approval for such disease generally receives marketing exclusivity
for the use of the drug for such disease for a period of seven years from
approval. The orphan drug exclusivity
bars others from obtaining approval for the same drug for the designated
indication during the seven years, unless the subsequent applicant can
demonstrate that its product is clinically superior to the drug with
exclusivity or the prior applicant is unable to provide adequate supply to meet
medical need. Orphan drug exclusivity is
also available in markets outside the United States on similar terms.
We
have obtained orphan drug designation in the United States for ipilimumab and
certain of our other product candidates in development, and therefore each is
eligible for orphan drug exclusivity if approved first. The FDAs approach with
respect to orphan drug status for antibody products is uncertain, particularly
with respect to whether two antibody products against the same disease target
would be considered to be the same for orphan drug purposes under current law
and regulations. Furthermore, we are not
aware of established FDA policies or precedent for how orphan drug exclusivity
applies in circumstances where two or more compounds
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with
orphan drug designations are approved for combination therapy. The FDA may not
grant us exclusivity for ipilimumab, or may permit others to receive approval
for differing combinations of similar compounds despite any orphan drug
exclusivity we receive for different uses or for treating metastatic melanoma,
depending on the FDAs assessment of the similarity of the other drugs to our
products. Orphan drug exclusivity also
does not prevent the FDA from permitting others to market the same compound for
different uses than the orphan use. We therefore may not receive any meaningful
protection for ipilimumab or our other product candidates based on orphan drug
exclusivity.
We
are subject to extensive and costly government regulation.
Product
candidates employing our human antibody technology are subject to extensive and
rigorous domestic government regulation including regulation by the FDA, the
Centers for Medicare and Medicaid Services, other divisions of the U.S.
Department of Health and Human Services, the U.S. Department of Justice, state
and local governments and their respective foreign equivalents. The FDA
regulates the research, development, preclinical and clinical testing,
manufacture, safety, effectiveness, record-keeping, reporting, labeling,
storage, approval, advertising, promotion, sale, distribution, import, and
export of biopharmaceutical products. The FDA regulates human antibodies as
biologics, subject to a BLA, under the Public Health Service Act, as amended,
and the Federal Food, Drug, and Cosmetic Act, as amended. If products employing
our human antibody technology are marketed abroad, they will also be subject to
extensive regulation by foreign governments, whether or not we have obtained
FDA approval for a given product and its uses. Such foreign regulation may be
equally or more demanding than corresponding U.S. regulation.
Government regulation substantially increases
the cost and risk of researching, developing, manufacturing, and selling our
products. The regulatory review and approval process, which includes
preclinical testing and clinical trials of each product candidate, is lengthy,
expensive and uncertain. We or our partners must obtain and maintain regulatory
authorization to conduct clinical trials, and register our clinical trials in
accordance with new legal requirements to register clinical trials on publicly
available databases. We or our partners must obtain regulatory approval for
each product candidate we intend to market, and the manufacturing facilities
used for the products must be inspected and meet legal requirements. Securing
regulatory approval requires the submission of extensive preclinical and clinical
data and other supporting information for each proposed therapeutic indication
in order to establish the products safety, efficacy, potency and purity for
each intended use. The development and approval process takes many years,
requires substantial resources, and may never lead to the approval of a
product. Failure to obtain regulatory approvals, or delays in obtaining
regulatory approvals may:
·
adversely affect the successful
commercialization of any drugs that we or our partners develop;
·
impose additional costs on us or our
partners;
·
diminish any competitive advantages that
we or our partners may attain; and
·
adversely affect our receipt of revenues
or royalties.
