Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Our management's discussion and analysis of our financial condition and results of our operations contains forward-looking statements, including statements about
our growth and future operating results, discovery and development of products, strategic alliances and intellectual property. For this purpose, any statement that is not a statement of historical
fact should be considered a forward-looking statement. We often use the words "expect," "anticipate," "intend," "plan," "believe," "may," "will" and similar expressions to help identify
forward-looking statements.
Actual
results may differ from those indicated by such forward-looking statements as a result of various important factors, including, without limitation, those factors discussed in this
annual report under the heading "Risk Factors."
Overview
We are an innovation-driven biopharmaceutical company focused on discovering, developing and commercializing medicines to improve the lives of patients with
cancer, inflammatory bowel diseases and other inflammatory diseases. We currently commercialize VELCADE, the global market leader for the treatment of patients with multiple myeloma who have received
at least one prior therapy and the United States market leader for the treatment of mantle cell lymphoma, or MCL, patients who have received at least one prior therapy. We are also awaiting a decision
from the Food and Drug Administration, or FDA, to market VELCADE for patients with newly diagnosed multiple myeloma. We have a development pipeline of clinical and preclinical product candidates in
our therapeutic focus areas of cancer and inflammatory diseases. We have an oncology-focused drug discovery organization. Strategic business relationships are a key component of our business to
maximize the global potential of our products and product candidates.
In
January 2007, we began, with Ortho Biotech Inc., or OBI, to jointly promote VELCADE for a two year time period in the United States. We believe this collaboration, with the
well-established OBI oncology sales force, is helping us to realize the full potential of VELCADE in the U.S. market. In May 2007, the FDA granted marketing approval to OBI for the
combination therapy of VELCADE/DOXIL® (pegylated liposomal doxorubicin) in multiple myeloma patients who have received at least one prior therapy.
Our
business strategy is to build a portfolio of new medicines based on our understanding of genomics and protein homeostasis, which is a set of particular molecular pathways that affect
the establishment and progression of diseases. These molecular pathways include the related effects of proteins on cellular performance, reproduction and death. We plan to develop and commercialize
many of our products on our own, but expect to seek development and commercial collaborators when favorable terms are available or when we otherwise believe that doing so would be advantageous
to us.
In
the near term, we expect to focus our commercial activities in cancer where we plan to build on our commercial and regulatory experience with VELCADE. We also are working to obtain
approval to market VELCADE in the United States and, through Ortho Biotech Products, L.P., or OBL, a member of The Johnson & Johnson Family Of Companies and an affiliate of OBI, outside
of the United States for the treatment of multiple myeloma in newly diagnosed, or front-line, patients and for the treatment of additional types of cancers. We believe, if approved, these
additional uses of VELCADE would lead to a significant expansion of our cancer business.
In
the area of inflammatory disease, we are advancing novel product candidates in clinical development as potential treatments for serious and widely prevalent conditions. For example,
MLN0002 is a highly selective gut-targeted immune therapy being studied in inflammatory bowel diseases. We expect to initiate pivotal trials with MLN0002 in patients with moderate to
40
severe ulcerative
colitis and Crohn's disease in late 2008 or early 2009. If we successfully complete these trials and are successful in obtaining FDA approval, we believe MLN0002 could be
available to patients as early as 2012.
In
the long term, we expect to bring new products to market on a regular basis from our pipeline of discovery and development-stage programs. We also expect to continue to evaluate
opportunities to in-license and acquire molecules from other companies in order to supplement our pipeline.
VELCADE
In May 2003, the FDA granted us approval to market VELCADE for the treatment of multiple myeloma patients who have received at least two prior therapies and have
demonstrated disease
progression on their most recent therapy, commonly referred to as third-line and beyond. In March 2005, the FDA granted us approval for the treatment of patients with multiple myeloma who
have received at least one prior therapy, commonly referred to as relapsed, or second-line multiple myeloma.
In
late 2007, we announced positive results from the large, randomized, Phase III VISTA trial in patients with newly diagnosed multiple myeloma who are not eligible for stem cell
transplantation. In this trial, the therapy of VELCADE, melphalan and prednisone demonstrated a highly statistically significant improvement, compared with melphalan and prednisone alone across all
efficacy endpoints. In December 2007, we filed a supplementary new drug application, or sNDA, for use of VELCADE in patients with newly diagnosed multiple myeloma. The filing was granted priority
review by the FDA. The FDA decision date for approval is scheduled to occur by June 20, 2008.
Outside
of the United States, VELCADE is approved by the European Commission as a monotherapy for multiple myeloma patients who have received at least one prior therapy and who have
already undergone or are unsuitable for bone marrow transplantation. Regulatory authorities in a number of other countries, including countries within Latin America, South-East Asia and
Japan have also approved VELCADE. The product is now approved in more than 85 countries. In December 2007, OBL submitted a variation to their Marketing Authorization to the European Medicines
Evaluation Agency, or EMEA, for use of VELCADE for the treatment of newly diagnosed multiple myeloma. We expect the EMEA's decision on the submission by the end of 2008.
In
December 2006, the FDA granted approval of VELCADE for the treatment of patients with MCL who have received at least one prior therapy, commonly referred to as relapsed, or
second-line MCL.
Our Alliances
VELCADE
Ortho Biotech Collaborations
In June 2003, we entered into an agreement with OBL to collaborate on the commercialization of VELCADE and with Johnson & Johnson Pharmaceutical
Research & Development, L.L.C., or JJPRD, for the continued clinical development of VELCADE. OBL and its affiliate, Janssen-Cilag, are commercializing VELCADE outside of the United States, and
Janssen Pharmaceutical K.K. is responsible for Japan. We receive distribution fees from OBL and its affiliates from sales of VELCADE outside of the United States. We record these distribution fees as
royalties. We manage the supply chain for VELCADE at the expense of OBL for products sold in the OBL territories. We retain a limited option to co-promote VELCADE with OBL at a future date
in specified European countries.
We
are engaged with JJPRD in an extensive global program for further clinical development of VELCADE with the purpose of maximizing the commercial potential of VELCADE. This program is
investigating the potential of VELCADE to treat multiple forms of tumors, including continued clinical
41
development
of VELCADE for multiple myeloma and non-Hodgkin's lymphoma, or NHL. JJPRD was responsible for 40% of the joint development costs through 2005 and is now responsible for 45% of
those costs. We are responsible for the remaining 55% of the joint development costs. We are eligible to receive payments from JJPRD or OBL for achieving clinical development milestones, regulatory
milestones outside of the United States or agreed-upon sales levels of VELCADE outside of the United States.
In
October 2006, we entered into a two-year agreement with OBI to jointly promote VELCADE in the U.S. Under the terms of the agreement, in the first quarter of 2007, OBI
began jointly promoting VELCADE with us to U.S.-based physicians. Under this agreement, we pay the cost of a portion of the OBI sales effort dedicated to VELCADE and a commission if sales associated
with the increased effort exceed specified targets. Both parties are able to terminate the agreement under certain circumstances and subject to fees. We continue to be responsible for
commercialization, manufacturing and distribution of VELCADE in the U.S.
INTEGRILIN
Through August 31, 2005, we co-promoted INTEGRILIN in the United States in collaboration with Schering-Plough Ltd. and Schering
Corporation, together referred to as SGP, and shared profits and losses. Since September 1, 2005, SGP has marketed INTEGRILIN in the United States and specified other areas outside of the
European Union. GlaxoSmithKline plc, or GSK, markets INTEGRILIN in the European Union under a license from us.
SGP Collaboration
In April 1995, COR entered into a collaboration agreement with SGP to jointly develop and commercialize INTEGRILIN on a worldwide basis. We acquired COR in
February 2002. Under our original collaboration agreement with SGP, we generally shared any profits or losses from INTEGRILIN sales in the United States included in co-promotion revenue
with SGP and we granted SGP an exclusive license to market INTEGRILIN outside the United States and the European Union in exchange for royalty obligations.
On
September 1, 2005, SGP obtained the exclusive U.S. development and commercialization rights for INTEGRILIN products from us and paid us a nonrefundable upfront payment of
approximately $35.5 million. In addition, we are entitled to receive royalties on net product sales of INTEGRILIN in the United States from SGP for so long as SGP is engaged in the
commercialization and sale of an INTEGRILIN product in the United States, with the potential of receiving royalties beyond the 2014 patent expiration date. Minimum royalty payments for 2006 and 2007
were approximately $85.4 million. There are no guaranteed minimum royalty payments for 2008 or future years. We also receive royalties on net product sales by SGP in SGP's territory outside of
the United States. SGP's obligation to pay us royalties in other countries expires on a country by country basis upon the later of fifteen years from the first commercial use of an INTEGRILIN product
in such country and the expiration of the last to expire patent covering such INTEGRILIN product. We continue to manage the supply chain for INTEGRILIN at the expense of SGP for products sold in the
SGP territories including the U.S. We receive payments as a result of managing the supply chain and record those payments as strategic alliance revenue.
GSK License Agreement
In June 2004, we reacquired the rights to market INTEGRILIN in Europe from SGP and concurrently entered into a license agreement granting GSK exclusive marketing
rights to INTEGRILIN in Europe. In January 2005, the transition of the INTEGRILIN marketing authorizations for the European Union from SGP to GSK was completed, and GSK began selling
42
INTEGRILIN
in the countries of the European Union. GSK also markets INTEGRILIN in other European countries where it has received approval of the transfer from SGP to GSK of the relevant marketing
authorizations. Under the terms of the agreement, we have received license fees and are entitled to future royalties from GSK on INTEGRILIN sales in Europe subject to the achievement of specified
objectives. We manage the supply chain for INTEGRILIN at the expense of GSK for products sold in the GSK territories. We receive payments as a result of managing the supply chain and record those
payments as strategic alliance revenue.
sanofi-aventis Small Molecule Inflammatory Disease Collaboration
In June 2000, we entered into a broad agreement in the field of inflammatory disease with Aventis, now sanofi-aventis, which includes joint discovery, development
and commercialization of small molecule drugs for the treatment of specified inflammatory diseases. This agreement covers several of our development programs in the inflammatory disease area and
provides us with potential access to sanofi-aventis' large promotional infrastructure in connection with the commercialization of jointly developed products. The discovery phase of this collaboration
has concluded. The development and commercialization programs continue under the agreement.
As
provided in the original agreement, in North America, we have agreed to share the responsibility for and cost of developing, manufacturing and marketing products arising from the
alliance. Outside of North America, sanofi-aventis is responsible for and bears the cost of developing, manufacturing and marketing products arising from the alliance. sanofi-aventis is required to
pay us a royalty on product sales outside of North America.
To
date, we and sanofi-aventis have identified a significant number of novel drug targets and associated molecules relevant in inflammatory diseases. During the remaining portion of the
development phase of the alliance, we and sanofi-aventis have agreed to focus our joint resources on preclinical and clinical development of candidates identified in the collaboration. As of the end
of 2007, the alliance has identified several development candidates, two of which, MLN3701 and MLN0415, are now being tested in clinical trials with another product candidate, MLN6095, now in
preclinical testing. In addition, we and sanofi-aventis are currently contemplating further development of MLN3897, a small molecule CCR1 inhibitor.
Critical Accounting Policies and Significant Judgments and Estimates
Our management's discussion and analysis of our financial condition and results of operations are based on our consolidated financial statements, which have been
prepared in accordance with generally accepted accounting principles, or GAAP. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported
amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements as well as the reported revenues and expenses during the reporting
periods. On an ongoing basis, we evaluate our estimates and judgments, including those related to revenue recognition, inventory, intangible assets, goodwill, restructuring and stock-based
compensation expense. We base our estimates on historical experience and on various other factors that we believe are appropriate under the circumstances, the results of which form the basis for
making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or
conditions.
While
our significant accounting policies are more fully described in Note 2 to our consolidated financial statements included in this report, we believe the following accounting
policies are most critical to aid in fully understanding and evaluating our reported financial results.
43
Revenue
We recognize revenue from the sale of our products, our strategic alliances, as well as royalties and distribution fees based on net sales of licensed products.
We recognized revenue from our co-promotion collaboration through August 31, 2005. We divide our revenue arrangements with multiple elements into separate units of accounting if
specified criteria are met, including whether the delivered element has stand-alone value to the customer and whether there is objective and reliable evidence of the fair value of the undelivered
items. We allocate the consideration we receive among the separate units based on their respective fair values, and we apply the applicable revenue recognition criteria to each of the separate units.
We classify advance payments received in excess of amounts earned as deferred revenue until earned.
We recognize revenue from the sale of VELCADE in the United States when delivery has occurred and title has transferred. During the fourth quarter of 2004, we
began distributing VELCADE through a sole-source open access distribution model in which we sell directly to an independent third party who in turn distributes to the wholesaler base. In
April 2006, our sole-source distributor added a second distribution site to its network in order to improve access to the product for physicians in the western United States. Under our
agreement with our sole-source distributor, inventory levels are contractually limited to no more than three weeks. VELCADE product inventory levels held by the sole-source
distributor have historically been below this limit at the end of each quarter. We expect future inventory levels to be within our desired range of one to two weeks of inventory in the distribution
channel.
We
record allowances as a reduction to product sales for discounts, product returns and governmental and contractual adjustments at the time of sale. Calculating these gross-to-net sales
adjustments involves estimates and judgments based primarily on sales or invoice data and historical experience.
An
analysis of the amount of, and change in, these allowances is as follows (in thousands):
|
|
Discounts
|
|
Returns
|
|
Governmental and contractual adjustments
|
|
Total
|
|
Beginning balance, January 1, 2005
|
|
$
|
210
|
|
$
|
2,517
|
|
$
|
336
|
|
$
|
3,063
|
|
|
|
|
|
|
|
|
|
|
|
|
Current provisions relating to sales in current period
|
|
|
3,971
|
|
|
1,301
|
|
|
5,676
|
|
|
10,948
|
|
|
Payments/credits relating to sales in current period
|
|
|
(2,955
|
)
|
|
(178
|
)
|
|
(4,377
|
)
|
|
(7,510
|
)
|
|
Payments/credits relating to sales in prior period
|
|
|
(88
|
)
|
|
(1,084
|
)
|
|
(402
|
)
|
|
(1,574
|
)
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2005
|
|
|
1,138
|
|
|
2,556
|
|
|
1,233
|
|
|
4,927
|
|
|
|
|
|
|
|
|
|
|
|
|
Current provisions relating to sales in current period
|
|
|
4,692
|
|
|
1,707
|
|
|
10,115
|
|
|
16,514
|
|
|
Adjustments relating to prior years
|
|
|
|
|
|
(1,282
|
)
|
|
|
|
|
(1,282
|
)
|
|
Payments/credits relating to sales in current period
|
|
|
(4,291
|
)
|
|
(43
|
)
|
|
(8,541
|
)
|
|
(12,875
|
)
|
|
Payments/credits relating to sales in prior period
|
|
|
(730
|
)
|
|
(376
|
)
|
|
(1,344
|
)
|
|
(2,450
|
)
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2006
|
|
|
809
|
|
|
2,562
|
|
|
1,463
|
|
|
4,834
|
|
|
|
|
|
|
|
|
|
|
|
|
Current provisions relating to sales in current period
|
|
|
5,786
|
|
|
1,679
|
|
|
15,722
|
|
|
23,187
|
|
|
Payments/credits relating to sales in current period
|
|
|
(5,389
|
)
|
|
(112
|
)
|
|
(12,545
|
)
|
|
(18,046
|
)
|
|
Payments/credits relating to sales in prior period
|
|
|
(387
|
)
|
|
(676
|
)
|
|
(1,402
|
)
|
|
(2,465
|
)
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2007
|
|
$
|
819
|
|
$
|
3,453
|
|
$
|
3,238
|
|
$
|
7,510
|
|
|
|
|
|
|
|
|
|
|
|
44
We offer a 2% prompt payment discount to our sole-source distributor as an incentive to remit payment in accordance with the stated terms of the
invoice. Because our customer typically takes advantage of the prompt payment discount, we accrue 100% of the prompt payment discount, based on the gross amount of each invoice, at the time of sale.
We adjust the accrual quarterly to reflect actual experience. Historically, these adjustments have not been material.
We estimate VELCADE product returns based on historical return patterns. Under our current methodology, we track actual returns by individual production lots.
Returns on closed lots (i.e., lots no longer eligible for credits under our returned goods policy) are analyzed to determine historical returns experience. Returns on open lots
(i.e., lots still eligible for credits under our returned goods policy) are monitored and compared with historical return trends and rates. Historical rates of return are adjusted for known or
expected changes in the marketplace.
We
consider several factors in our estimation process, including our internal sales forecasts and inventory levels in the distribution channel. We have experienced, and expect, that
wholesalers will not stock significant inventory due to the product's cost, expense to store and just-in-time distribution model and as a result, returns have been, and we expect will continue to be
low. When considering the level of inventory in the distribution channel, we determine whether an adjustment to the sales return reserve is appropriate. For example, if levels of inventory in the
distribution channel increase and we believe sales returns will be larger than expected, we adjust the sales return reserve, taking into account historical experience, our returned goods policy and
the shelf life of our product, which ranges from 18 to 24 months.
We
have reduced and may, from time to time in the future, reduce our product returns estimate. Doing so results in increased product revenue at the time the return estimate is reduced.