Even if we are able to obtain regulatory
approval for a particular product, the approval may limit the indicated medical
uses for the product, may otherwise limit our ability to promote, sell, and
distribute the product, may require that we conduct costly post-marketing
surveillance, and/or may require that we conduct ongoing post-marketing
studies. Material changes to an approved product, such as, for example,
manufacturing changes or revised labeling, may require further regulatory
review and approval. Once obtained, any approvals may be withdrawn,
restrictions may be placed on our ability to market or distribute the product,
or post-approval study or other requirements might be imposed, including, for
example, if there is a later discovery of previously unknown problems with the
product, such as a previously unknown safety issue. If we, our partners
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or our contract manufacturers fail to
comply with applicable regulatory requirements at any stage during the
regulatory process, such noncompliance could result in, among other things:
·
delays in the approval of applications or
supplements to approved applications;
·
refusal of a regulatory authority,
including the FDA, to review pending market approval applications or
supplements to approved applications;
·
warning letters;
·
fines;
·
import and/or export restrictions;
·
product recalls or seizures;
·
injunctions;
·
total or partial suspension of
production;
·
civil penalties;
·
withdrawals of previously approved
marketing applications or licenses;
·
limitations on previously approved
marketing applications or licenses, or new post-approval requirements;
·
recommendations by the FDA or other
regulatory authorities against governmental contracts; and
·
criminal prosecutions.
In
certain cases, we expect to rely on our partners to file Investigational New
Drug Applications (INDs) with the FDA and to direct the regulatory approval
process for product candidates employing our human antibody technology. Our
partners may not be able to conduct clinical testing or obtain necessary
approvals from the FDA or other regulatory authorities for their product
candidates employing our human antibody technology. If they fail to obtain
required governmental approvals, our partners will be delayed or precluded from
marketing these products. As a result, commercial use of products employing our
technology will not occur and our business, financial condition and results of
operations may be materially harmed.
We
do not have, and may never obtain, the regulatory approvals we need to market
our product candidates.
To date, we have not applied
for or received the regulatory approvals required for the commercial sale of
any of our product candidates in the U.S. or in any foreign jurisdiction. We
have only limited experience in filing and pursuing applications necessary to
obtain regulatory approval. It is possible that none of our product candidates,
including ipilimumab, will be approved for marketing. In April 2008,
Medarex and one of its partners, Bristol-Myers Squibb Company, announced that,
following a meeting with the FDA to discuss the regulatory pathway forward for
ipilimumab, at the request of the FDA, no BLA filing would be submitted for
market approval of ipilimumab in melanoma without additional overall survival
data from an ongoing Phase 3 trial of ipilimumab in combination with
chemotherapy in previously untreated melanoma (study 024). Clinical trial results are frequently
susceptible to varying interpretations that may delay, limit or prevent
regulatory approvals. Once submitted, the FDA may decide not to accept the BLA
for filing and the FDA may never give its approval. We cannot guarantee that we
will ever be able to produce commercially successful products.
Even
if approved, our products will be subject to extensive post-approval
regulation.
Once
a product is approved, numerous post-approval requirements apply. Among other
things, the holder of an approved BLA or New Drug Application, or NDA, is
subject to periodic and other FDA monitoring and reporting obligations,
including obligations to monitor and report adverse events and instances of the
failure of a product to meet the specifications in the BLA or NDA. Application holders must submit new or
supplemental
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applications
and obtain FDA approval for certain changes to the approved product, product
labeling or manufacturing process. Application holders must also submit
advertising and other promotional material to the FDA and report on ongoing
clinical trials. New legal requirements
have also been enacted to require disclosure of clinical trial results on
publicly available databases.
Advertising
and promotional materials must comply with FDA rules in addition to other
potentially applicable federal and state laws. The distribution of product
samples to physicians must comply with the requirements of the Prescription
Drug Marketing Act. Manufacturing facilities remain subject to FDA inspection
and must continue to adhere to FDAs cGMP requirements. Sales, marketing, and
scientific/educational grant programs must comply with the anti-fraud and abuse
provisions of the Social Security Act, the False Claims Act and similar state
laws, each as amended. Pricing and rebate programs must comply with the
Medicaid rebate requirements of the Omnibus Budget Reconciliation Act of 1990
and the Veterans Health Care Act of 1992, each as amended. If products are
made available to authorized users of the Federal Supply Schedule of the
General Services Administration, additional laws and requirements apply. All of
these activities are also potentially subject to federal and state consumer
protection and unfair competition laws.
In
recent years, several states in the United States, including California,
Massachusetts, Maine, Minnesota, Nevada, New Hampshire, New Mexico, Texas,
Vermont and West Virginia, as well as the District of Columbia, also have
enacted legislation requiring pharmaceutical companies to establish marketing
compliance programs, file periodic reports with the state, make periodic public
disclosures on sales, marketing, pricing, clinical trials and other activities,
and/or register their sales representatives, as well as to prohibit pharmacies
and other healthcare entities from providing certain physician prescribing data
to pharmaceutical companies for use in sales and marketing. Similar legislation is being considered in
other states and at the federal level in the United States. Many states also have laws requiring that
drug and biotechnology manufacturers obtain annual registrations in order to
ship products into the state, and some states have enacted requirements that
shipments be accompanied by pedigree statements identifying the source and
prior shipments of the product.
Depending
on the circumstances, failure to meet these post-approval requirements can
result in criminal prosecution, fines or other penalties, injunctions, recall
or seizure of products, total or partial suspension of production, denial or
withdrawal of pre-marketing product approvals, or refusal to allow us to enter
into supply contracts, including government contracts. Any government investigation of alleged
violations of law could require us to expend significant time and resources in
response, and could generate negative publicity. In addition, even if we comply with FDA and
other requirements, new information regarding the safety or effectiveness of a
product could lead the FDA to modify or withdraw a product approval.
New
legal and regulatory requirements could make it more difficult for us to obtain
approvals for our product candidates, and could limit or make more burdensome
our ability to commercialize any approved products.
Federal
legislation known as the FDA Amendments Act of 2007 grants FDA extensive
authority to impose post-approval clinical study and clinical trial
requirements, require safety-related changes to product labeling, review
advertising aimed at consumers, and require the adoption of risk management
plans, referred to in the legislation as risk evaluation and mitigation
strategies, or REMS. The REMS may
include requirements for special labeling or medication guides for patients,
special communication plans to healthcare professionals, and restrictions on
distribution and use. For example, if
the FDA makes the requisite findings, it might require that a new product be
used only by physicians with certain specialized training, only in certain
designated healthcare settings, or only in conjunction with special patient
testing and monitoring. The legislation
also includes requirements for providing the public information on ongoing
clinical trials through a clinical trial registry and for disclosing clinical
trial results to the public through a clinical trial database; renewed
requirements for
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conducting
trials to generate information on the use of products in pediatric patients;
new requirements to pay the FDA a fee to obtain advisory review of certain
consumer television advertisements; and new penalties, for example for false or
misleading consumer advertisements.
Other proposals have been made to impose additional requirements on drug
approvals, further expand post-approval requirements, and restrict sales and
promotional activities. The FDA
Amendments Act, and the additional proposals if enacted, may make it more
difficult or burdensome for us to obtain approval of our product candidates,
any approvals we receive may be more restrictive or be subject to onerous
post-approval requirements, our or our partners ability to commercialize
approved products successfully may be hindered, and our business may be harmed
as a result.
If we are able to
obtain approvals for our products, we could face competition from generic or follow-on
versions of our products.
Under
current U.S. law and FDA policy, generic versions of conventional chemical drug
compounds, sometimes referred to as small molecule compounds, may be approved
through an abbreviated approval process. In general terms, the generic
applicant references an approved innovator product for which full clinical data
demonstrating safety and effectiveness exist for the approved conditions of
use. The generic applicant in turn need only demonstrate that its product has
the same active ingredient(s), dosage form, strength, route of administration,
and conditions of use (labeling) as the referenced innovator drug, and that the
generic product is absorbed in the body at the same rate and to the same extent
as the referenced innovator drug (this is known as bioequivalence). In
addition, the generic application must contain information regarding the
manufacturing processes and facilities that will be used to ensure product quality,
and must contain certifications to patents listed with the FDA for the
referenced innovator drug.