For example, since the launch of VELCADE in 2003, we have estimated our returns based upon historical trends in the pharmaceutical industry for similar products and our historical return patterns as
they became available. In 2006, we reduced our return estimate based on lower than previously anticipated returns as our first commercial lots reached expiration during the second half of 2005. These
adjustments to our estimates were not material to product sales in any quarter or on an annual basis for 2006. We did not make any adjustments to our return estimate in 2007.
If
circumstances change or conditions become more competitive in the market for therapeutic products that address the approved indications for VELCADE, we may take actions to increase
our product return estimates. Doing so would result in an incremental reduction of product sales at the time the return estimate is changed. For example, an increase in our returns as a percentage of
gross sales for the year ended December 31, 2007 of 0.50% would have resulted in a $1.4 million decrease in net product sales.
Governmental and contractual adjustment reserves relate to chargebacks and rebates. Chargeback reserves represent our estimated obligations resulting from the
difference between the wholesaler price and the lower pricing as mandated by statute to eligible federally funded healthcare providers, and in rare instances, lower contractual pricing to certain
other classes of trade. We determine our chargeback estimates based on our historical chargeback data. Chargebacks are generally invoiced and paid monthly in arrears, so that our accrual consists of
an estimate of the amount to be expected for the current month's product sales for which actual adjustments have not been billed, plus an accrual based upon the amount of inventory in the distribution
channel. Rebate reserves relate to our reimbursement arrangements with state Medicaid programs. We determine our rebate estimates based on our historical
45
experience
regarding rebates, outstanding claims and payments under state Medicaid programs. Rebate amounts generally are invoiced and paid quarterly in arrears, so that our accrual consists of an
estimate of the rebates that will be paid on the current quarter's product sales, plus an accrual for unprocessed and unpaid rebates from prior periods. Governmental and contractual adjustment reserve
accruals are recorded in the same period the related revenue is recognized resulting in a reduction to product revenue and the establishment of a liability. We adjust the accrual rate quarterly to
reflect actual experience, taking into consideration price increases, as well as current and expected product sales to federally and state funded healthcare providers. Historically, these adjustments
have not been material.
Through August 31, 2005, we recognized co-promotion revenue based on SGP's reported shipments of INTEGRILIN to wholesalers.
Co-promotion revenue included our share of the profits from the sales of INTEGRILIN and reimbursements of our manufacturing-related costs, development costs and advertising and promotional
expenses. We communicated with SGP to calculate our share of the profits from the sales of INTEGRILIN on a monthly basis. The calculation included estimates of the amount of advertising and
promotional expenses and other costs incurred on a monthly basis. Adjustments to our estimates were based upon actual information that we received subsequent to our reporting deadlines. Our estimates
were adjusted on a monthly basis and historically the adjustments were not significant due to frequent communication with SGP.
We recognize nonrefundable upfront licensing fees and guaranteed, time-based payments that, in either case, require continuing involvement in the form
of research and development, manufacturing or other commercialization efforts by us as strategic alliance revenue:
-
-
ratably
over the development period if development risk is significant;
-
-
ratably
over the manufacturing period or estimated product useful life if development risk has been substantially eliminated; or
-
-
based
upon the level of research services performed during the period of the research contract.
When
the period of deferral cannot be specifically identified from the contract, management estimates the period based upon other critical factors contained within the contract. We
continually review these estimates, which could result in a change in the deferral period and might impact the timing and the amount of revenue recognized.
Milestone
payments are recognized as strategic alliance revenue when the substantive performance obligations, as defined in the contract, are achieved. Performance obligations typically
consist of significant milestones in the development life cycle of the related product candidate, such as initiation of clinical trials, filing for approval with regulatory agencies and approvals by
regulatory agencies. Reimbursements of research and development costs are recognized as strategic alliance revenue as the related costs are incurred.
We are entitled to receive royalty payments under license agreements with a number of third parties that sell products based on technology we have developed or to
which we have rights. These license agreements provide for the payment of royalties to us based on sales of the licensed product and we record royalty revenues based on estimates of sales from interim
data provided by licensees. Under certain of our license agreements, the royalty structure is tiered based upon annual sales and resets at the beginning of each annual period. Beginning
September 1, 2005, upon closing the amended collaboration agreement with SGP, we began recording royalty revenues as a separate line item in our
46
statement
of operations. For all of our royalty arrangements, we perform an analysis of historical royalties we have been paid, adjusted for any changes in facts and circumstances, as appropriate.
Differences between actual royalty revenues and estimated royalty revenues are adjusted for in the period which they become known, typically the following quarter. These adjustments have not been, and
we do not expect them to be, significant. To the extent we do not have sufficient ability to accurately estimate royalty revenue, we record royalties on a cash basis.
Inventory
Inventory consists of currently marketed products. VELCADE inventories primarily represent raw materials used in production, work in process and finished goods
inventory on hand, valued at cost. INTEGRILIN inventories include raw materials used in production and work in process, valued at cost, to supply GSK and limited amounts of work in process, valued at
cost, to supply SGP. We review inventories periodically for slow-moving or obsolete status based on sales activity, both projected and historical. Our current sales projections provide for
full utilization of the inventory balance. If product sales levels differ from projections or a launch of a new product is delayed, inventory may not be fully utilized and could be subject to
impairment, at which point we would adjust inventory to its net realizable value.
Intangible Assets
We have acquired significant intangible assets that we value and record. Those assets that do not yet have regulatory approval and for which there are no
alternative uses are expensed as acquired in-process research and development, and those that are specifically identified and have alternative future uses are capitalized. We use a
discounted cash flow model to value intangible assets at acquisition. The discounted cash flow model requires assumptions about the timing and amount of
future cash inflows and outflows, risk, the cost of capital, and terminal values. Each of these factors can significantly affect the value of the intangible asset. We review intangible assets for
impairment using an undiscounted net cash flows approach when impairment indicators arise. If the undiscounted cash flows of an intangible asset are less than the carrying value of an intangible
asset, we would write down the intangible asset to the discounted cash flow value. Where we cannot identify cash flows for an individual asset, our review is applied at the lowest group level for
which cash flows are identifiable.
Goodwill
On October 1, 2007, we performed our annual goodwill impairment test and determined that no impairment existed on that date. We continually monitor
business and market conditions, including the restructured relationship with SGP, to assess whether an impairment indicator exists. If we were to determine that an impairment indicator exists, we
would be required to perform an impairment test, which could result in a material impairment charge to our statement of operations.
Restructuring
In accordance with Statement of Financial Accounting Standard, or SFAS, No. 146, "Accounting for Costs Associated with Exit or Disposal Activities," our
facilities related expenses and liabilities under all of our restructuring plans included estimates of the remaining rental obligations, net of estimated sublease income, for facilities we no longer
occupy. We review our estimates and assumptions on a regular basis until the outcome is finalized, and make whatever modifications we believe necessary, based on our best judgment, to reflect any
changed circumstances. It is possible that such estimates could change in the future resulting in additional adjustments, and the effect of any such adjustments could be material.
47
Stock-Based Compensation Expense
We adopted SFAS No. 123 (revised 2004), "Share Based Payment," or SFAS 123R, effective January 1, 2006 under the modified prospective method.
SFAS 123R requires the recognition of the fair value of stock-based compensation expense in our operations, and accordingly the adoption of SFAS 123R fair value method has had and will
continue to have a significant impact on our results of operations, although it will have no impact on our overall financial position. Option valuation models require the
input of highly subjective assumptions, including stock price volatility and expected term of an option. In determining our volatility, we have considered implied volatilities of currently traded
options to provide an estimate of volatility based upon current trading activity in addition to our historical volatility. After considering other such factors as our stage of development, the length
of time we have been public and the impact of having a marketed product, we believe a blended volatility rate based upon historical performance, as well as the implied volatilities of currently traded
options, best reflects the expected volatility of our stock going forward. Changes in market price directly affect volatility and could cause stock-based compensation expense to vary significantly in
future reporting periods.
We
use historical data to estimate option exercise and employee termination behavior, adjusted for known trends, to arrive at the estimated expected life of an option. We update these
assumptions on a quarterly basis to reflect recent historical data. Additionally, we are required to estimate forfeiture rates to approximate the number of shares that will vest in a period to which
the fair value is applied. We will continually monitor employee exercise behavior and may further adjust the estimated term and forfeiture rates in future periods. Increasing the estimated life would
result in an increase in the fair value to be recognized over the requisite service period, generally the vesting period. Estimated forfeitures will be adjusted to actual forfeitures upon the vest
date of the cancelled options as a cumulative adjustment on a quarterly basis. Doing so could cause future expenses to vary at each reporting period.
In
March 2006, we revised our annual merit compensation program to include the availability of both stock options and restricted stock to certain employees. In March 2007, we extended
the choice of stock options or restricted stock to all employees through the annual merit compensation program. Additionally, in March 2007, we implemented performance based vesting for a portion of
executive officer restricted stock awards. A significant portion of the annual equity awards to all executive officers will vest only upon achievement of predefined performance objectives. In May
2007, we issued restricted stock units to members of the Board of Directors as partial compensation for their board member service. For the years ended December 31, 2007 and 2006, we recognized
total stock-based compensation expense under SFAS 123R of $25.2 million and $42.1 million, respectively. As of December 31, 2007, the total remaining unrecognized
compensation cost related to nonvested stock option awards amounted to approximately $6.6 million, including estimated forfeitures, which will be recognized over the weighted-average remaining
requisite service periods of approximately one and one half years. As of December 31, 2007, the total remaining unrecognized compensation cost related to nonvested restricted stock awards and
restricted stock units amounted to approximately $12.1 million, including estimated forfeitures, which will be recognized over the weighted-average remaining requisite service periods of
approximately one and one half years.
Accounting Pronouncements
In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements," or SFAS 157. SFAS157 defines fair value, establishes a framework for
measuring fair value in accordance with generally accepted accounting principles and expands disclosures about fair value measurements. SFAS 157 codifies the definition of fair value as the
price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date, clarifies the principle that fair value
should be based on the assumptions market participants
48
would
use when pricing the asset or liability and establishes a fair value hierarchy that prioritizes the information used to develop those assumptions. SFAS 157 is effective for fiscal years
beginning after December 15, 2007. We do not currently believe that adoption will have a material impact on our results of operations, financial position or cash flows.
In
February 2007, the FASB released SFAS No. 159, "The Fair Value Option for Financial Assets and Financial Liabilities," or SFAS 159. SFAS 159 permits entities to
choose to measure many financial instruments and certain other items at fair value. The objective is to improve financial reporting by providing entities with the opportunity to mitigate volatility in
reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. SFAS 159 is effective for fiscal years beginning
after November 15, 2007. We are currently analyzing the effect, if any, SFAS 159 will have on our consolidated financial position and results of operations.
In
June 2007, the FASB issued EITF No. 07-3, "Accounting for Nonrefundable Advance Payments for Goods or Services to Be Used in Future Research and Development
Activities," or EITF 07-3. EITF 07-3 requires that nonrefundable advance payments for goods or services to be received in the future for use in research and
development activities should be deferred and capitalized. The capitalized amounts should be expensed as the related goods are delivered or the services are performed. EITF 07-3 is
effective for new contracts entered into during fiscal years beginning after December 15, 2007. We are currently analyzing the effect, if any, EITF 07-3 will have on our
consolidated financial position and results of operations.
In
December 2007, the FASB issued EITF Issue 07-1, "Accounting for Collaborative Arrangements," or EITF 07-1. EITF 07-1 requires
collaborators to present the results of activities for which they act as the principal on a gross basis and report any payments received from (made to) other collaborators based on other applicable
GAAP or, in the absence of other applicable GAAP, based on analogy to authoritative accounting literature or a reasonable, rational, and consistently applied accounting policy election. Further,
EITF 07-1 clarified the determination of whether transactions within a collaborative arrangement are part of a vendor-customer (or analogous) relationship subject to
EITF 01-9, "Accounting for Consideration Given by a Vendor to a Customer (Including a Reseller of the Vendor's Products)." EITF 07-1 will be effective for us
beginning on January 1, 2009. We are currently evaluating the effect of EITF 07-1 on our consolidated financial statements.
Reclassifications
We have reclassified certain prior year consolidated statements of operations amounts between research and development and selling, general and administrative
expenses to conform to the current year presentation. This reclassification does not have a material impact on previously reported research and development and selling, general and administrative
expenses and has no impact on previously reported net loss from operations.
49
Results of Operations
|
|
Year Ended December 31,
|
|
Annual Percentage Change
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
2007/2006
|
|
2006/2005
|
|
|
|
(in thousands, except per share amounts)
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net product sales
|
|
$
|
265,241
|
|
$
|
220,452
|
|
$
|
192,073
|
|
20
|
%
|
15
|
%
|
|
Co-promotion revenue
|
|
|
|
|
|
|
|
|
123,524
|
|
|
|
(100
|
)
|
|
Revenue under strategic alliances
|
|
|
95,417
|
|
|
131,675
|
|
|
204,519
|
|
(28
|
)
|
(36
|
)
|
|
Royalties
|
|
|
166,867
|
|
|
134,703
|
|
|
38,192
|
|
24
|
|
253
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
527,525
|
|
|
486,830
|
|
|
558,308
|
|
8
|
|
(13
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales (excludes amortization of acquired intangible assets)
|
|
|
28,380
|
|
|
45,445
|
|
|
141,327
|
|
(38
|
)
|
(68
|
)
|
|
Research and development
|
|
|
287,094
|
|
|
310,910
|
|
|
334,110
|
|
(8
|
)
|
(7
|
)
|
|
Selling, general and administrative
|
|
|
189,062
|
|
|
162,893
|
|
|
188,673
|
|
16
|
|
(14
|
)
|
|
Restructuring
|
|
|
12,886
|
|
|
20,393
|
|
|
77,110
|
|
(37
|
)
|
(74
|
)
|
|
Amortization of intangibles
|
|
|
33,950
|
|
|
33,950
|
|
|
33,987
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total costs and expenses
|
|
|
551,372
|
|
|
573,591
|
|
|
775,207
|
|
(4
|
)
|
(26
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(23,847
|
)
|
|
(86,761
|
)
|
|
(216,899
|
)
|
(73
|
)
|
(60
|
)
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment income, net
|
|
|
48,810
|
|
|
30,973
|
|
|
29,083
|
|
58
|
|
6
|
|
|
Interest expense
|
|
|
(10,054
|
)
|
|
(11,068
|
)
|
|
(10,433
|
)
|
(9
|
)
|
6
|
|
|
Other income
|
|
|
|
|
|
22,903
|
|
|
|
|
(100
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
14,909
|
|
$
|
(43,953
|
)
|
$
|
(198,249
|
)
|
134
|
%
|
(78
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) per share, basic and diluted
|
|
$
|
0.05
|
|
$
|
(0.14
|
)
|
$
|
(0.64
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares, basic
|
|
|
318,221
|
|
|
313,724
|
|
|
308,284
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares, diluted
|
|
|
321,320
|
|
|
313,724
|
|
|
308,284
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 1: Stock-based
compensation expense is allocated in the consolidated statements of operations expense lines as follows:
|
|
Year Ended December 31,
|
|
|
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
|
|
|
Research and development
|
|
$
|
10,674
|
|
$
|
23,280
|
|
$
|
|
|
|
|
|
Selling, general and administrative
|
|
|
14,484
|
|
|
18,861
|
|
|
|
|
|
|
|
Revenues
Total revenues increased 8% to $527.5 million in 2007 compared to 2006 and decreased 13% to $486.8 million in 2006 from $558.3 million in
2005. The increase in 2007 was primarily related to increased net product sales of VELCADE within the United States and to a lesser extent, increased distribution fees recognized from OBL on sales of
VELCADE outside of the United States partially offset by a decrease in strategic alliance revenue. The decrease in 2006 was primarily related to lower revenue received from our collaborators, which
consisted of revenue under strategic alliances, royalties,
50
and
in 2005, co-promotion revenue. The decrease in revenue received from our collaborations was primarily the result of the restructured relationship with SGP, including a
one-time sale of $71.4 million of existing INTEGRILIN inventory to SGP during the third quarter of 2005. Additionally, we recognized lower license fees from GSK in 2006. This
decrease was offset in part by increased distribution fees recognized from OBL on sales of VELCADE outside of the United States.
Net
product sales of VELCADE increased 20% to $265.2 million in 2007 and 15% to $220.5 million in 2006 from $192.1 million in 2005. The increase in 2007 was
primarily attributable to growth in product demand and to a lesser extent, price increases during the period. The increase in 2006 was primarily due to price increases of the product as we maintained
the product's market leadership in the relapsed
multiple myeloma treatment setting despite new competition in 2006. Reserves as a percentage of gross product sales for discounts, product returns and governmental and contractual adjustments were 8%
in 2007, 6% in 2006 and 5% in 2005. The increases in both 2007 and 2006 were primarily related to increased governmental and contractual adjustments. Net product sales of VELCADE represented
approximately 50% of our 2007 total revenues, 45% of our 2006 total revenues and 34% of our 2005 total revenues.
Total
revenues related to VELCADE, including net product sales of the product by us in the U.S. and revenues from OBL included in strategic alliance revenue and royalties as more fully
described below, were approximately $397.2 million in 2007, $327.2 million in 2006 and $248.6 million in 2005.
As
of September 1, 2005, we are no longer reporting co-promotion revenue due to our restructured relationship with SGP. Co-promotion revenue from
INTEGRILIN represented approximately 22% of our 2005 total revenues.
Total
revenues related to INTEGRLIN from GSK and our modified relationship with SGP included in strategic alliance revenue and royalties more fully described below, were
$109.6 million in 2007 and $142.0 million in 2006, including $85.4 million in royalties we received from SGP for sales of INTEGRILIN in the United States in both periods. In 2005,
total revenues related to INTEGRILIN, including co-promotion revenue, revenues from SGP and GSK included in strategic alliance revenues and royalties as more fully described below, were
approximately $287.9 million.
Revenue
under strategic alliances decreased 28% to $95.4 million in 2007 and 36% to $131.7 million in 2006 from $204.5 million in 2005. The decrease in 2007 was
primarily related to lower manufacturing-related reimbursement revenue and lower license revenue under the SGP and GSK relationships as well as a decrease in milestone revenue earned in 2007. Revenue
under the SGP relationship was generated from the management of the INTEGRILIN supply chain on behalf of SGP in the form of license fees and reimbursement of manufacturing-related expenses. On
July 1, 2006, SGP began purchasing the majority of the active pharmaceutical ingredient necessary to manufacture INTEGRILIN resulting in lower reimbursement of manufacturing-related expenses
during 2007. The decrease in 2006 was primarily due to the one-time sale of existing INTEGRILIN inventory to SGP in 2005, as well as lower license fees recognized from GSK.
We
expect revenue under strategic alliances to fluctuate in future periods depending on the level of revenues earned for ongoing development efforts, the level of milestones achieved and
the number of alliances we may enter into in the future with major biopharmaceutical companies.
We
began recording royalties on September 1, 2005 in connection with the closing of our transaction with SGP. Royalty revenue may include royalties earned upon sales of INTEGRILIN
in the United States and other territories around the world as provided by SGP, royalties earned upon sales of INTEGRILIN in Europe as provided by GSK, distribution fees earned upon sales of VELCADE
outside of the United States as provided by OBL and any royalties earned under certain of our early discovery alliances. Royalty revenue increased 24% to $166.9 million in 2007 and 253% to
$134.7 million in 2006 from $38.2 million in 2005. The increase in 2007 was primarily a result of
51
increased
distribution fees from OBL on sales of VELCADE outside of the United States. We recognized the minimum royalty from SGP in 2007. There are no guaranteed minimum royalty payments for 2008 or
future years. The increase in 2006 was primarily a result of the first full year of reported royalty revenue from SGP and to a lesser extent increased distribution fees from OBL.
We
recognize revenues from activities outside of the U.S., including royalties, distribution fees, milestones from OBL, SGP and GSK for sales of VELCADE and INTEGRILIN and for cost
reimbursement of product sold to these parties. Without taking into account revenues we receive for license fees, our revenues for these activities outside of the U.S. were $132.9 million in
2007, $113.5 million in 2006 and $62.2 million in 2005.
Cost of Sales
Cost of sales decreased 38% to $28.4 million in 2007 and 68% to $45.4 million in 2006 from $141.3 million in 2005. Cost of sales includes
manufacturing-related expenses associated with the sales of VELCADE, as well as costs associated with managing the INTEGRILIN supply chain on behalf of SGP and GSK. The decrease in 2007 was primarily
due to the decrease in INTEGRILIN manufacturing-related expenses as a result of SGP purchasing the majority of the active pharmaceutical ingredient directly from the manufacturer beginning as of
July 1, 2006. The decrease in 2006 was primarily due to the one-time sale of existing INTEGRILIN inventory to SGP on September 1, 2005.
Research and Development
Research and development expenses decreased 8% to $287.1 million in 2007 and 7% to $310.9 million in 2006 from $334.1 million in 2005. The
decrease in 2007 was primarily a result of cost reductions associated with our 2006 restructuring efforts combined with reduced stock-based compensation expense offset by an increases in drug product
manufacturing and clinical development activity. The reduction in stock-based compensation expense was primarily due to forfeitures in excess of our original estimates related to certain cliff-based
awards held by employees whose employment was terminated in connection with restructuring initiatives, normal attrition, and the vesting of certain
options grants that were included in expense during 2006. The decrease in 2006 was primarily a result of cost reductions associated with our 2005 strategy refinement and restructuring efforts combined
with the decreased spending in our discovery organization offset by the inclusion of stock-based compensation expense upon adoption of SFAS 123R beginning on January 1, 2006.
52
In
addition to our ongoing clinical trials of VELCADE, we have a significant pipeline of product candidates in clinical and late preclinical development. The following chart summarizes
the applicable disease indication and the clinical or preclinical trial status of our pipeline of drug candidates.
Product Description
|
|
Disease Indication
|
|
Current Trial Status
|
Cancer
|
|
|
|
|
MLN0518 is a small molecule inhibitor of the class III receptor tyrosine kinase (RTKs), FLT-3, c-KIT, and PDGF-R
|
|
Acute myeloid leukemia
Glioma(1)
Prostate cancer(1)
|
|
phase I/II
phase I/II
phase I/II
|
MLN8054/MLN9237 are small molecule inhibitors of Aurora A Kinase
|
|
Advanced malignancies
|
|
phase I
|
MLN4924 is a small molecule inhibitor of Nedd8activating enzyme (NAE)
|
|
Advanced malignancies
|
|
phase I planned
|
MLN2238 is a second generation proteasome small molecule inhibitor
|
|
Advanced malignancies
|
|
preclinical
|
Inflammatory Bowel Diseases
|
|
|
|
|
MLN0002 is a humanized monoclonal antibody directed against the alpha4beta7 integrin
|
|
Ulcerative colitis
Crohn's disease
|
|
phase II(2)
|
Other Inflammatory Diseases
|
|
|
|
|
MLN1202 is a humanized monoclonal antibody directed against CCR2
|
|
Atherosclerosis
Multiple sclerosis
|
|
phase IIa-completed
|
MLN3897/3701 are small molecule CCR1 inhibitors(3)
|
|
Chronic inflammatory diseases
|
|
phase I/II
|
MLN0415 is a small molecule inhibitor of IKKbeta(3)
|
|
Chronic inflammatory diseases
|
|
phase I
|
MLN6095 is a small molecule CrTh2 receptor antagonist(3)
|
|
Asthma
|
|
preclinical
|
-
(1)
-
Trials
are conducted through Cancer Therapy Evaluation Program, a division of the National Cancer Institute.
-
(2)
-
Clinical
trials resumed in May 2007 with a new, commercially scalable cell line; prior phase II data established proof-of-concept for this mechanism
in ulcerative colitis.
-
(3)
-
In
development through our sanofi-aventis small molecule inflammatory disease collaboration. In November 2007, we announced that the results from a phase II trial of MLN3897
did not achieve the pre-established criteria for moving this product candidate forward in rheumatoid arthritis. We and sanofi-aventis are evaluating next steps with this program.
Completion
of clinical trials may take several years or more and the length of time can vary substantially according to the type, complexity, novelty and intended use of a product
candidate. The types of costs incurred during a clinical trial vary depending upon the type of product candidate and the nature of the study.
53
We
estimate that clinical trials in our areas of focus are typically completed over the following timelines:
Clinical Phase
|
|
Objective
|
|
Estimated Completion Period
|
|
phase I
|
|
Establish safety in humans, study how the drug works,
metabolizes and interacts with other drugs
|
|
12 years
|
|
phase II
|
|
Evaluate efficacy, optimal dosages and expanded evidence of safety
|
|
23 years
|
|
phase III
|
|
Confirm efficacy and safety of the product
|
|
23 years
|
Upon
successful completion of phase III clinical trials of a product candidate, we intend to submit the results to the FDA to support regulatory approval. However, we cannot be
certain that any of our product candidates will prove to be safe or effective, will receive regulatory approvals, or will be successfully commercialized. Our clinical trials might prove that our
product candidates may not be effective in treating the disease or have undesirable or unintended side effects, toxicities or other
characteristics that require us to cease further development of the product candidate. The cost to take a product candidate through clinical trials is dependent upon, among other things, the disease
indications, the timing, the size and dosing schedule of each clinical trial, the number of patients enrolled in each trial and the speed at which patients are enrolled and treated. We could incur
increased product development costs if we experience delays in clinical trial enrollment, delays in the evaluation of clinical trial results or delays in regulatory approvals.
Some
products that are likely to result from our research and development projects are based on new technologies and new therapeutic approaches that have not been extensively tested in
humans. The regulatory requirements governing these types of products may be more rigorous than for conventional products. As a result, it is difficult to estimate the nature and length of the efforts
to complete such products as we may experience a longer regulatory process in connection with any products that we develop based upon these new technologies or therapeutic approaches. In addition,
ultimate approval for commercial manufacturing and marketing of our products is dependent on the FDA or applicable approval body in the country for which approval is being sought, adding further
uncertainty to estimated costs and completion dates. Significant delays could allow our competitors to bring products to market before we do and impair our ability to commercialize our product
candidates.
Due
to the variability in the length of time necessary to develop a product, the uncertainties related to the estimated cost of the projects and ultimate ability to obtain governmental
approval for commercialization, accurate and meaningful estimates of the ultimate cost to bring our product candidates to market are not available.
We
budget and monitor our research and development costs by type or category, rather than by project on a comprehensive or fully allocated basis. Significant categories of costs include
personnel, clinical, third party research and development services and laboratory supplies. In addition, a significant portion of our research and development expenses is not tracked by project as it
benefits multiple projects or our technology platform. Consequently, fully loaded research and development cost summaries by project are not available.
Given
the uncertainties related to development, we are currently unable to reliably estimate when, if ever, our product candidates will generate revenue and cash flows. We do not expect
to receive net cash inflows from any of our major research and development projects until a product candidate becomes a profitable commercial product.
54
Selling, General and Administrative
Selling, general and administrative expenses increased 16% to $189.1 million in 2007 compared to 2006 and decreased 14% to $162.9 million in 2006
from $188.7 million in 2005. The 2007 increase was primarily attributable to higher expense associated with the long-term investment in our VELCADE brand, including continuing
medical education, higher commission expense payable to our sales force associated with increased product sales as well as payments to OBI for their portion of VELCADE related costs under our
co-promotion agreement. This increase was offset by lower stock-based compensation expense primarily due to forfeitures in excess of our original estimates related to certain cliff-based
awards held by employees whose employment was terminated in connection with restructuring initiatives, normal attrition and the vesting of certain options grants that were included in expense during
2006. The decrease in 2006 was primarily the result of reduced sales and marketing expenses associated with the transfer of the U.S. commercialization rights for INTEGRILIN to SGP as of
September 1, 2005 offset by the inclusion of stock-based compensation expense upon adoption of SFAS 123R beginning on January 1, 2006.
Restructuring
In October 2006, we announced a program to further align resources with our current corporate priorities of advancing VELCADE and accelerating the clinical
pipeline by lowering investment in discovery and supporting areas. As part of our program, we reduced in-house research and development technologies and headcount in areas where the work
can now be effectively outsourced, and we also scaled back infrastructure supporting these activities.
During
the fourth quarter of 2005, we announced a 2005 strategy refinement focused on advancing key growth assets, including VELCADE, our clinical and preclinical pipeline of oncology
and inflammation molecules and our oncology-focused discovery organization. As part of our refined strategy, we took a series of steps, building on our restructured relationship with SGP, which
together reduced research and development and selling, general and administrative expenses in 2006. We reduced the size of our company from approximately 1,500 employees at the end of 2004 to
approximately 1,100 at the end of 2005, by managing attrition, eliminating INTEGRILIN sales and marketing positions, and reducing the number of positions in our inflammation discovery and business
support groups.
In
December 2002 and June 2003, we took steps as part of our 2003 restructuring plan to focus our resources on drug development and commercialization. Our restructuring plan included
consolidation of research and development facilities, overall headcount reduction and streamlining of discovery and development projects.
During
2007, we recorded net restructuring charges of $12.9 million under all of our restructuring initiatives. We recorded restructuring charges of approximately
$17.2 million under the 2006
restructuring program primarily related to facilities-related costs associated with vacated buildings and employee termination benefits as a result of headcount reductions. We also recorded net
restructuring credits in 2007 of approximately $3.8 million under the 2005 restructuring plan, primarily related to the earlier than anticipated sublease of one of our facilities charged to
restructuring in prior years at a higher rate per square foot than we had originally estimated. We recorded net restructuring credits of approximately $0.5 million in 2007 under the 2003
restructuring plan, primarily related to the earlier than anticipated sublease of one of our facilities charged to restructuring in prior years at a higher rate per square foot than we had originally
estimated as well as the sublease extension for another facility charged to restructuring in prior years.
During
2006, we recorded a total of $20.4 million of restructuring charges under all of our restructuring initiatives. We recorded restructuring charges of approximately
$5.2 million under the 2006 restructuring program primarily related to employee termination benefits. Costs of termination
55
benefits
relate to severance packages, outplacement services and career counseling for employees affected by restructuring. We also recorded restructuring charges in 2006 of approximately
$1.2 million under the 2005 restructuring plan, primarily related to the impairment charges for leasehold improvements that were abandoned at facilities, offset by a credit resulting from the
earlier than anticipated sublease of one of the vacated buildings at a higher rate per square foot than we had originally estimated. We recorded restructuring charges of approximately
$14.0 million in 2006 under the 2003 restructuring plan, primarily related to the lease termination payment for our vacated facility in Cambridge, England.
In
connection with the 2006 decision to abandon certain facilities in 2007 under the 2006 restructuring program, we shortened the useful lives of the leasehold improvements at these
facilities in accordance with SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." During the years ended December 31, 2007 and 2006, we recorded
additional depreciation expense of approximately $3.3 million and $3.8 million, respectively, in research and development expense related to our decision.
We
estimate that of the remaining restructuring liabilities under all restructuring initiatives at December 31, 2007, we will pay approximately $23.0 million in 2008 and
$26.4 million thereafter through 2014 primarily for noncancelable lease agreements. We expect to record additional restructuring charges during 2008 of less than $5.0 million.
Amortization of Intangibles
Amortization of intangible assets was $34.0 million in 2007, 2006 and 2005. Amortization primarily related to specifically identified intangible assets
from the COR acquisition. We will continue to
amortize the specifically identified intangible assets from our COR acquisition through 2015. We expect to incur amortization expense of approximately $34.0 million for each of the next
five years.
Investment Income
Investment income increased 58% to $48.8 million in 2007 compared to $31.0 million in 2006 and increased 6% in 2006 from $29.1 million in
2005. The increase in 2007 was primarily attributable to a higher average balance of invested funds resulting from our 2006 convertible debt offering, combined with higher effective interest rates, a
$3.5 million gain on sale of our investment in SGX Pharmaceuticals, Inc. common stock and a $2.3 million gain related to our share of additional proceeds from a class action
proceeding against WorldCom, Inc. The increase in 2006 was primarily attributable to a higher average balance of invested funds combined with a $3.1 million gain recognized in December
2006 upon the settlement of the class action lawsuit of WorldCom, Inc. and an additional realized gain of approximately $2.9 million in October 2006 upon the final settlement and receipt
of the escrowed portion of the TransForm Pharmaceuticals, Inc., or TransForm, sales proceeds.
Interest Expense
Interest expense decreased 9% to $10.1 million in 2007 compared to 2006 and increased 6% to $11.1 million in 2006 from $10.4 million in 2005.
The decrease in 2007 was primarily related to decreased capital lease buyouts resulting in lower related interest expense offset slightly by an increase in interest, including amortization of deferred
financing costs, on our convertible notes as a result of higher average balances of indebtedness during the year. The increase in 2006 was primarily due to increased interest under our 2.25%
convertible senior notes due November 15, 2011, or the 2.25% notes, combined with the amortization of deferred financing costs incurred in connection with the sale of our 2.25% notes.
56
Other income
We recorded other income of approximately $22.9 million in 2006 upon the receipt of $19.5 million in connection with the termination of the support
agreement that we entered into in connection with a proposed acquisition of AnorMED, Inc. in October 2006 and the recognition of a deferred gain of $3.4 million in July 2006 from the
sale of assets to GeneLogic, Inc. in 2004.
Liquidity and Capital Resources
We require cash to fund our operating expenses, to make capital expenditures, acquisitions and investments and to pay debt service, including principal and
interest and capital lease payments. We have also made strategic purchases of debt and equity securities of some of our alliance collaborators in accordance with our Board of Directors' approved
policies and our business needs. These investments were generally in smaller companies. We have and may in the future lose money in these investments and our ability to liquidate these investments is
in some cases very limited. We may also owe our partners milestone payments and royalties. We also have committed to fund development costs incurred by some of our collaborators.
We
have funded our cash requirements primarily through the following:
-
-
product
sales of VELCADE;
-
-
payments
from our strategic collaborators, including equity investments, license fees, milestone payments and research funding;
-
-
our
co-promotion relationship with SGP for the sale of INTEGRILIN through August 31, 2005;
-
-
royalty
payments related to the sales of our products; and
-
-
equity
and debt financings in the public markets.
In
the future, we expect to continue to fund our cash requirements from some or all of these sources as well as from sales of other products, subject to receiving regulatory approval. We
are entitled to
additional committed research and development funding under some of our strategic alliances. We believe the key factors that could affect our internal and external sources of cash are:
-
-
revenues
from sales of VELCADE, INTEGRILIN and other products and services for which we may obtain marketing approval in the future or which are sold by companies that may
owe us royalty, milestone, distribution or other payments on account of such products;
-
-
the
success of our clinical and preclinical development programs;
-
-
our
ability to enter into additional strategic collaborations and to maintain existing collaborations as well as the success of such collaborations; and
-
-
the
receptivity of the capital markets to financings by biopharmaceutical companies generally and to financings by our company specifically.