There
is no such abbreviated approval process under current law for biological
products approved under the Public Health Service Act through a BLA, such as
monoclonal antibodies, cytokines, growth factors, enzymes, interferons and
certain other proteins. However, various proposals have been made to establish
an abbreviated approval process to permit approval of generic or follow-on
versions of certain types of biological products. The proposals include
proposals for legislation, and proposals for the FDA to extend its existing
authority to this area.
If
the law is changed or if the FDA somehow extends its existing authority in new
ways, and third parties are permitted to obtain approvals of versions of our
antibody products through an abbreviated approval mechanism, and without
conducting full clinical studies of their own, it could materially harm our
business. Such products would be significantly less costly than ours to bring
to market, and could lead to the existence of multiple lower priced competitive
products. This would substantially limit our ability to obtain a return on the
investments we have made in those products.
We are
subject to federal, state, local and foreign laws and regulations, and
complying with these may cause us to incur significant costs.
We are subject to laws and
regulations enforced by certain federal, state, local and foreign health and
environmental authorities and other regulatory statutes including:
·
the
Occupational Safety and Health Act;
·
the
Environmental Protection Act;
·
the Toxic
Substances Control Act;
·
the Federal
Food, Drug and Cosmetic Act;
·
the Resource
Conservation and Recovery Act; and
·
other current
and potential federal, state, local or foreign laws and regulations.
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In particular, with respect
to environmental laws, our product development activities involve the use of
hazardous materials, and we may incur significant costs as a result of the need
to comply with these laws. Our research, development and manufacturing
activities involve the controlled use of hazardous materials, chemicals,
viruses and radioactive compounds. We are subject to federal, foreign, state
and local laws and regulations governing the use, manufacture, storage,
handling and disposal of these materials and waste products. Although we believe
that our safety procedures for handling and disposing of these materials comply
with the standards prescribed by applicable laws and regulations, we cannot
completely eliminate the risk of contamination or injury, by accident or as the
result of intentional acts of terrorism, from these materials. In the event of
an accident, we could be held liable for any damages that result, and any
resulting liability could exceed our resources. We may also be required to
incur significant costs to comply with environmental laws and regulations in
the future.
Risks Related to Intellectual
Property
We
depend on patents and proprietary rights.
Our success depends in part on our ability to:
·
apply for, obtain, protect and enforce
patents;
·
protect trade secrets;
·
operate without infringing upon the
proprietary rights of others; and
·
in-license or acquire certain
technologies.
We
rely on patent protection against use of our proprietary products and
technologies by competitors. We will be
able to protect our proprietary rights from unauthorized use by third parties
only to the extent that our proprietary rights are covered by valid and
enforceable patents or are effectively maintained as trade secrets. We protect our proprietary position by filing
U.S. and foreign patent applications related to our proprietary technology,
inventions and improvements that are important to the development of our business. Our pending patent applications, those we may
file in the future, or those we may license from third parties, may not result
in patents being issued or, if issued, may not be held enforceable. The products and product candidates currently
being developed or considered for development are in the area of biotechnology,
an area in which there are extensive patent filings. The patent position of
biotechnology intellectual property generally is highly uncertain and involves
complex legal and factual questions; to date, no consistent policy has emerged
regarding the breadth of claims allowed in biotechnology patents. Therefore, we cannot predict with certainty
the breadth of claims that we may be allowed for our proprietary technology or
products, or their enforceability.
Granted
patents may be invalidated, circumvented, or may expire before or soon after
commercialization. Because of the
extensive time required for development, testing and regulatory review of a
potential product, it is possible that before we commercialize any of our
products, any related patent may expire, or its term may exist for only a short
period once commercialization begins, thus reducing any advantage of the
patent. Also, patent rights may not
provide us with proprietary protection or competitive advantages against competitors
having similar technology that falls outside the scope of our claims. Furthermore, others may independently develop
similar technologies or duplicate any technology that we have developed which
is not covered by an issued patent in a particular country. The laws of foreign countries may not protect
our intellectual property rights to the same extent as do the laws of the
U.S. Thus, any patents that we own or
license from third parties may not provide sufficient protection against
competitors. In addition to patents, we
rely on trade secrets and proprietary know-how.