As
of December 31, 2007, we had $891.3 million in cash, cash equivalents and marketable securities. This excludes $7.7 million of interest-bearing marketable
securities classified as restricted cash on our balance sheet as of December 31, 2007, which primarily serve as collateral for letters of credit securing leased facilities.
57
Our
significant capital resources and sources and uses of cash are as follows:
|
|
December 31,
|
(in thousands)
|
|
2007
|
|
2006
|
|
2005
|
Cash, cash equivalents and marketable securities
|
|
$
|
891,276
|
|
$
|
894,349
|
|
$
|
645,588
|
Working capital
|
|
|
901,595
|
|
|
790,135
|
|
|
576,501
|
|
|
Year Ended December 31,
|
|
(in thousands)
|
|
|
2007
|
|
2006
|
|
2005
|
|
Cash provided by (used in):
|
|
|
|
|
|
|
|
|
|
|
|
Operating activities
|
|
$
|
67,162
|
|
$
|
(19,185
|
)
|
$
|
(56,065
|
)
|
|
Investing activities
|
|
|
(131,336
|
)
|
|
(38,152
|
)
|
|
32,988
|
|
|
Financing activities
|
|
|
(58,939
|
)
|
|
264,557
|
|
|
13,713
|
|
Capital expenditures (included in investing activities above)
|
|
|
(17,859
|
)
|
|
(8,789
|
)
|
|
(12,466
|
)
|
Cash Flows
Operating activities provided cash of $67.2 million in 2007 and used cash of $19.2 million in 2006. The principal source of funds in 2007 was our
net income and adjustments for non-cash charges. The principal use of cash in operating activities in 2006 was to fund our net loss. In December 2007, we achieved a $40.0 million
milestone related to sales of VELCADE outside of the United States, which we collected in January 2008. In December 2006, we achieved a $25.0 million milestone related to sales of VELCADE
outside of the United States, which we collected in January 2007. In September 2005, we received approximately $85.5 million from SGP, consisting of the upfront license fee associated with the
U.S. commercialization rights for INTEGRILIN, as well as payment for the one-time sale of existing INTEGRILIN raw materials and finished goods inventory. In January 2005, we paid SGP
approximately $49.3 million for advances SGP had made to COR for inventory purchases in prior years. Cash flows from operations can vary significantly due to various factors including changes
in accounts receivable, as well as changes in accounts payable and accrued expenses. The average collection period of our accounts receivable can vary and is dependent on various factors, including
the type of revenue and the payment terms related to those revenues.
Investing
activities used cash of $131.3 million in 2007 primarily to invest in marketable securities. In January 2007, we received proceeds of approximately $2.3 million
related to our share of proceeds from a class action proceeding against WorldCom, Inc. In February 2007, we received proceeds of approximately $3.5 related to the sale of our investment in SGX
Pharmaceuticals, Inc. Investing activities used cash of $38.2 million in 2006, primarily for the purchase of marketable securities, partially offset by the receipt of approximately
$2.9 million in October 2006 upon final settlement of the escrowed portion of the sale proceeds from TransForm.
Financing
activities used cash of $58.9 million in 2007 and provided cash of $264.6 million in 2006. The principal use of cash in 2007 was the repayment of
$83.3 million and $16.2 million of our 5.5% and 5.0% convertible subordinated notes, respectively, in accordance with the payment terms offset by payments received from the purchase of
common stock by our employees pursuant to the exercise of stock options. In December 2007, we received proceeds of $4.1 million from the exercise of warrants to purchase 429,600 shares of our
common stock with a weighted-average exercise price of $9.44 per share. The principal source of funds in 2006 was proceeds of $242.2 million from the sale of our 2.25%
notes in November 2006. We used cash of approximately $5.9 million in 2006 to pay off our 4.5% convertible senior notes in accordance with the payment terms. We also used cash in financing
activities to make principal payments on our capital leases in all periods presented.
58
We
believe that our existing cash, cash equivalents and marketable securities and the anticipated cash receipts from our product sales, current strategic alliances and royalties will be
sufficient to support our expected operations, fund our debt service and capital lease obligations and fund our capital commitments for at least the next several years.
Contractual Obligations
Our major outstanding contractual obligations relate to our facility leases, convertible notes, capital lease financings and long term supply contracts.
As
of December 31, 2007, we had $250.0 million in principal amount outstanding under our 2.25% notes. Under the terms of the 2.25% notes, we are required to make
semi-annual interest payments on the outstanding principal balance on May 15 and November 15 of each year. As of December 31, 2007, all required interest payments have
been made.
The
2.25% notes are convertible into our common stock based upon a conversion rate of 64.6465 shares of common stock per $1,000 principal amount of the 2.25% notes, which was equal to
the initial conversion price of approximately $15.47 per share of stock, subject to adjustment. The 2.25% notes are convertible only in the following circumstances: (1) if the closing price of
the common stock exceeds 120% of the conversion price within a specified period, (2) if specified distributions to holders of the common stock are made or specified corporate transactions
occur, (3) if the average trading price per $1,000 principal amount is less than 98% of the product of the closing price of common stock and the then applicable conversion rate within a
specified period or (4) during the last three months prior to the maturity date of the notes, unless previously repurchased by us under certain circumstances. In lieu of delivery of shares of
our common stock, we, at our sole option, may elect to deliver cash or a combination of cash and shares of common stock in satisfaction of our obligation upon conversion. The 2.25% notes are
subordinated in right of payment to future secured debt.
In
accordance with the payment terms, we repaid the entire $83.3 million principal balance on our 5.5% convertible subordinated notes due on January 15, 2007 that were
convertible at a price equal to $42.07
per share and the entire $16.2 million principal balance on our 5.0% convertible subordinated notes due on March 1, 2007 that were convertible at a price equal to $34.21
per share.
Below
is a table which presents our contractual obligations and commercial commitments as of December 31, 2007:
|
|
Payments Due by Period
|
(in thousands)
|
|
Total
|
|
Less than
One Year
|
|
12 Years
|
|
34 Years
|
|
5 Years
and Beyond
|
Long term debt obligations, including interest payments
|
|
$
|
272,500
|
|
$
|
5,625
|
|
$
|
11,250
|
|
$
|
255,625
|
|
$
|
|
Capital lease obligations, including rental and interest payments
|
|
|
274,654
|
|
|
16,915
|
|
|
34,366
|
|
|
34,366
|
|
|
189,007
|
Operating lease obligations
|
|
|
115,248
|
|
|
32,184
|
|
|
44,246
|
|
|
27,269
|
|
|
11,549
|
Long term supply contracts
|
|
|
131,482
|
|
|
17,600
|
|
|
48,860
|
|
|
29,441
|
|
|
35,581
|
External collaborations
|
|
|
5,433
|
|
|
2,563
|
|
|
2,870
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
799,317
|
|
$
|
74,887
|
|
$
|
141,592
|
|
$
|
346,701
|
|
$
|
236,137
|
|
|
|
|
|
|
|
|
|
|
|
Long
term supply contracts represent contracts with certain third party manufacturers that we rely on for the manufacturing, fill/finish and packaging of VELCADE and INTEGRILIN for both
commercial purposes and for ongoing clinical trials.
59
In
addition to the amounts reflected in the table above, in the future we may owe royalties and other contingent payments to our collaborators, licensors and other parties based on the
achievement of product sales and specified other objectives and milestones.
At
December 31, 2007, we had unused net operating loss carryforwards of approximately $1.4 billion available to reduce federal taxable income, expiring in 2008 through
2027, and $266.0 million available to reduce state taxable income, expiring in 2008 through 2012. We also have federal and net state tax credits of approximately $112.2 million available
to offset federal and state income taxes, both of which begin to expire in 2008. Due to the degree of uncertainty related to the ultimate use of the loss carryforwards and tax credits, we have fully
reserved these tax benefits.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Millennium Pharmaceuticals, Inc.
Report of Independent Registered Public Accounting Firm
Board
of Directors and Stockholders
Millennium Pharmaceuticals, Inc.
We
have audited the accompanying consolidated balance sheets of Millennium Pharmaceuticals, Inc. as of December 31, 2007 and 2006, and the related consolidated statements
of operations, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 2007. Our audits also included the financial statement schedule listed in the
Index at Item 15. These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and
schedule based on our audits.
We
conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our opinion.
In
our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Millennium Pharmaceuticals, Inc. at
December 31, 2007 and 2006, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2007, in conformity with U.S.
generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents
fairly in all material respects the information set forth therein.
As
discussed in Note 2 to the consolidated financial statements, effective January 1, 2007, the Company adopted FASB Interpretation No. 48 "Accounting for
Uncertainty in Income Taxes," and effective January 1, 2006, the Company adopted Statement of Financial Accounting Standards No. 123R, "Share-Based Payments" using the modified
prospective transition method.
We
also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Millennium Pharmaceuticals, Inc.'s internal control over
financial reporting as of December 31, 2007, based on criteria established in Internal ControlIntegrated Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission and our report dated February 25, 2008 expressed an unqualified opinion thereon.
|
|
/s/ Ernst & Young LLP
|
Boston, Massachusetts
|
|
|
February 25, 2008
|
|
|
61
Millennium Pharmaceuticals, Inc.
Consolidated Balance Sheets
|
|
December 31,
|
|
|
|
2007
|
|
2006
|
|
|
|
(in thousands, except per share amounts)
|
|
Assets
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
89,163
|
|
$
|
212,273
|
|
Marketable securities
|
|
|
802,113
|
|
|
682,076
|
|
Accounts receivable, net of allowances of $524 in 2007 and $521 in 2006
|
|
|
126,349
|
|
|
94,516
|
|
Inventory
|
|
|
6,821
|
|
|
13,598
|
|
Prepaid expenses and other current assets
|
|
|
9,624
|
|
|
13,191
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
1,034,070
|
|
|
1,015,654
|
|
Property and equipment, net
|
|
|
147,869
|
|
|
153,349
|
|
Restricted cash
|
|
|
7,650
|
|
|
7,600
|
|
Other assets
|
|
|
29,961
|
|
|
27,900
|
|
Goodwill
|
|
|
1,217,501
|
|
|
1,213,910
|
|
Developed technology, net
|
|
|
238,413
|
|
|
271,876
|
|
Intangible assets, net
|
|
|
61,036
|
|
|
61,523
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
2,736,500
|
|
$
|
2,751,812
|
|
|
|
|
|
|
|
Liabilities and Stockholders' Equity
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
23,461
|
|
$
|
26,301
|
|
Accrued expenses
|
|
|
75,370
|
|
|
62,544
|
|
Current portion of restructuring
|
|
|
22,986
|
|
|
25,540
|
|
Current portion of deferred revenue
|
|
|
9,412
|
|
|
10,378
|
|
Current portion of capital lease obligations
|
|
|
1,246
|
|
|
1,185
|
|
Current portion of long term debt
|
|
|
|
|
|
99,571
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
132,475
|
|
|
225,519
|
|
Other long term liabilities
|
|
|
2,016
|
|
|
757
|
|
Restructuring, net of current portion
|
|
|
26,416
|
|
|
41,974
|
|
Deferred revenue, net of current portion
|
|
|
14,905
|
|
|
13,344
|
|
Capital lease obligations, net of current portion
|
|
|
73,795
|
|
|
75,041
|
|
Long term debt
|
|
|
250,000
|
|
|
250,000
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
Stockholders' Equity:
|
|
|
|
|
|
|
|
Preferred stock, $0.001 par value; 5,000 shares authorized, none issued
|
|
|
|
|
|
|
|
Common stock, $0.001 par value; 500,000 shares authorized: 324,605 shares at December 31, 2007 and 317,342 shares at December 31, 2006 issued and outstanding
|
|
|
325
|
|
|
317
|
|
Additional paid-in capital
|
|
|
4,728,762
|
|
|
4,657,177
|
|
Accumulated other comprehensive income (loss)
|
|
|
3,888
|
|
|
(1,326
|
)
|
Accumulated deficit
|
|
|
(2,496,082
|
)
|
|
(2,510,991
|
)
|
|
|
|
|
|
|
|
Total stockholders' equity
|
|
|
2,236,893
|
|
|
2,145,177
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders' equity
|
|
$
|
2,736,500
|
|
$
|
2,751,812
|
|
|
|
|
|
|
|
The
accompanying notes are an integral part of these consolidated financial statements.
62
Millennium Pharmaceuticals, Inc.
Consolidated Statements of Operations
|
|
Year Ended December 31,
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
|
|
(in thousands, except per share amounts)
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
Net product sales
|
|
$
|
265,241
|
|
$
|
220,452
|
|
$
|
192,073
|
|
|
Co-promotion revenue
|
|
|
|
|
|
|
|
|
123,524
|
|
|
Revenue under strategic alliances
|
|
|
95,417
|
|
|
131,675
|
|
|
204,519
|
|
|
Royalties
|
|
|
166,867
|
|
|
134,703
|
|
|
38,192
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
527,525
|
|
|
486,830
|
|
|
558,308
|
|
|
|
|
|
|
|
|
|
Costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales (excludes amortization of acquired intangible assets)
|
|
|
28,380
|
|
|
45,445
|
|
|
141,327
|
|
|
Research and development
|
|
|
287,094
|
|
|
310,910
|
|
|
334,110
|
|
|
Selling, general and administrative
|
|
|
189,062
|
|
|
162,893
|
|
|
188,673
|
|
|
Restructuring
|
|
|
12,886
|
|
|
20,393
|
|
|
77,110
|
|
|
Amortization of intangibles
|
|
|
33,950
|
|
|
33,950
|
|
|
33,987
|
|
|
|
|
|
|
|
|
|
|
|
Total costs and expenses
|
|
|
551,372
|
|
|
573,591
|
|
|
775,207
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(23,847
|
)
|
|
(86,761
|
)
|
|
(216,899
|
)
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
Investment income, net
|
|
|
48,810
|
|
|
30,973
|
|
|
29,083
|
|
|
Interest expense
|
|
|
(10,054
|
)
|
|
(11,068
|
)
|
|
(10,433
|
)
|
|
Other income
|
|
|
|
|
|
22,903
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
14,909
|
|
$
|
(43,953
|
)
|
$
|
(198,249
|
)
|
|
|
|
|
|
|
|
|
Amounts per common share:
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) per share, basic and diluted
|
|
$
|
0.05
|
|
$
|
(0.14
|
)
|
$
|
(0.64
|
)
|
|
|
|
|
|
|
|
|
Weighted average shares, basic
|
|
|
318,221
|
|
|
313,724
|
|
|
308,284
|
|
|
|
|
|
|
|
|
|
Weighted average shares, diluted
|
|
|
321,320
|
|
|
313,724
|
|
|
308,284
|
|
|
|
|
|
|
|
|
|
Note 1:
Stock-based compensation expense is allocated in the consolidated statements of operations expense lines as follows:
|
|
Year Ended December 31,
|
|
|
2007
|
|
2006
|
|
2005
|
Research and development
|
|
$
|
10,674
|
|
$
|
23,280
|
|
$
|
|
Selling, general and administrative
|
|
|
14,484
|
|
|
18,861
|
|
|
|
The
accompanying notes are an integral part of these consolidated financial statements.
63
Millennium Pharmaceuticals, Inc.
Consolidated Statements of Cash Flows
|
|
Year Ended December 31,
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
|
|
(in thousands)
|
|
Cash Flows from Operating Activities:
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
14,909
|
|
$
|
(43,953
|
)
|
$
|
(198,249
|
)
|
Adjustments to reconcile net income (loss) to cash provided by (used in) operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
56,516
|
|
|
66,427
|
|
|
76,318
|
|
|
Restructuring charges, net
|
|
|
(301
|
)
|
|
4,869
|
|
|
6,157
|
|
|
Restructuring related stock-based compensation expense
|
|
|
|
|
|
|
|
|
479
|
|
|
Amortization of deferred financing costs
|
|
|
1,669
|
|
|
632
|
|
|
451
|
|
|
Realized (gain) loss on marketable securities and other investments, net
|
|
|
(4,570
|
)
|
|
2,223
|
|
|
3,457
|
|
|
Realized gain on sale of investment in TransForm Pharmaceuticals
|
|
|
|
|
|
(2,898
|
)
|
|
(10,465
|
)
|
|
Realized gain on sale of assets to GeneLogic, Inc.
|
|
|
|
|
|
(3,403
|
)
|
|
|
|
|
401K stock match
|
|
|
4,616
|
|
|
4,716
|
|
|
5,232
|
|
|
Stock-based compensation expense
|
|
|
25,158
|
|
|
42,141
|
|
|
565
|
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(31,833
|
)
|
|
(30,178
|
)
|
|
23,536
|
|
|
|
Inventory
|
|
|
6,777
|
|
|
2,226
|
|
|
81,352
|
|
|
|
Prepaid expenses and other current assets
|
|
|
3,567
|
|
|
(1,248
|
)
|
|
2,405
|
|
|
|
Restricted cash and other assets
|
|
|
(3,336
|
)
|
|
(3,976
|
)
|
|
(8,113
|
)
|
|
|
Accounts payable and accrued expenses
|
|
|
(7,864
|
)
|
|
(37,476
|
)
|
|
(673
|
)
|
|
|
Advance from Schering-Plough
|
|
|
|
|
|
|
|
|
(49,250
|
)
|
|
|
Deferred revenue
|
|
|
595
|
|
|
(19,996
|
)
|
|
10,733
|
|
|
|
Other long term liabilities
|
|
|
1,259
|
|
|
709
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) operating activities
|
|
|
67,162
|
|
|
(19,185
|
)
|
|
(56,065
|
)
|
|
|
|
|
|
|
|
|
Cash Flows from Investing Activities:
|
|
|
|
|
|
|
|
|
|
|
Investments in marketable securities
|
|
|
(560,476
|
)
|
|
(391,683
|
)
|
|
(386,887
|
)
|
Proceeds from sales and maturities of marketable securities
|
|
|
444,392
|
|
|
355,540
|
|
|
426,750
|
|
Proceeds from the sale of investment in TransForm Pharmaceuticals
|
|
|
|
|
|
2,898
|
|
|
10,585
|
|
Proceeds from the sale of assets to GeneLogic, Inc.
|
|
|
|
|
|
3,403
|
|
|
|
|
Purchases of property and equipment
|
|
|
(17,859
|
)
|
|
(8,789
|
)
|
|
(12,466
|
)
|
Other investing activities
|
|
|
2,607
|
|
|
479
|
|
|
(4,994
|
)
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) investing activities
|
|
|
(131,336
|
)
|
|
(38,152
|
)
|
|
32,988
|
|
|
|
|
|
|
|
|
|
Cash Flows from Financing Activities:
|
|
|
|
|
|
|
|
|
|
|
Issuance of convertible senior notes, net of issuance costs
|
|
|
|
|
|
242,239
|
|
|
|
|
Net proceeds from employee stock purchases
|
|
|
37,762
|
|
|
32,341
|
|
|
24,283
|
|
Repayment of principal of long term debt obligations
|
|
|
(99,571
|
)
|
|
(5,890
|
)
|
|
|
|
Net proceeds from warrant exercise
|
|
|
4,055
|
|
|
|
|
|
|
|
Principal payments on capital leases
|
|
|
(1,185
|
)
|
|
(4,133
|
)
|
|
(10,570
|
)
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities
|
|
|
(58,939
|
)
|
|
264,557
|
|
|
13,713
|
|
|
|
|
|
|
|
|
|
Increase (decrease) in cash and cash equivalents
|
|
|
(123,113
|
)
|
|
207,220
|
|
|
(9,364
|
)
|
Effects of exchange rate changes on cash and cash equivalents
|
|
|
3
|
|
|
24
|
|
|
(43
|
)
|
Cash and cash equivalents, beginning of period
|
|
|
212,273
|
|
|
5,029
|
|
|
14,436
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of period
|
|
$
|
89,163
|
|
$
|
212,273
|
|
$
|
5,029
|
|
|
|
|
|
|
|
|
|
Supplemental Cash Flow Information:
|
|
|
|
|
|
|
|
|
|
|
Cash paid for interest
|
|
$
|
10,801
|
|
$
|
9,442
|
|
$
|
10,233
|
|
Supplemental Disclosure of Noncash Investing and Financing Activities:
|
|
|
|
|
|
|
|
|
|
|
Receipt of shares of SGX Pharmaceuticals, Inc. common stock in exchange for note receivable.
|
|
$
|
|
|
$
|
6,000
|
|
$
|
|
|
Issuance of restricted stock under APB No. 25
|
|
|
|
|
|
|
|
|
4,784
|
|
The accompanying notes are an integral part of these consolidated financial statements.
64
Millennium Pharmaceuticals, Inc.
Statements of Stockholders' Equity
|
|
Common Stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
Other
Comprehensive
Income (Loss)
|
|
|
|
|
|
|
|
Additional
Paid-in
Capital
|
|
Deferred Compensation
|
|
Accumulated
Deficit
|
|
Total
Stockholders'
Equity
|
|
|
|
shares
|
|
amount
|
|
|
|
(in thousands, except shares)
|
|
Balance at December 31, 2004
|
|
306,399,120
|
|
$
|
306
|
|
$
|
4,547,430
|
|
$
|
|
|
$
|
(5,953
|
)
|
$
|
(2,268,789
|
)
|
$
|
2,272,994
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(198,249
|
)
|
|
(198,249
|
)
|
Unrealized loss on marketable securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4,368
|
)
|
|
|
|
|
(4,368
|
)
|
Foreign currency translation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
741
|
|
|
|
|
|
741
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(201,876
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee stock purchases
|
|
3,662,719
|
|
|
4
|
|
|
24,280
|
|
|
|
|
|
|
|
|
|
|
|
24,284
|
|
Restructuring related stock-based compensation expense
|
|
|
|
|
|
|
|
479
|
|
|
|
|
|
|
|
|
|
|
|
479
|
|
Issuance of deferred stock-based compensation
|
|
480,000
|
|
|
1
|
|
|
4,783
|
|
|
(4,219
|
)
|
|
|
|
|
|
|
|
565
|
|
401K stock match
|
|
579,036
|
|
|
|
|
|
5,232
|
|
|
|
|
|
|
|
|
|
|
|
5,232
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2005
|
|
311,120,875
|
|
|
311
|
|
|
4,582,204
|
|
|
(4,219
|
)
|
|
(9,580
|
)
|
|
(2,467,038
|
)
|
|
2,101,678
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(43,953
|
)
|
|
(43,953
|
)
|
Unrealized gain on marketable securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9,385
|
|
|
|
|
|
9,385
|
|
Foreign currency translation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,131
|
)
|
|
|
|
|
(1,131
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(35,699
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee stock purchases
|
|
4,533,701
|
|
|
5
|
|
|
32,336
|
|
|
|
|
|
|
|
|
|
|
|
32,341
|
|
Issuance of restricted stock
|
|
1,391,730
|
|
|
1
|
|
|
(1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeiture of restricted stock
|
|
(172,630
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Write-off of deferred stock-based compensation upon adoption of SFAS 123R
|
|
|
|
|
|
|
|
(4,219
|
)
|
|
4,219
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation expense
|
|
|
|
|
|
|
|
42,141
|
|
|
|
|
|
|
|
|
|
|
|
42,141
|
|
401K stock match
|
|
467,857
|
|
|
|
|
|
4,716
|
|
|
|
|
|
|
|
|
|
|
|
4,716
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2006
|
|
317,341,533
|
|
|
317
|
|
|
4,657,177
|
|
|
|
|
|
(1,326
|
)
|
|
(2,510,991
|
)
|
|
2,145,177
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14,909
|
|
|
14,909
|
|
Unrealized gain on marketable securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,248
|
|
|
|
|
|
5,248
|
|
Foreign currency translation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(34
|
)
|
|
|
|
|
(34
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20,123
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee stock purchases
|
|
4,517,631
|
|
|
5
|
|
|
37,757
|
|
|
|
|
|
|
|
|
|
|
|
37,762
|
|
Warrants exercise
|
|
429,600
|
|
|
1
|
|
|
4,054
|
|
|
|
|
|
|
|
|
|
|
|
4,055
|
|
Issuance of restricted stock
|
|
2,260,786
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2
|
|
Forfeiture of restricted stock
|
|
(370,526
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation expense
|
|
|
|
|
|
|
|
25,158
|
|
|
|
|
|
|
|
|
|
|
|
25,158
|
|
401K stock match
|
|
426,051
|
|
|
|
|
|
4,616
|
|
|
|
|
|
|
|
|
|
|
|
4,616
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2007
|
|
324,605,075
|
|
$
|
325
|
|
$
|
4,728,762
|
|
$
|
|
|
$
|
3,888
|
|
$
|
(2,496,082
|
)
|
$
|
2,236,893
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
65
Millennium Pharmaceuticals, Inc.
Notes to Consolidated Financial Statements December 31, 2007
1. The Company
Millennium Pharmaceuticals, Inc. ("Millennium" or the "Company") is an innovation-driven biopharmaceutical company focused on discovering, developing and
commercializing medicines to improve the lives of patients with cancer, inflammatory bowel diseases and other inflammatory diseases. The Company currently commercializes VELCADE, the global market
leader for the treatment of patients with multiple myeloma who have received at least one prior therapy and the United States market leader for the treatment of mantle cell lymphoma patients who have
received at least one prior therapy. The Company is also awaiting a decision from the Food and Drug Administration ("FDA") to market VELCADE for patients with newly diagnosed multiple myeloma. The
Company has a development pipeline of clinical and preclinical product candidates in its therapeutic focus areas of cancer and inflammatory diseases. The Company has an oncology-focused drug discovery
organization. Strategic business relationships are a key component of the Company's business to maximize the global potential of its products and product candidates.
Millennium's
strategy is to build a portfolio of new medicines based on its understanding of genomics and protein homeostasis, which is a set of particular molecular pathways that affect
the establishment
and progression of diseases. These molecular pathways include the related effects of proteins on cellular performance, reproduction and death. The Company plans to develop and commercialize many of
its products on its own, but expects to seek development and commercial collaborators on favorable terms or when it believes that doing so would be advantageous to the Company.
2. Summary of Significant Accounting Policies
Basis of Presentation
The consolidated financial statements include the accounts of Millennium and its wholly-owned subsidiaries. All significant intercompany accounts and transactions
have been eliminated in consolidation.
The
preparation of financial statements in accordance with generally accepted accounting principles ("GAAP") requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the
reporting period. Actual results could differ from those estimates.
Reclassifications
Certain prior year consolidated statements of operations amounts have been reclassified between research and development and selling, general and administrative
expenses to conform to the current year presentation. This reclassification does not have a material impact on previously reported research and development and selling, general and administrative
expenses and has no impact on previously reported net loss from operations.
Cash Equivalents, Marketable Securities and Other Investments
Cash equivalents principally consist of money market funds and corporate bonds with maturities of three months or less at the date of purchase. Marketable
securities primarily consist of investment-grade corporate bonds, asset-backed debt securities and U.S. government agency debt securities. Other investments represent ownership in private companies in
which the Company holds less than a
66
Millennium Pharmaceuticals, Inc.
Notes to Consolidated Financial Statements December 31, 2007 (Continued)
20 percent
ownership position and does not otherwise exercise significant influence. The Company carries such investments at cost unless significant influence can be exercised over the
investee, in which case such securities are recorded using the equity method. The Company monitors these investments in private companies on a quarterly basis and determines whether any impairment in
their value would require a charge to the statement of operations, based on the implied value from any recent rounds of financing completed by the investee, market prices of comparable public
companies and general market conditions. These other investments are included in other assets and aggregate $9.3 million and $8.9 million at December 31, 2007 and
December 31, 2006, respectively.
Management
determines the appropriate classification of marketable securities at the time of purchase and reevaluates such designation at each balance sheet date. Marketable securities
at December 31, 2007 and December 31, 2006 are classified as "available-for-sale." Available-for-sale securities are carried at fair
value, with the unrealized gains and losses reported in a separate component of stockholders' equity. The cost of debt securities in this category is adjusted for amortization of premiums and
accretion of discounts to maturity. Such amortization and accretion are included in investment income. Realized gains and losses and declines in value judged to be
other-than-temporary on available-for-sale securities and other investments are included in investment income. The cost of securities sold is based on
the specific identification method. Interest and dividends on securities classified as available-for-sale are included in investment income.
During
the years ended December 31, 2007, 2006 and 2005, the Company recorded realized gains on marketable securities and other investments of $9.6 million,
$3.1 million and $0.1 million, respectively, and realized losses and declines in value judged to be other-than-temporary on marketable securities and other
investments of $5.0 million, $5.3 million and $3.6 million, respectively.
Realized
gains on marketable securities for the year ended December 31, 2007 and 2006 included a realized gain of approximately $2.3 million and $3.1 million,
respectively, related to the Company's share of proceeds from a class action proceeding against WorldCom, Inc. The Company had previously recorded realized losses equal to the carrying value of
its investment in WorldCom, Inc., as the decline in value was determined to be other-than-temporary at that time.
During
the year ended December 31, 2005, the Company recorded a realized gain of approximately $10.5 million from the sale of its cost method investment in TransForm
Pharmaceuticals, Inc. ("TransForm"). In October 2006, the Company recorded an additional realized gain of $2.9 million upon the final settlement and receipt of the escrowed portion of
the sale proceeds. TransForm, a company specializing in the discovery of formulations and novel crystalline forms of drug molecules, was acquired by Johnson & Johnson in a
cash-for-stock transaction that closed in April 2005.
Concentrations of Credit Risk
Cash and cash equivalents are primarily maintained with two major financial institutions in the United States. Deposits with banks may exceed the amount of
insurance provided on such deposits. Generally, these deposits may be redeemed upon demand and, therefore, bear minimal risk. Financial instruments that potentially subject the Company to
concentrations of credit risk consist principally of marketable securities and accounts receivable. Marketable securities consist of investment-grade corporate bonds, asset-backed and U.S. government
agency securities. The Company's investment policy, approved by the Board of Directors, limits the amount the Company may invest in any one type of investment and, in certain cases, in any one issuer,
thereby reducing credit risk concentrations. Accounts receivable includes trade receivables which result from product sales to a sole distributor and
67
Millennium Pharmaceuticals, Inc.
Notes to Consolidated Financial Statements December 31, 2007 (Continued)
amounts
due under strategic alliances. Concentration of credit risk with respect to accounts receivables is limited by ongoing credit evaluation and account monitoring procedures.
Segment Information
Statement of Financial Accounting Standards ("SFAS") No. 131, "Disclosures about Segments of an Enterprise and Related Information" ("SFAS
No. 131"), establishes standards for the way that public business enterprises report information about operating segments in their financial statements. SFAS No. 131 also establishes
standards for related disclosures about products and services, geographic areas, and major customers.
The
Company operates in one business segment, which focuses on the research, development and commercialization of therapeutic products. All of the Company's product sales are currently
related to sales of VELCADE® (bortezomib) for Injection. All of the Company's co-promotion revenue reported in prior periods was related to sales and development of
INTEGRILIN® (eptifibatide) Injection through August 31, 2005. The remainder of the Company's total revenue is related to its strategic alliances and royalties.
Revenues
from Ortho Biotech Products, L.P. ("OBL"), a member of The Johnson & Johnson Family Of Companies, accounted for approximately 25 percent,
22 percent and 10 percent of consolidated revenues for the years ended December 31, 2007, 2006 and 2005, respectively.
Revenues
from Schering-Plough Ltd. and Schering Corporation (collectively "SGP"), excluding co-promotion revenue, related to the sale of INTEGRILIN, accounted for
approximately 20 percent, 27 percent and 24 percent of consolidated revenues for the years ended December 31, 2007, 2006 and 2005, respectively.
There
were no other significant customers under strategic alliances and royalties in 2007, 2006 and 2005.
Information Concerning Market and Source of Supply Concentration
The Company relies on third party contract manufacturers for the manufacturing, fill/finish and packaging of VELCADE for both commercial purposes and for ongoing
clinical trials. The Company has established long term supply relationships for the production of commercial supplies of VELCADE. The Company works with one manufacturer under a long term supply
agreement to complete fill/finish for VELCADE. The Company is currently qualifying a second fill/finish supplier in order to mitigate its risk of VELCADE supply interruption.
The
Company distributes VELCADE in the United States through a sole-source open access distribution model where the Company sells directly to an independent third party who
in turn distributes to the wholesaler base. In April 2006, the Company's distributor added a second distribution site to its network in order to improve access to the product for physicians in the
western United States.
INTEGRILIN
has received regulatory approvals in the United States, the countries of the European Union and a number of other countries for various indications. The Company and SGP
co-promoted INTEGRILIN in the United States and shared any profits and losses through August 31, 2005. In September 2005, SGP acquired the exclusive development and
commercialization rights to INTEGRILIN in the United States from the Company. In the European Union, GlaxoSmithKline plc ("GSK") exclusively markets INTEGRILIN. The Company continues to manage
the supply chain for
68
Millennium Pharmaceuticals, Inc.
Notes to Consolidated Financial Statements December 31, 2007 (Continued)
INTEGRILIN
at the expense of SGP for products sold in the SGP territories, and at the expense of GSK in the GSK territory.
The
Company relies on third party contract manufacturers for the clinical and commercial production of INTEGRILIN. The Company has three approved manufacturers, two of which currently
provide the Company with eptifibatide, the active pharmaceutical ingredient ("API") necessary to make INTEGRILIN, for both clinical trials and commercial supply. Solvay, S.A., one of the
current manufacturers, owns the process technology used by it and one other manufacturer for the production of the API. In June 2006, the Company received FDA approval of its own alternative process
technology utilized by the second manufacturer for the production of eptifibatide for approval in the United States. The European Medicines Agency approved the alternate process technology for
eptifibatide in June 2007. The Company has two manufacturers that currently perform fill/finish services for INTEGRILIN and two packaging suppliers for INTEGRILIN for the United States. The FDA or
other regulatory agencies must approve the processes or the facilities that may be used for the manufacture of the Company's marketed products.
Inventory
Inventory consists of currently marketed products, including VELCADE and INTEGRILIN. Inventories are stated at the lower of cost (first in, first out) or market.
Inventories are reviewed periodically for slow-moving or obsolete status based on sales activity, both projected and historical.
VELCADE
inventories primarily relate to raw materials used in production, work in process and finished goods inventory on hand. INTEGRILIN inventories include raw materials used in
production and work in process to supply GSK and limited amounts of work in process to supply SGP.