We protect these secrets and know-how, in part, through confidentiality
and proprietary information agreements.
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We
generally require our staff members, material consultants, scientific advisors
and parties to collaboration or licensing agreement to execute confidentiality
agreements upon the commencement of employment, the consulting relationship or
the collaboration or licensing arrangement with us. These agreements may not provide protection
or adequate remedies in the event of unauthorized use or disclosure of
confidential and proprietary information or breach of these agreements. Furthermore, our trade secrets may otherwise
become known to, or be independently developed by, our competitors.
We
do not have exclusive access to certain patents and therefore we may face
increased competition from those entities that share access to these patents.
Even
though we own issued patents and pending applications and have received
licenses pertaining to the HuMAb-Mouse® and the KM-Mouse® technologies, this
does not mean that we and our licensees of these technologies will have
exclusive rights to all antibodies against the targets bound by these
antibodies, or that we or our licensees will have the right to make, develop,
use and sell the antibodies we make.
Our
patents and applications covering the HuMAb-Mouse® and the KM-Mouse®
technologies also cover particular human antibodies, but they do not cover all
human antibodies. Additionally, our
patents may not protect against the importation of products, such as
antibodies, made using the HuMAb-Mouse® or KM-Mouse® technologies.
We
do not have exclusive access to the patents underlying the HuMAb-Mouse®
technology. In March 1997, prior to our acquisition of GenPharm, GenPharm
entered into a cross-license and settlement agreement with Abgenix, Cell Genesys, Inc.,
Xenotech, L.P. and Japan Tobacco, Inc., pursuant to which Abgenix and
these entities paid GenPharm a total of approximately $38.6 million in exchange
for a non-exclusive license to certain intellectual property, including
patents, patent applications, third-party licenses and inventions pertaining to
the development and use of certain transgenic rodents, including mice, that
produce fully human antibodies that are integral to our product candidates and
business. This intellectual property and the related third-party licenses form
the basis of our HuMAb-Mouse® technology.
Amgen may have access to such intellectual property and licenses as a
result of its acquisition of Abgenix in 2006. Our business may suffer from the
competition of these entities and their licensees and sublicensees.
We
are not the exclusive owner of the technology underlying the KM-Mouse®. Our
collaboration and license agreement with Kirin contains certain cross-licenses
for certain of each others technologies for the development and
commercialization of human antibody products made using the HuMAb-Mouse®, the
KM-Mouse® and certain other antibody-generating mice. Kirin has certain rights
to distribute and use such mice throughout the world. Our business may be
materially harmed as a consequence of competition from Kirin and its licensees
and sublicensees or if the collaboration and license agreement were breached or
terminated.
Moreover,
other parties could have blocking patent rights to products made using the
HuMAb-Mouse® and KM-Mouse® technologies, such as antibodies, and their
production and uses, based on proprietary rights covering the antibody or the
antibodys target or the method of manufacturing or use of the antibody. For example, we are aware of certain U.S. and
foreign patents owned by third parties relating to antibody product candidates
that we are developing alone or with our collaborators, including to specific
targets for making monoclonal antibodies, to human monoclonal antibodies, and
to the method of manufacture and use of such products.
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Third parties may
allege our products or technologies infringe their patents or may challenge the
validity of our patents and our other intellectual property rights, resulting
in litigation or other time-consuming and expensive proceedings which could
deprive us of valuable products and/or rights
.
Our
commercial success depends significantly on our ability to operate without
infringing the patents and other proprietary rights of third parties. If we become involved in any intellectual
property litigation, interference or other judicial or administrative
proceedings, we may incur substantial expenses and the efforts of our technical
and management personnel may be diverted.
If any of our products or technologies are found to infringe a third
partys patent or violate their proprietary rights, such an adverse
determination may subject us to significant liabilities, including payment of
significant monetary damages and royalties, or require us to seek licenses from
third parties that may not be available on commercially favorable terms, if at
all. Therefore, we and our partners may
be restricted or prevented from further product development or commercializing
and selling products that are covered by third party intellectual
property. This could materially harm
our business, financial condition and results of operations.
With
respect to third party patent rights, we are aware of a U.S. patent owned by
Genentech, relating to the production of recombinant antibodies in host
cells. This patent is currently in a reexamination proceeding before the
U.S. Patent and Trademark Office, or USPTO. The USPTO has issued a Notice
of Intent to Issue a Reexamination Certificate confirming the patentability of
the reexamined claims. It is anticipated that a reexamination certificate
will issue later in 2009.
We
currently produce our product candidates and our partners product candidates
using recombinant antibodies from host cells and may choose to produce
additional product candidates in this manner.
If any of our antibody product candidates are produced in a manner
subject to claims in the Genentech patent that survive the appeal processes, if
any, then we may need to obtain a license from Genentech, should one be
available. We have a license to this
patent from Genentech for our anti-CTLA-4 product candidate (ipilimumab) but currently
do not have licenses for any of our other antibody product candidates. If we desire a license for any of our other
antibody product candidates and are unable to obtain a license on commercially
reasonable terms or at all, we may be restricted in our ability to make
recombinant antibodies from host cells, as claimed by Genentech, or to import
them into the United States.
We
are also aware of certain U.S. patents held by third parties relating to
antibody expression in particular types of host cells, including Chinese
hamster ovary, or CHO, cells, including certain media preparations and their
use for culturing CHO cells, and particular antibody formulations, any of which
may be relevant to our current or future manufacturing techniques. If we determine that we need a license to
these or other patents relating to methods of making antibodies and are unable
to obtain licenses on commercially reasonable terms or at all, we may be
restricted in our ability to use these methods to make antibodies or to import
the antibodies into the United States.
We
cannot provide assurances that our product candidates and/or actions in
developing or selling human antibody product candidates will not infringe the
aforementioned patents. We intend to
seek licenses to such patents when, in our judgment, such licenses are
needed. If any licenses are required,
there can be no assurance that we will be able to obtain any such license on
commercially favorable terms, if at all.
If these licenses are required and are not obtained, we might be
prevented from using certain of our technologies for generating recombinant
human antibody product candidates. Our
failure to obtain a license to any technology that we may require may
materially harm our business, financial condition and results of operations.
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Risks Related to Our Common Stock
*Our
stock price may be volatile.
Historically, there has been significant
volatility in the market prices of biotechnology companies securities. During
the two-year period ended June 30, 2009, the sale prices of our common
stock ranged between $3.40 and $18.23.
Various factors and events may have a significant impact on the market
price of our common stock. These factors include, by way of example:
·
interim or final results of, or
speculation about, clinical trials of and the regulatory filing schedule for
our lead product candidate, ipilimumab;
·
progress with clinical trials;
·
fluctuations in our operating results;
·
announcements of technological
innovations or new commercial therapeutic products by us or our competitors;
·
published reports by securities analysts;
·
governmental regulation;
·
developments in patent or other
proprietary rights;
·
developments in our relationship with
collaborative partners;
·
public concern as to the safety and
effectiveness of our product candidates or products;
·
changes in our management;
·
matters relating to the investigation of
our past stock option grant practices; and
·
general market conditions.
The
trading price of our common stock has been, and could continue to be, subject
to wide fluctuations in response to these or other factors, including the sale
or attempted sale of a large amount of our common stock into the market. Broad market
fluctuations may also adversely affect the market price of our common stock.
*We
have obligations to issue shares of our common stock in the future, which may
have a dilutive effect on the shares of our common stock currently outstanding.
As
of July 31, 2009, we had
21,302,527
shares of common stock reserved for
issuance pursuant to options and other stock based awards which had been
granted under our equity incentive plans having a weighted average exercise
price of $
8.71
per share and we had reserved
8,970,797
shares of common stock for issuance
pursuant to future grants of options under our equity incentive plans. We have
filed registration statements on Form S-8 under the Securities Act of
1933, as amended, covering all of these shares. Shares issued pursuant to these
plans, other than shares issued to affiliates, will be freely tradable in the
open market. Shares held by affiliates may be sold pursuant to the requirements
of Rule 144.