Inventory
consists of the following (in thousands):
|
|
December 31, 2007
|
|
December 31, 2006
|
Raw materials
|
|
$
|
4,270
|
|
$
|
6,770
|
Work in process
|
|
|
1,385
|
|
|
6,424
|
Finished goods
|
|
|
1,166
|
|
|
404
|
|
|
|
|
|
|
|
$
|
6,821
|
|
$
|
13,598
|
|
|
|
|
|
Property and Equipment
Property and equipment are stated at cost. Assets held under capitalized leases are stated at the present value of future minimum lease obligations. Application
development costs incurred for computer software developed or obtained for internal use are capitalized in accordance with Statement of Position ("SOP") No. 98-1, "Accounting for
the Costs of Computer Software Developed for Internal Use." Leasehold improvements are stated at cost and are amortized over the shorter of the remaining life of the building lease or useful life.
Depreciation is recorded on the straight-line method over the shorter of the estimated useful life of the asset or the term of the lease as follows:
Equipment
|
|
3 to 4 years
|
Capitalized software
|
|
3 to 5 years
|
Leasehold improvements
|
|
4 to 27 years
|
69
Millennium Pharmaceuticals, Inc.
Notes to Consolidated Financial Statements December 31, 2007 (Continued)
Goodwill and Intangible Assets
Intangible assets consist of specifically identified intangible assets. Goodwill is the excess of any purchase price over the estimated fair market value of net
tangible assets acquired not allocated to specific intangible assets.
Intangible
assets consist of the following (in thousands):
|
|
December 31, 2007
|
|
December 31, 2006
|
|
|
|
Gross Carrying Amount
|
|
Accumulated Amortization
|
|
Gross Carrying Amount
|
|
Accumulated Amortization
|
|
Developed technology
|
|
$
|
435,000
|
|
$
|
(196,587
|
)
|
$
|
435,000
|
|
$
|
(163,124
|
)
|
|
|
|
|
|
|
|
|
|
|
Core technology
|
|
$
|
18,712
|
|
$
|
(18,712
|
)
|
$
|
18,712
|
|
$
|
(18,712
|
)
|
Other
|
|
|
17,060
|
|
|
(15,024
|
)
|
|
17,060
|
|
|
(14,537
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Total amortizable intangible assets, excluding developed technology
|
|
|
35,772
|
|
|
(33,736
|
)
|
|
35,772
|
|
|
(33,249
|
)
|
Indefinite-lived trademark
|
|
|
59,000
|
|
|
|
|
|
59,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total intangible assets, excluding developed technology
|
|
$
|
94,772
|
|
$
|
(33,736
|
)
|
$
|
94,772
|
|
$
|
(33,249
|
)
|
|
|
|
|
|
|
|
|
|
|
Amortization
of intangibles is computed using the straight-line method over the useful lives of the respective assets as follows:
Developed technology
|
|
13 years
|
Core technology
|
|
4 years
|
Other
|
|
2 to 12 years
|
Amortization
expense was approximately $34.0 million in each of the years ended December 31, 2007, 2006, and 2005. The Company expects to incur amortization expense of
approximately $34.0 million for each of the next five years.
As
required by SFAS No. 142, "Goodwill and Other Intangible Assets," goodwill and indefinite lived intangible assets are not amortized, but are reviewed annually for impairment,
or more frequently if impairment indicators arise. Separable intangible assets that are not deemed to have an indefinite life are amortized over their useful lives and reviewed for impairment when
events or changes in circumstances suggest that the assets may not be recoverable. The Company tests for goodwill impairment annually, on October 1, and whenever events or changes in
circumstances suggest that the carrying amount may not be recoverable.
On
October 1, 2007, the Company performed its annual goodwill impairment test and determined that no impairment existed on that date. The Company continually monitors business and
market conditions, including the restructured relationship with SGP, to assess whether an impairment indicator exists. If the Company were to determine that an impairment indicator exists, it would be
required to perform an impairment test, which might result in a material impairment charge to the statement of operations.
Goodwill
as of December 31, 2007 consists of the excess purchase price over the estimated fair value of net tangible and intangible assets. The carrying value may be adjusted as a
result of the continued settlement of contingent consideration arising from acquisitions. Accordingly, goodwill
70
Millennium Pharmaceuticals, Inc.
Notes to Consolidated Financial Statements December 31, 2007 (Continued)
increased
by $3.6 million and $3.0 million for the years ended December 31, 2007 and 2006, respectively.
Fair Value of Financial Instruments
The carrying amounts reported in the Company's balance sheets for current assets and current liabilities approximate their fair value. The estimated fair value as
of December 31, 2007 of the Company's 2.25% convertible senior notes due November 15, 2011 (the "2.25% notes") was $294.1 million based on quoted market values.
Revenue Recognition
The Company recognizes revenue from the sale of its products, its co-promotion collaboration through August 31, 2005, strategic alliances and
royalties. The Company's revenue arrangements with multiple elements are divided into separate units of accounting if specified criteria are met, including whether the delivered element has
stand-alone value to the customer and whether there is objective and reliable evidence of the fair value of the undelivered items. The consideration received is allocated among the separate units
based on their respective fair values, and the applicable revenue recognition criteria are applied to each of the separate units. Advance payments received in excess of amounts earned are classified
as deferred revenue until earned.
Net product sales
The Company records product sales of VELCADE when delivery has occurred, title has transferred, collection is reasonably assured and the Company has no further
obligations. Allowances are recorded as a reduction to product sales for discounts, product returns and governmental and contractual adjustments at the time of sale. Costs incurred by the Company for
shipping and handling are recorded in cost of sales.
Co-promotion revenue
Through August 31, 2005, co-promotion revenue included the Company's share of profits from the sale of INTEGRILIN in co-promotion
territories by SGP. Also included in co-promotion revenue were reimbursements from SGP of the Company's manufacturing-related costs, development costs, advertising and promotional expenses
associated with the sale of INTEGRILIN within co-promotion territories and royalties from SGP on sales of INTEGRILIN outside of the co-promotion territory other than Europe.
The Company recognized revenue when SGP shipped INTEGRILIN to wholesalers and recorded it net of allowances, if any. The Company deferred specified manufacturing-related expenses until the time SGP
shipped related product to its customers inside and outside of co-promotion territories and outside of Europe.
Beginning
September 1, 2005 as a result of the Company's transition from a co-promotion to a royalty arrangement for INTEGRILIN in the United States, the Company no
longer reports co-promotion revenue.
Revenue under strategic alliances
The Company recognizes revenue under strategic alliances from nonrefundable license payments, milestone payments, reimbursement of research and development costs
and reimbursement of manufacturing-related costs. Nonrefundable upfront fees for which no further performance obligations exist are recognized as revenue on the earlier of when payments are received
or collection is assured.
71
Millennium Pharmaceuticals, Inc.
Notes to Consolidated Financial Statements December 31, 2007 (Continued)
Nonrefundable
upfront licensing fees and guaranteed, time-based payments that require continuing involvement in the form of research and development, manufacturing or other
commercialization efforts by the Company are recognized as revenue:
-
-
ratably
over the development period if development risk is significant;
-
-
ratably
over the manufacturing period or estimated product useful life if development risk has been substantially eliminated; or
-
-
based
upon the level of research services performed during the period of the research contract.
Milestone
payments are recognized as revenue when the performance obligations, as defined in the contract, are achieved. Performance obligations typically consist of significant
milestones in the development life cycle of the related technology or product candidate, such as initiation of clinical trials, filing for approval with regulatory agencies and approvals by regulatory
agencies.
Reimbursements
of research and development costs are recognized as revenue as the related costs are incurred.
Royalties
Royalties are recognized as revenue when earned. Royalties may include:
-
-
royalties
earned on sales of INTEGRILIN in the United States and other territories around the world, as provided by SGP;
-
-
royalties,
or distribution fees, earned on international sales of VELCADE, as provided by OBL;
-
-
royalties
earned on sales of INTEGRILIN in Europe, as provided by GSK; and
-
-
other
royalties.
Advertising and Promotional Expenses
Advertising and promotional expenses are expensed as incurred. During the years ended December 31, 2007, 2006 and 2005, advertising and promotional
expenses were $43.1 million, $23.2 million and $35.8 million, respectively. Amounts recorded in 2005 include advertising and promotional expenses related to INTEGRILIN.
Other Income
In July 2006, the Company recognized a deferred gain of $3.4 million upon receipt of proceeds from the sale of assets to Gene Logic, Inc., which was
included in other income for the year ended December 31, 2006.
In
September 2006, the Company entered into a support agreement to acquire the outstanding stock of AnorMED, Inc. Subsequent to executing the support agreement, AnorMED received a
more favorable acquisition offer from Genzyme Corporation and terminated the initial support agreement with the Company. As a result of the termination of the support agreement, the Company received a
$19.5 million termination fee from AnorMED in October 2006, which was included in other income for the year ended December 31, 2006. Transaction costs associated with the attempted
acquisition of approximately $5.5 million were included in selling, general and administrative expenses for the year ended December 31, 2006.
72
Millennium Pharmaceuticals, Inc.
Notes to Consolidated Financial Statements December 31, 2007 (Continued)
Income Taxes
The liability method, in accordance with SFAS No. 109, "Accounting for Income Taxes" ("SFAS No. 109"), is used to account for income taxes.
Deferred tax assets and liabilities are determined based on differences between financial reporting and income tax bases of assets and liabilities, as well as net operating loss and tax credit
carryforwards, and are measured using the enacted tax rates and laws that will be in effect when the differences reverse. Deferred tax assets, representing future tax benefits, are reduced by a
valuation allowance to reflect uncertainty when it is more likely than not that the related tax asset will not be realized. If it is determined at a later date that these deferred tax assets may
become realizable, it would result in a reversal of some or all of the valuation allowance recorded against these assets. This would result in a corresponding tax benefit in the Company's results of
operation, which could be material.
Effective
January 1, 2007, the Company adopted FASB Interpretation No. 48 ("FIN 48"), "Accounting for Uncertainty in Income Taxesan Interpretation of
FASB 109" (the "Interpretation"). The Interpretation clarifies the accounting for uncertainty in income taxes recognized in an enterprise's financial statements in accordance with SFAS
No. 109. The Interpretation proscribes a recognition
threshold and measurement attribute for financial statement recognition of an income tax position taken or expected to be taken in a tax return. This Interpretation also provides guidance on
derecognition, measurement, classification, interest and penalties, accounting in interim periods, disclosure and transition. The Company's adoption did not have a material impact on its results of
operations or financial position as it did not recognize any assets or liabilities for unrecognized tax benefits relative to uncertain tax positions upon adoption of the Interpretation. The adoption
resulted in the net derecognition of approximately $33.7 million of deferred tax assets from tax credit carryforwards which was offset by a reduction in the valuation allowance on the deferred
tax assets.
Earnings (Loss) Per Common Share
Basic earnings (loss) per common share is computed using the weighted-average number of common shares outstanding during the period, excluding restricted stock
that has been issued but is not yet vested. Diluted earnings (loss) per share is based upon the weighted average number of common shares outstanding during the period, plus additional weighted average
common equivalent shares outstanding during the period when the effect is not anti-dilutive. Common equivalent shares result from the assumed exercise of outstanding stock options and
warrants (the proceeds of which are then assumed to have been used to repurchase outstanding stock using the treasury stock method), the assumed conversion of convertible notes and the vesting of
unvested restricted shares of common stock. Common equivalent shares from options, warrants, unvested restricted shares and the assumed conversion of convertible notes that were not included in the
calculation of diluted shares because the effect would have been anti-dilutive were 31.7 million, 39.4 million and 27.7 million at December 31,
73
Millennium Pharmaceuticals, Inc.
Notes to Consolidated Financial Statements December 31, 2007 (Continued)
2007,
2006 and 2005, respectively. Basic and diluted earnings (loss) per common share were determined as follows (in thousands, except per share amounts):
|
|
Year Ended December 31,
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
Basic
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
14,909
|
|
$
|
(43,953
|
)
|
$
|
(198,249
|
)
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding
|
|
|
318,221
|
|
|
313,724
|
|
|
308,284
|
|
|
|
|
|
|
|
|
|
Basic earnings (loss) per share
|
|
$
|
0.05
|
|
$
|
(0.14
|
)
|
$
|
(0.64
|
)
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
14,909
|
|
$
|
(43,953
|
)
|
$
|
(198,249
|
)
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding
|
|
|
318,221
|
|
|
313,724
|
|
|
308,284
|
|
|
Effect of dilutive options and restricted stock
|
|
|
3,099
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares assuming dilution
|
|
|
321,320
|
|
|
313,724
|
|
|
308,284
|
|
|
|
|
|
|
|
|
|
Diluted earnings (loss) per share
|
|
$
|
0.05
|
|
$
|
(0.14
|
)
|
$
|
(0.64
|
)
|
|
|
|
|
|
|
|
|
For
the quarter ended December 31, 2007, the assumed conversion of convertible notes into 16.2 million shares of common stock has a dilutive effect resulting in a dilutive
income adjustment of $1.8 million in the calculation of the quarterly earnings per share included in Note 13.
Foreign Currency Translation
The financial statements of the Company's foreign subsidiaries are measured using the local currency as the functional currency, with results of operations and
cash flows translated at average exchange rates during the period, and assets and liabilities translated at end of period exchange rates. Foreign currency transaction gains and losses are included in
the results of operations and are not material to the Company's consolidated financial statements. Translation adjustments are excluded from the determination of net income (loss) and are presented in
a separate component of accumulated other comprehensive income (loss) in stockholders' equity.
Comprehensive Income (Loss)
Comprehensive income (loss) comprises net income (loss), changes in unrealized gains and losses on marketable securities and cumulative foreign currency
translation adjustments. Accumulated other comprehensive income (loss) as of December 31, 2007 and 2006 included unrealized gains of $4.9 million and unrealized losses of
$0.4 million, respectively, on marketable securities and $(1.0) million and $(0.9) million, respectively, of cumulative foreign currency translation adjustments. Comprehensive income (loss) is
reflected in the consolidated statements of stockholders' equity.
Stock-Based Compensation Expense
As discussed more fully in Note 10, the Company adopted SFAS No. 123 (revised 2004), "Share Based Payment" ("SFAS 123R") effective
January 1, 2006 under the modified prospective transition method of adoption. SFAS 123R requires the recognition of the fair value of stock-based compensation in its statements of
operations. Stock-based compensation expense primarily relates to stock options, restricted stock and stock issued under the Company's employee stock purchase plans.
74
Millennium Pharmaceuticals, Inc.
Notes to Consolidated Financial Statements December 31, 2007 (Continued)
Prior
to January 1, 2006, the Company followed Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25") and related
interpretations, in accounting for its stock-based compensation plans. Under APB 25, when the exercise price of the employee stock options equals the market price of the underlying stock on the
date of grant, no stock-based compensation expense was recognized. The Company elected the modified prospective transition method for adopting SFAS 123R. Under this method, the provisions of
SFAS 123R apply to all awards granted or modified after the date of adoption. In addition, the unrecognized expense of awards not yet vested at the date of adoption, determined under the
original provisions of SFAS 123, "Accounting for Stock-Based Compensation" ("SFAS 123"), is being recognized in the Company's statements of operations in the periods after the date of
adoption. For stock options granted prior to January 1, 2006, the Company calculated stock-based compensation expense on a straight-line basis over the requisite service period for
each separately vesting portion of the award as if the award was, in substance, multiple awards. For restricted stock granted prior to January 1, 2006, the Company calculated stock-based
compensation expense on a straight-line basis over the requisite service period of the entire award.
SFAS 123
and 123R require the presentation of pro forma information for periods prior to adoption as if the Company had accounted for all stock-based employee compensation expense
under the fair value
method of those statements. For purposes of this pro forma disclosure, the estimated fair value of the stock options at the date of the grant is amortized to expense on a straight-line
basis over the requisite service period for each separately vesting portion of the award as if the award was, in substance, multiple awards. The Company accounted for forfeitures as they occurred. The
following table illustrates the effect on net loss and loss per share as if the Company had applied the fair value recognition provisions to stock-based employee compensation expense (in thousands,
except per share amounts):
|
|
Year Ended
December 31, 2005
|
|
Net loss
|
|
$
|
(198,249
|
)
|
Add: Stock-based compensation as reported in the Statement of Operations
|
|
|
1,044
|
|
Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards
|
|
|
(48,629
|
)
|
|
|
|
|
Pro forma net loss
|
|
$
|
(245,834
|
)
|
|
|
|
|
Amounts per common share:
|
|
|
|
|
Basic and dilutedas reported
|
|
$
|
(0.64
|
)
|
|
|
|
|
Basic and dilutedpro forma
|
|
$
|
(0.80
|
)
|
|
|
|
|
Accounting Pronouncements
In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements," ("SFAS No. 157"). SFAS No. 157 defines fair value,
establishes a framework for measuring fair value in accordance with generally accepted accounting principles and expands disclosures about fair value measurements. SFAS No. 157 codifies the
definition of fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date, clarifies
the principle that fair value should be based on the assumptions market participants would use when pricing the asset or liability and establishes a fair value hierarchy that
75
Millennium Pharmaceuticals, Inc.
Notes to Consolidated Financial Statements December 31, 2007 (Continued)
prioritizes
the information used to develop those assumptions. SFAS No. 157 is effective for fiscal years beginning after December 15, 2007. The Company does not believe that adoption
will have a material impact on its results of operations, financial position or cash flows.