As
of July 31, 2009, we had reserved
501,013
shares of common stock for issuance
pursuant to our 2002 Employee Stock Purchase Plan. We have filed a registration
statement on Form S-8 under the Securities Act covering all of those
shares. All shares issued under this plan, other than shares issued to
affiliates, will be freely tradable on the open market. Shares held by
affiliates may be sold pursuant to the requirements of Rule 144.
The
exercise of all or a portion of the outstanding options may result in a
significant increase in the number of shares of our common stock that will be
subject to trading on the NASDAQ Global Market and the issuance
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Table of Contents
and
sale of the shares of our common stock upon the exercise thereof may have an
adverse effect on the price of our common stock.
As of July 31, 2009, we had 10,936,935
shares of common stock reserved for issuance pursuant to the conversion of the
$150.0 million aggregate principal amount of our outstanding 2.25% Convertible
Senior Notes due May 15, 2011. Holders of these notes may convert their
notes into shares of common stock at any time prior to maturity or redemption
by us at a conversion rate of 72.9129 shares per each $1,000 principal amount
of the notes ($13.72 per share), subject to adjustment.
Upon
the occurrence of certain change of control events of our Company, we are
required to offer to repurchase all of our debt, which may adversely affect our
business and the price of our common stock.
Upon
the occurrence of certain change of control events of our company, we are
required to offer to repurchase all of our outstanding 2.25% Convertible Senior
Notes due May 15, 2011. BMS
commenced a tender offer on July 28, 2009 (see Note 10 to the consolidated
financial statements for further information) which could result in a change of
control. As of July 31, 2009, $150.0 million aggregate principal amount of
these notes was outstanding. In each instance, we may pay the repurchase price
in cash or, at our option, in common stock. These change of control events
include, without limitation, (i) the acquisition by any third party of at
least 50% of our common stock; or (ii) our merger or consolidation with or
into any other person, any merger or consolidation of another person into us or
our sale or other disposal of all or substantially all of our assets, except in
certain limited circumstances provided in the indentures relating to the notes.
Such repurchase rights may be triggered at a time at which we do not have
sufficient funds available to pay the repurchase price in cash or determine
that payment in cash is otherwise inadvisable. In such event, the issuance of a
significant number of additional shares of common stock in payment of the
repurchase price may lower the market price of our common stock.
Our
restated certificate of incorporation, amended and restated by-laws,
shareholder rights plan and New Jersey law contain provisions that could delay
or prevent an acquisition of our Company even if the acquisition would be
beneficial to our shareholders, and as a result, our management may become
entrenched and hard to replace.
In
May 2001, our board of directors adopted a shareholder rights plan. The
shareholder rights plan provides for a dividend of one preferred share purchase
right on each outstanding share of our common stock. Each right entitles
shareholders to buy 1/1000th of a share of our Series A junior
participating preferred stock at an exercise price of $150.00. Each right will
become exercisable following the tenth day after a person or group announces an
acquisition of 20% or more of our common stock. We will be entitled to redeem
the rights at $0.001 per right at any time on or before the close of business
on the tenth day following acquisition by a person or group of 20% or more of
our common stock.
The shareholder rights plan and certain
provisions of our restated certificate of incorporation and amended and
restated by-laws and New Jersey law may have the effect of making it more
difficult for a third party to acquire, or of discouraging a third party from
attempting to acquire control of us. This could limit the price that certain
investors might be willing to pay in the future for our common stock. The provisions
of our restated certificate of incorporation and amended and restated by-laws
include:
·
a classified board of directors;
·
a requirement that special meetings of
shareholders be called only by our board of directors, chairman of the board,
lead independent director, chief executive officer or president;
·
advance notice requirements for
shareholder proposals and nominations;
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Table of Contents
·
limitations on the ability of
shareholders to amend, alter or repeal our by-laws; and
·
the authority of the board of directors
to issue, without shareholder approval, preferred stock with such terms as the
board of directors may determine.