In
February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for Financial Assets and Financial Liabilities," ("SFAS 159"). SFAS 159 permits entities to
choose to measure many financial instruments and certain other items at fair value. The objective is to improve financial reporting by providing entities with the opportunity to mitigate volatility in
reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. SFAS 159 is effective for fiscal years beginning
after November 15, 2007. The Company is currently analyzing the effect, if any, SFAS 159 will have on its consolidated financial position and results of operations.
In
June 2007, the FASB issued EITF No. 07-3, "Accounting for Nonrefundable Advance Payments for Goods or Services to Be Used in Future Research and Development
Activities," ("EITF 07-3"). EITF 07-3 requires that nonrefundable advance payments for goods or services to be received in the future for use in research and
development activities should be deferred and capitalized. The capitalized amounts should be expensed as the related goods are delivered or the services are performed. EITF 07-3 is
effective for new contracts entered into during fiscal years beginning after December 15, 2007. The Company is currently analyzing the effect, if any, EITF 07-3 will have on
its consolidated financial position and results of operations.
In
December 2007, the FASB issued EITF Issue 07-1, "Accounting for Collaborative Arrangements," ("EITF 07-1"). EITF 07-1 requires
collaborators to present the results of activities for which they act as the principal on a gross basis and report any payments received from (made to) other collaborators based on other applicable
GAAP or, in the absence of other applicable GAAP, based on analogy to authoritative accounting literature or a reasonable, rational, and consistently applied accounting policy election. Further,
EITF 07-1 clarified the determination of whether transactions within a collaborative arrangement are part of a vendor-customer (or analogous) relationship subject to
EITF 01-9, "Accounting for Consideration Given by a Vendor to a Customer (Including a
Reseller of the Vendor's Products)." EITF 07-1 will be effective for the Company beginning on January 1, 2009. The Company is currently evaluating the effect
EITF 07-1 will have on its consolidated financial position and results of operations.
3. Restructuring
2006 Resource Alignment
In October 2006, the Company announced a program to further align resources with its current corporate priorities of advancing VELCADE and accelerating the
clinical and preclinical pipeline by lowering investment in discovery and supporting areas. As part of its program, the Company has reduced in-house research and development technologies
and headcount in areas where the work can now be outsourced.
The
Company recorded restructuring charges of approximately $17.2 million during the year ended December 31, 2007 under the 2006 restructuring program primarily for
additional facility-related costs associated with vacated buildings and employee termination benefits as a result of headcount reductions. "Other" in the table below includes the write-off
of deferred rent in accordance with SFAS No. 13, "Accounting for Leases," upon vacating the facilities. During the year ended December 31, 2006, the Company recorded restructuring
charges of approximately $5.2 million under the 2006
76
Millennium Pharmaceuticals, Inc.
Notes to Consolidated Financial Statements December 31, 2007 (Continued)
restructuring
program primarily related to employee termination benefits as a result of headcount reductions.
The
following table displays the restructuring activity and liability balances (in thousands):
|
|
Balance at December 31, 2006
|
|
Net Charges/(Credits)
|
|
Payments
|
|
Asset Impairment
|
|
Other
|
|
Balance at December 31, 2007
|
Termination benefits
|
|
$
|
3,602
|
|
$
|
1,460
|
|
$
|
(4,423
|
)
|
$
|
|
|
$
|
|
|
$
|
639
|
Facilities
|
|
|
|
|
|
16,028
|
|
|
(3,955
|
)
|
|
|
|
|
(2,593
|
)
|
|
9,480
|
Asset impairment
|
|
|
|
|
|
(301
|
)
|
|
|
|
|
301
|
|
|
|
|
|
|
Other associated costs
|
|
|
|
|
|
57
|
|
|
(57
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
3,602
|
|
$
|
17,244
|
|
$
|
(8,435
|
)
|
$
|
301
|
|
$
|
(2,593
|
)
|
$
|
10,119
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2005
|
|
Net Charges/(Credits)
|
|
Payments
|
|
Balance at December 31, 2006
|
Termination benefits
|
|
$
|
|
|
$
|
5,155
|
|
$
|
(1,553
|
)
|
$
|
3,602
|
|
|
|
|
|
|
|
|
|
2005 Strategic Refinement
In October 2005, the Company announced its 2005 restructuring plan in support of a refined business strategy focused on advancing key growth assets, including
VELCADE, advancing the Company's clinical pipeline and building a leading oncology-focused discovery organization. In connection with the strategic refinement, the Company substantially reduced its
effort in inflammation discovery and reduced overall headcount, including eliminating positions in INTEGRILIN sales and marketing, inflammation discovery and various other business support groups.
The
Company recorded net restructuring credits of approximately $3.8 million during the year ended December 31, 2007 under the 2005 restructuring plan, primarily related to
the earlier than anticipated sublease of one of its facilities charged to restructuring in prior years at a higher rate per square foot than it had originally estimated. During the year ended
December 31, 2006, the Company recorded restructuring charges under the Company's 2005 restructuring plan of approximately $1.2 million primarily for additional facility-related costs
associated with vacated buildings, changes in sublease assumptions of certain vacated buildings, and employee termination benefits as a result of headcount reductions within inflammation discovery and
business support groups, partially offset by a credit resulting from the earlier than anticipated sublease of one of the vacated buildings at a higher rate per square foot than the Company had
originally estimated.
The
following table displays the restructuring activity and liability balances (in thousands):
|
|
Balance at December 31, 2006
|
|
Net Charges/(Credits)
|
|
Payments
|
|
Balance at December 31, 2007
|
Termination benefits
|
|
$
|
133
|
|
$
|
(30
|
)
|
$
|
(103
|
)
|
$
|
|
Facilities
|
|
|
13,827
|
|
|
(3,780
|
)
|
|
(3,815
|
)
|
|
6,232
|
Other associated costs
|
|
|
24
|
|
|
(24
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
13,984
|
|
$
|
(3,834
|
)
|
$
|
(3,918
|
)
|
$
|
6,232
|
|
|
|
|
|
|
|
|
|
77
Millennium Pharmaceuticals, Inc.
Notes to Consolidated Financial Statements December 31, 2007 (Continued)
|
|
Balance at December 31, 2005
|
|
Net Charges/(Credits)
|
|
Payments
|
|
Asset Impairment
|
|
Other
|
|
Balance at December 31, 2006
|
Termination benefits
|
|
$
|
4,367
|
|
$
|
280
|
|
$
|
(4,514
|
)
|
$
|
|
|
$
|
|
|
$
|
133
|
Facilities
|
|
|
24,812
|
|
|
(3,997
|
)
|
|
(7,240
|
)
|
|
|
|
|
252
|
|
|
13,827
|
Asset impairment
|
|
|
|
|
|
4,869
|
|
|
|
|
|
(4,869
|
)
|
|
|
|
|
|
Contract termination
|
|
|
37
|
|
|
37
|
|
|
(74
|
)
|
|
|
|
|
|
|
|
|
Other associated costs
|
|
|
16
|
|
|
47
|
|
|
(39
|
)
|
|
|
|
|
|
|
|
24
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
29,232
|
|
$
|
1,236
|
|
$
|
(11,867
|
)
|
$
|
(4,869
|
)
|
$
|
252
|
|
$
|
13,984
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2003 Restructuring Plan
In December 2002 and June 2003, the Company realigned its resources to become a commercially-focused biopharmaceutical company. The Company discontinued specified
discovery research efforts, reduced overall headcount, primarily in its discovery group, and consolidated its research and development facilities.
During
the year ended December 31, 2007, the Company recorded net restructuring credits under the Company's 2003 restructuring plan of approximately $0.5 million primarily
related to the earlier than anticipated sublease of one of its facilities charged to restructuring in prior years at a higher rate per square foot than it had originally estimated, as well as the
sublease extension for another facility charged to restructuring in prior years. During the year ended December 31, 2006, the Company recorded restructuring charges under the Company's 2003
restructuring plan of approximately $14.0 million primarily related to the lease termination payment for its vacated facility in Cambridge, England.
The
following table displays the restructuring activity and liability balances (in thousands):
|
|
Balance at December 31, 2006
|
|
Net Charges/(Credits)
|
|
Payments
|
|
Balance at December 31, 2007
|
Termination benefits
|
|
$
|
|
|
$
|
(10
|
)
|
$
|
10
|
|
$
|
|
Facilities
|
|
|
49,928
|
|
|
(514
|
)
|
|
(16,363
|
)
|
|
33,051
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
49,928
|
|
$
|
(524
|
)
|
$
|
(16,353
|
)
|
$
|
33,051
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2005
|
|
Net Charges/(Credits)
|
|
Payments
|
|
Balance at December 31, 2006
|
Facilities
|
|
$
|
75,671
|
|
$
|
13,995
|
|
$
|
(39,738
|
)
|
$
|
49,928
|
Other associated costs
|
|
|
|
|
|
7
|
|
|
(7
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
75,671
|
|
$
|
14,002
|
|
$
|
(39,745
|
)
|
$
|
49,928
|
|
|
|
|
|
|
|
|
|
The
Company accounts for its restructuring charges in accordance with SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities" ("SFAS No. 146").
SFAS No. 146 requires that a liability for a cost associated with an exit or disposal activity be recognized and measured initially at its fair value in the period in which the liability is
incurred, except for one-time termination benefits that meet specified requirements. Costs of termination benefits relate to severance packages,
out-placement services and career counseling for employees affected by the restructuring.
78
Millennium Pharmaceuticals, Inc.
Notes to Consolidated Financial Statements December 31, 2007 (Continued)
In
accordance with SFAS No. 146, the Company's facilities related expenses and liabilities in all restructuring plans include estimates of the remaining rental obligations, net of
estimated sublease income, for facilities the Company no longer occupies. The Company reviews its estimates and assumptions on a regular basis, until the outcome is finalized, and makes whatever
modifications are necessary, based on the Company's best judgment, to reflect any changed circumstances.
The
Company's decisions to vacate specified facilities and abandon the related leasehold improvements as well as terminate specified research programs were deemed to be impairment
indicators under SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." As a result of performing the impairment evaluations, asset impairment charges were
recorded to adjust the carrying value of the related long-lived assets to their net realizable values. The fair values of the assets were estimated based upon anticipated future cash
flows, discounted at a rate commensurate with the risk involved. These amounts are included in asset impairment in the above tables.
In
connection with its 2006 decision to abandon certain facilities in 2007 under the 2006 restructuring program, the Company shortened the useful lives of the leasehold improvements at
these facilities in accordance with SFAS No. 144. During the years ended December 31, 2007 and 2006, the Company recorded additional depreciation expense of approximately
$3.3 million and $3.8 million, respectively, in research and development expense related to its decision.
The
projected timing of payments of the remaining restructuring liabilities under all of the Company's restructuring initiatives at December 31, 2007 is approximately
$23.0 million in 2008 and $26.4 million thereafter through 2014. The actual amount and timing of the payment of the remaining accrued liability is dependent upon the ultimate terms of
any potential subleases or lease restructuring.
4. Revenue and Strategic Alliances
The Company has entered into research, development, technology transfer and commercialization arrangements with major pharmaceutical and biotechnology companies
relating to a broad range of therapeutic products. These alliances provide the Company with the opportunity to receive various combinations of license fees, research funding, distribution fees and may
provide additional payments
contingent upon its achievement of research and regulatory milestones and royalties and/or profit shares if the Company's collaborations are successful in developing and commercializing products.
Product Alliances
VELCADE
On June 30, 2003, the Company entered into an agreement with OBL to collaborate on the commercialization and with Johnson & Johnson Pharmaceutical
Research & Development, L.L.C., or JJPRD, to continue clinical development of VELCADE. Under the terms of the agreement, the Company retains all commercialization rights to VELCADE in the
United States. OBL and its affiliate, Janssen-Cilag, have agreed to commercialize VELCADE outside of the United States. The Company is entitled to royalties in the form of distribution fees from OBL
and its affiliate on sales of VELCADE outside of the United States. The Company also retains a limited option to co-promote VELCADE with OBL at a future date in specified European
countries.
The
Company is engaged with JJPRD in an extensive global program for further clinical development of VELCADE with the purpose of maximizing the commercial potential of VELCADE. This
program is investigating the potential of VELCADE to treat multiple forms of solid and hematological cancers, including continued clinical development of VELCADE for multiple myeloma.
79
Millennium Pharmaceuticals, Inc.
Notes to Consolidated Financial Statements December 31, 2007 (Continued)
JJPRD
was responsible for 40% of the joint development costs through 2005 and is currently responsible for 45% of those costs. The Company is responsible for the remaining 55% of the joint development
costs.
The
Company may receive payments for achieving clinical development milestones, for achieving regulatory milestones outside of the United States and for achieving agreed-upon
sales levels of VELCADE outside of the United States. The Company may also receive additional payments for achieving specified clinical and regulatory approval milestones outside of the United States
for additional solid and hematological cancers and for achieving sales milestones outside of the United States. During the years ended December 31, 2007, 2006 and 2005, the Company recognized
approximately $40.0 million, $48.0 million and $22.0 million, respectively, of milestone payments as revenue under this alliance.
In
October 2006, the Company and Ortho Biotech Inc. ("OBI") announced a two-year agreement to jointly promote VELCADE in the U.S. Under the terms of the agreement, in
the first quarter of 2007, OBI and the Company began jointly promoting VELCADE to U.S.-based physicians. The Company pays a proportion of the VELCADE related costs for the OBI sales force, and OBI is
entitled to receive a commission should sales associated with the increased promotional effort exceed pre-specified targets. Both parties are able to terminate the agreement under certain
circumstances and subject to fees. The Company continues to be responsible for manufacturing and distribution of VELCADE in the U.S. The Company believes this collaboration, with the
well-established OBI oncology sales force, helps realize the full potential of the product. The current agreement between the Company and OBL for the promotion of VELCADE outside the U.S.
remains unchanged.
INTEGRILIN
In April 1999, COR entered into a collaboration agreement with SGP to jointly develop and commercialize INTEGRILIN on a worldwide basis. The Company acquired COR
in February 2002. Under its collaboration agreement with SGP, the Company generally shared any profits or losses from the sale of INTEGRILIN in the United States with SGP based on the amount of
promotional efforts that each party contributed. Since the United States launch of INTEGRILIN in June 1998, the Company and SGP had agreed to share promotional efforts in the United States equally,
except for costs associated with marketing programs that are specific to the Company. The Company had granted SGP an exclusive license to market INTEGRILIN outside of the United States and Europe and
SGP paid the Company royalties based on those sales.
In
June 2004, the Company reacquired the rights to market INTEGRILIN in Europe from SGP and concurrently entered into a license agreement granting GSK exclusive marketing rights to
INTEGRILIN in Europe. In January 2005, the transition of the INTEGRILIN marketing authorization for the European Union from SGP to GSK was completed and GSK began selling INTEGRILIN in the countries
of the European Union. Under the terms of the agreement, the Company is entitled to license fees and royalties from GSK on INTEGRILIN sales in Europe upon the achievement of specified objectives.
During the years ended December 31, 2006 and 2005, the Company recognized license fees of approximately $2.9 million and $21.7 million, respectively, included in strategic
alliance revenue from GSK.
80
Millennium Pharmaceuticals, Inc.
Notes to Consolidated Financial Statements December 31, 2007 (Continued)
On September 1, 2005, the Company transferred to SGP the exclusive development and commercialization rights to INTEGRILIN in the United States. In exchange
for these rights, SGP paid the Company approximately $35.5 million in a nonrefundable upfront payment that the Company is recognizing as revenue ratably over the Company's period of involvement
in managing the supply chain. In addition, SGP is obligated to pay the Company royalties on product sales of INTEGRILIN over the lifetime of the product, with the potential of the Company receiving
royalties beyond the 2014 patent expiration date.
As
of September 1, 2005, the Company no longer records co-promotion revenue. The Company now records royalties on sales of INTEGRILIN in the United States and other
territories, as earned on a quarterly basis over the life of the INTEGRILIN product. Minimum royalty payments for 2006 and 2007 were approximately $85.4 million. There are no guaranteed minimum
royalty payments for 2008 or future years.
Upon
closing the amended collaboration agreement with SGP, the Company recognized strategic alliance revenue of approximately $71.4 million in the third quarter of 2005 relating
to the Company's sale to SGP of its existing raw materials and finished goods INTEGRILIN inventory. SGP assumed development obligations relating to the product. The Company continues to manage the
supply chain
for INTEGRILIN at the expense of SGP for products sold in the United States and other areas outside of the European Union.
5. Marketable Securities
The following is a summary of available-for-sale securities (in thousands):
|
|
December 31, 2007
|
|
|
Cost
|
|
Gross Unrealized Gains
|
|
Gross Unrealized Losses
|
|
Estimated Fair Value
|
Corporate bonds
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Due in one year or less
|
|
$
|
15,755
|
|
$
|
10
|
|
$
|
(65
|
)
|
$
|
15,700
|
|
Due in one to three years
|
|
|
561,253
|
|
|
4,861
|
|
|
(769
|
)
|
|
565,345
|
Asset-backed securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Due in one to five years
|
|
|
84,432
|
|
|
342
|
|
|
(54
|
)
|
|
84,720
|
|
Due in six to ten years
|
|
|
2,931
|
|
|
12
|
|
|
(14
|
)
|
|
2,929
|
|
Due after ten years
|
|
|
85,782
|
|
|
400
|
|
|
(679
|
)
|
|
85,503
|
U.S. government agency securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Due in one year or less
|
|
|
2,492
|
|
|
22
|
|
|
|
|
|
2,514
|
|
Due in one to three years
|
|
|
44,577
|
|
|
828
|
|
|
(3
|
)
|
|
45,402
|
|
|
|
|
|
|
|
|
|
|
|
$
|
797,222
|
|
$
|
6,475
|
|
$
|
(1,584
|
)
|
$
|
802,113
|
|
|
|
|
|
|
|
|
|
81
Millennium Pharmaceuticals, Inc.