We
are also afforded the protections of the New Jersey Shareholders Protection
Act. This New Jersey statute contains provisions that impose restrictions on
shareholder action to acquire control of our company. The effect of the
provisions of our shareholder rights plan, restated certificate of
incorporation and amended and restated by-laws and New Jersey law may
discourage third parties from acquiring control of our company. In addition,
these measures may result in the entrenchment of our management and may prevent
or frustrate any attempt by shareholders to replace or remove our current
management.
We
do not intend to pay cash dividends on our common stock in the foreseeable
future.
We
intend to retain any future earnings to finance the growth and development of
our business, and we do not plan to pay cash dividends on our common stock in
the foreseeable future.
Item
4. Submission of Matters to a Vote of Security Holders
At our annual meeting of shareholders held on May 21, 2009, our
shareholders elected: (i) three Class I
Directors each to serve for a term to expire in 2012. Our shareholders also voted to ratify the
appointment of Ernst & Young LLP as our independent registered public
accounting firm for 2009. Out of the 128,532,698 eligible votes, the following
votes were cast at the meeting either by proxies solicited in accordance with Section 14
of the Securities Exchange Act of 1934, as amended, and the regulations set
forth thereunder, or by securities holders voting in person. With respect to
the election of directors, abstentions are treated as votes withheld and are
included in the table:
Proposal 1
Nominees for Directors
DirectorsClass I
|
|
Votes For
|
|
Votes
Withheld
|
|
Marc Rubin, M.D.
|
|
103,258,540
|
|
5,588,642
|
|
Ronald J. Saldarini, Ph.D.
|
|
97,891,832
|
|
10,955,350
|
|
Charles R. Schaller
|
|
102,008,161
|
|
6,839,021
|
|
The following persons are incumbent directors whose
terms of office continued after the 2009 annual meeting of shareholders:
Class III
Terms Expiring in 2010
|
|
Class II Terms Expiring in 2011
|
Abhijeet
J. Lele
|
|
Patricia
M. Danzon, Ph.D.
|
Julius
A. Vida, Ph.D.
|
|
Robert
C. Dinerstein
|
|
|
Howard
H. Pien
|
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Proposal 2
Ratification of the appointment by the Board of
Directors of Ernst & Young LLP as independent registered public
accounting firm, to audit the financial statements of Medarex for 2009:
FOR
|
|
AGAINST
|
|
ABSTAIN
|
105,065,366
|
|
2,825,953
|
|
955,863
|
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Item 6. Exhibits
Exhibits:
10.1
|
|
License,
Development and Commercialization Agreement, dated as of April 20, 2009,
by and among Merck Sharpe & Dohme Research Ltd., University of
Massachusetts, Massachusetts Biologic Laboratories, Worcester City Campus
Corporation and the Registrant (incorporated by reference to
Exhibit 10.1 to Registrants Current Report on Form 8-K/A filed on
July 29, 2009)(1).
|
31.1*
|
|
Certification
of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
|
31.2*
|
|
Certification
of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
|
32.1*
|
|
Certification
of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
|
* Filed herewith.
(1)
Portions of this exhibit have been omitted pursuant to a request for
confidential treatment.
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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.
|
|
|
|
MEDAREX, INC.
|
|
|
|
|
(Registrant)
|
|
|
|
|
|
Date:
|
July 31,
2009
|
|
By:
|
/s/ HOWARD H. PIEN
|
|
|
|
|
Howard H. Pien
|
|
|
|
|
President and Chief
|
|
|
|
|
Executive Officer
|
|
|
|
|
(Principal Executive Officer)
|
|
|
|
|
|
Date:
|
July 31,
2009
|
|
By:
|
/s/ CHRISTIAN S. SCHADE
|
|
|
|
|
Christian S. Schade
|
|
|
|
|
Senior Vice President
|
|
|
|
|
Finance & Administration,
|
|
|
|
|
Chief Financial Officer
|
|
|
|
|
(Principal Financial and
|
|
|
|
|
Accounting Officer)
|
78
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