Notes to Consolidated Financial Statements December 31, 2007 (Continued)
|
|
December 31, 2006
|
|
|
Cost
|
|
Gross Unrealized Gains
|
|
Gross Unrealized Losses
|
|
Estimated Fair Value
|
Corporate bonds
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Due in one year or less
|
|
$
|
15,420
|
|
$
|
|
|
$
|
(181
|
)
|
$
|
15,239
|
|
Due in one to three years
|
|
|
537,055
|
|
|
426
|
|
|
(3,719
|
)
|
|
533,762
|
Asset-backed securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Due in one to five years
|
|
|
65,385
|
|
|
152
|
|
|
(206
|
)
|
|
65,331
|
|
Due in six to ten years
|
|
|
3,441
|
|
|
5
|
|
|
(52
|
)
|
|
3,394
|
|
Due after ten years
|
|
|
15,435
|
|
|
37
|
|
|
(99
|
)
|
|
15,373
|
U.S. government agency securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Due in one year or less
|
|
|
2,275
|
|
|
|
|
|
(11
|
)
|
|
2,264
|
|
Due in one to three years
|
|
|
43,422
|
|
|
48
|
|
|
(257
|
)
|
|
43,213
|
Equity securities
|
|
|
|
|
|
3,500
|
|
|
|
|
|
3,500
|
|
|
|
|
|
|
|
|
|
|
|
$
|
682,433
|
|
$
|
4,168
|
|
$
|
(4,525
|
)
|
$
|
682,076
|
|
|
|
|
|
|
|
|
|
The
following is a summary of the gross unrealized losses and the fair value of the Company's investments with unrealized losses that are not deemed to be
other-than-temporarily impaired, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position (in
thousands):
|
|
December 31, 2007
|
|
|
|
Less Than 12 Months
|
|
12 Months or Greater
|
|
Total
|
|
|
|
Fair Value
|
|
Unrealized Losses
|
|
Fair Value
|
|
Unrealized Losses
|
|
Fair Value
|
|
Unrealized Losses
|
|
Corporate bonds
|
|
$
|
98,026
|
|
$
|
(773
|
)
|
$
|
12,182
|
|
$
|
(61
|
)
|
$
|
110,208
|
|
$
|
(834
|
)
|
Asset-backed securities
|
|
|
49,803
|
|
|
(514
|
)
|
|
8,866
|
|
|
(233
|
)
|
|
58,669
|
|
|
(747
|
)
|
U.S. government agency securities
|
|
|
5,103
|
|
|
(3
|
)
|
|
|
|
|
|
|
|
5,103
|
|
|
(3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
152,932
|
|
$
|
(1,290
|
)
|
$
|
21,048
|
|
$
|
(294
|
)
|
$
|
173,980
|
|
$
|
(1,584
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
There
were 58 corporate bonds and 125 asset-backed securities in an unrealized loss position at December 31, 2007. The majority of the securities in an unrealized
loss position greater than one year have been in an unrealized loss position for less than two years. The unrealized losses were primarily caused by interest rate changes, and not credit quality
issues. To determine whether an other-than-temporary impairment exists, the Company demonstrates that it has the ability and intent to hold the investment until a market price
recovery and, in doing so, considers evidence indicating the cost of the investment is recoverable and outweighs evidence to the contrary. Since the decline in market value is primarily attributable
to changes in interest rates and the Company has the ability and intent to hold these investments until a recovery of fair value, the Company does not consider these investments to be
other-than-temporarily impaired at December 31, 2007.
The
unrealized losses on investments in United States government agency securities at December 31, 2007 were primarily caused by interest rate changes. The contractual terms of
those investments do not permit the issuer to settle the securities at a price less than amortized cost of the investment. Because the Company has the ability and intent to hold these investments
until a recovery of fair value, the Company does not consider these investments to be other-than-temporarily impaired at December 31, 2007.
82
Millennium Pharmaceuticals, Inc.
Notes to Consolidated Financial Statements December 31, 2007 (Continued)
6. Property and Equipment
Property and equipment consists of the following at December 31 (in thousands):
|
|
2007
|
|
2006
|
|
Equipment
|
|
$
|
147,555
|
|
$
|
164,463
|
|
Capitalized software
|
|
|
39,861
|
|
|
39,192
|
|
Leasehold improvements
|
|
|
241,144
|
|
|
231,730
|
|
Construction in progress
|
|
|
2,376
|
|
|
1,621
|
|
|
|
|
|
|
|
|
|
|
430,936
|
|
|
437,006
|
|
Less accumulated depreciation and amortization
|
|
|
(283,067
|
)
|
|
(283,657
|
)
|
|
|
|
|
|
|
|
|
$
|
147,869
|
|
$
|
153,349
|
|
|
|
|
|
|
|
Depreciation
expense, which includes amortization of assets recorded under capital leases as described in Note 9, was $23.1 million, $31.9 million
and $42.3 million, in 2007, 2006 and 2005, respectively. During the years ended December 31, 2007 and December 31, 2006, the Company retired certain fixed assets that had been
fully amortized.
7. Accrued expenses
Accrued expenses consist of the following at December 31 (in thousands):
|
|
2007
|
|
2006
|
Payroll and benefits
|
|
$
|
31,886
|
|
$
|
24,895
|
Clinical and preclinical development
|
|
|
11,822
|
|
|
10,933
|
Manufacturing
|
|
|
8,158
|
|
|
4,330
|
Product returns
|
|
|
3,453
|
|
|
2,562
|
Governmental and contractual adjustments
|
|
|
3,238
|
|
|
1,463
|
Other expenses
|
|
|
16,813
|
|
|
18,361
|
|
|
|
|
|
|
|
$
|
75,370
|
|
$
|
62,544
|
|
|
|
|
|
8. Commitments
Lease Commitments
The Company leases some of its laboratory and office space under operating lease agreements with various terms and renewal options, including major facilities
with lease expirations ranging from 2008 through 2020. In addition to minimum lease commitments, these lease agreements require the Company to pay its pro rata share of property taxes and building
operating expenses.
On
August 4, 2000, the Company entered into lease agreements, relating to two buildings for laboratory and office space in Cambridge, MA. The rent obligation for the first of
these buildings began in July 2002 and the rent obligation on the second building began in July 2003. The Company was responsible for a portion of the construction costs for both buildings and was
deemed to be the owner during the construction period of each building under EITF 97-10, "The Effect of Lessee Involvement in Asset Construction." In July 2002 and July 2003, upon
completion of the construction period of the buildings, respectively, the Company recorded the leases as capital leases. Payments under these capital leases comprise principal, interest and rent
expense.
83
Millennium Pharmaceuticals, Inc.
Notes to Consolidated Financial Statements December 31, 2007 (Continued)
At
December 31, 2007, the Company has pledged $6.9 million of marketable securities, included in restricted cash, primarily as collateral for letters of credit for
specified leased facilities.
At
December 31, 2007, future minimum commitments under leases with noncancelable terms, including leases for facilities that the Company no longer occupies as part of its
restructuring plan, of more than one year are as follows (in thousands):
|
|
Capital Leases
|
|
Operating Leases
|
|
Operating Subleases
|
|
Year:
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
$
|
16,915
|
|
$
|
32,184
|
|
$
|
(14,184
|
)
|
|
2009
|
|
|
17,183
|
|
|
22,341
|
|
|
(12,422
|
)
|
|
2010
|
|
|
17,183
|
|
|
21,905
|
|
|
(12,388
|
)
|
|
2011
|
|
|
17,183
|
|
|
15,884
|
|
|
(10,623
|
)
|
|
2012
|
|
|
17,183
|
|
|
11,385
|
|
|
(9,239
|
)
|
Thereafter
|
|
|
189,007
|
|
|
11,549
|
|
|
(9,740
|
)
|
|
|
|
|
|
|
|
|
Total
|
|
|
274,654
|
|
$
|
115,248
|
|
$
|
(68,596
|
)
|
|
|
|
|
|
|
|
|
|
Less amount representing additional rental payments
|
|
|
(167,621
|
)
|
|
|
|
|
|
|
Less amount representing interest
|
|
|
(31,992
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Present value of minimum lease payments
|
|
|
75,041
|
|
|
|
|
|
|
|
Less current portion of capital lease obligations
|
|
|
(1,246
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital lease obligations, net of current portion
|
|
$
|
73,795
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
rent expense, which includes rent for buildings and equipment, was $27.8 million, $31.4 million and $37.4 million in 2007, 2006 and 2005,
respectively.
Long-Term Supply Contracts
The Company relies on third party contract manufacturers for the manufacturing, fill/finish and packaging of VELCADE and INTEGRILIN for both commercial purposes
and ongoing clinical trials. The Company has entered into long term supply contracts with certain of these manufacturers. Total future fixed commitments under these long term arrangements approximate
$17.6 million in 2008, $24.3 million in 2009, $24.6 million in 2010 and $65.0 million thereafter.
External Collaborations
The Company funds research efforts of its strategic alliance and various academic collaborators in connection with its research and development programs. Total
future fixed commitments under these agreements approximate $2.5 million in 2008 and $2.9 million thereafter.
9. Convertible Debt
The Company had the following convertible notes outstanding at December 31, (in thousands):
|
|
2007
|
|
2006
|
2.25% convertible notes due November 15, 2011
|
|
$
|
250,000
|
|
$
|
250,000
|
5.5% convertible notes due January 15, 2007
|
|
|
|
|
|
83,325
|
5.0% convertible notes due March 1, 2007
|
|
|
|
|
|
16,246
|
|
|
|
|
|
Total
|
|
$
|
250,000
|
|
$
|
349,571
|
|
|
|
|
|
84
Millennium Pharmaceuticals, Inc.
Notes to Consolidated Financial Statements December 31, 2007 (Continued)
In
November 2006, the Company completed the sale of $250.0 million of its 2.25% notes, which resulted in net proceeds of approximately $242.2 million. The
2.25% notes are convertible into the Company's common stock based upon a conversion rate of 64.6465 shares of common stock per $1,000 principal amount of the 2.25% notes, which was equal to the
initial conversion price of approximately $15.47 per
share of stock, subject to adjustment. The 2.25% notes are convertible only in the following circumstances: (1) if the closing price of the common stock exceeds 120% of the conversion price
within a specified period, (2) if specified distributions to holders of the common stock are made or specified corporate transactions occur, (3) if the average trading price per $1,000
principal amount is less than 98% of the product of the closing price of common stock and the then applicable conversion rate within a specified period or (4) during the last three months prior
to the maturity date of the notes, unless previously repurchased by the Company under certain circumstances. The 2.25% notes are subordinated in right of payment to all existing and future secured
debt of the Company.
In
connection with the sale of the 2.25% notes, the Company paid approximately $7.8 million in financing costs, which have been deferred and are included in other assets. These
deferred financing costs are being amortized to interest expense under the effective interest method over the life of the debt. The Company recognized $1.6 million and $0.2 million of
interest expense related to deferred financing cost amortization associated with the 2.25% notes during the years ended December 31, 2007 and 2006, respectively.
Under
the terms of the 2.25% notes, the Company is required to make semi-annual interest payments on the outstanding principal balance on May 15 and November 15
of each year. All required interest payments to date have been made.
The
estimated fair value of the Company's 2.25% notes as of December 31, 2007 was $294.1 million based on quoted market values.
In
accordance with the payment terms, the Company repaid the entire $83.3 million principal balance on its 5.5% convertible subordinated notes due on January 15, 2007 that
were convertible at a price equal to $42.07 per share and the entire $16.2 million principal balance on its 5.0% convertible subordinated notes due on March 1, 2007 that were convertible
at a price equal to $34.21 per share.
10. Stockholders' Equity
Preferred Stock
The Company has 5,000,000 authorized shares of preferred stock, $0.001 par value, issuable in one or more series, each of such series to have such rights and
preferences, including voting rights, dividend
rights, conversion rights, redemption privileges and liquidation preferences, as shall be determined by the Board of Directors.
Common Stock
At December 31, 2007, the Company had 500,000,000 authorized shares of common stock, $0.001 par value, with 324,605,075 shares issued and outstanding.
Common Stock Warrants
During the year ended December 31, 2007, warrants to purchase 429,600 shares of common stock were exercised with a weighted-average exercise price of $9.44
per share. There are no outstanding warrants at December 31, 2007.
85
Millennium Pharmaceuticals, Inc.
Notes to Consolidated Financial Statements December 31, 2007 (Continued)
Stock Option Plans
As discussed in Note 2, the Company adopted SFAS 123R effective January 1, 2006. Stock-based compensation expense primarily relates to stock
options, restricted stock and stock issued under the Company's employee stock purchase plans. The Company's policy is to grant stock options to employees at exercise prices equal to the fair market
value of the Company's stock at the dates of grant. Generally, options have a contractual term of ten years and vest monthly over a four-year period from grant date, although certain
options have been, and may in the future, be granted with shorter vesting periods. Certain of the Company's option plans provide for full vesting of options issued under the plans to optionholders who
terminate their employment for good reason or are terminated without cause within the period one month before and one year after a change of control. Options granted to consultants and other
nonemployees generally vest over the period of service to the Company. Awards of restricted stock are granted to officers and certain employees and generally fully vest four years from the grant date,
although certain awards have been, and may in the future, be granted with shorter vesting periods. The Company recognizes stock-based compensation expense equal to the fair value of stock options on a
straight-line basis over the requisite service period for each separately vesting portion of the award as if the award was, in substance, multiple awards. Restricted stock awards are
recorded as stock-based compensation expense, based on the market value on the date of the grant, on a straight-line basis over the
requisite service period for each separately vesting portion of the award as if the award was, in substance, multiple awards. The Company provides newly issued shares to satisfy stock option
exercises, the issuance of restricted stock and stock issued under the Company's employee stock purchase plans.
As
a result of the adoption of SFAS 123R, the Company's net loss for the year ended December 31, 2006 was $42.1 million, or $0.13 per basic and diluted share,
greater than if it had continued to account for share-based compensation related to stock options and the Company's employee stock purchase plan under APB 25.
In
connection with the adoption of SFAS 123R, the Company reassessed its valuation methodology for stock options and the related input assumptions. The assessment of the valuation
methodology resulted in the continued use of the Black-Scholes model. In the fourth quarter of 2005, the Company considered implied volatilities of currently traded options to provide an estimate of
volatility based upon current trading activity. After considering other factors such as its stage of development, the length of time the Company has been public and the impact of having a marketed
product, the Company concluded that a blended volatility rate based upon historical performance, as well as the implied volatilities of currently traded options, better reflects the expected
volatility of its stock going forward. The Company uses historical data to estimate option exercise and employee termination behavior, adjusted for known trends, to arrive at the estimated expected
life of an option. The Company updates its assumptions on a quarterly basis to reflect recent historical data. The risk-free interest rate for periods within the contractual life of the
option is based on the U.S. Treasury yield curve in effect at the time of grant.
The
following table summarizes the weighted-average assumptions the Company used in its fair value calculations at the date of grant:
|
|
Stock Options
|
|
Stock Purchase Plan
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
2007
|
|
2006
|
|
2005
|
|
Expected life (years)
|
|
4.1
|
|
3.7
|
|
4.8
|
|
0.5
|
|
0.5
|
|
0.5
|
|
Risk-free interest rate
|
|
4.58
|
%
|
4.76
|
%
|
4.03
|
%
|
4.20
|
%
|
4.49
|
%
|
3.13
|
%
|
Volatility
|
|
39
|
%
|
45
|
%
|
60
|
%
|
37
|
%
|
49
|
%
|
60
|
%
|
86
Millennium Pharmaceuticals, Inc.
Notes to Consolidated Financial Statements December 31, 2007 (Continued)
The
Company has never declared cash dividends on any of its capital stock and does not expect to do so in the foreseeable future.
SFAS 123R
requires the application of an estimated forfeiture rate to current period expense to recognize stock-based compensation expense only for those awards expected to vest.
The Company estimates forfeitures based upon historical data, adjusted for known trends, and will adjust its estimate of forfeitures if actual forfeitures differ, or are expected to differ from such
estimates. Subsequent changes in estimated forfeitures will be recognized through a cumulative adjustment in the period of change and will also impact the amount of stock-based compensation expense in
future periods.
The
Company has various stock options plans for employees, officers and directors of the Company. During 2007, the Company's 2007 Incentive Plan (the "2007 Plan") was approved to allow
for the granting of incentive and nonstatutory stock options, restricted stock awards and other stock-based awards, including the grant of shares based upon specified conditions, the grant of
securities convertible into common stock and the grant of stock appreciation rights of up to 25,000,000 shares of common stock. At December 31, 2007, 520,278 shares of common stock have been
reserved for the exercise of options outstanding, 40,000 shares of common stock have been reserved for the vesting of restricted stock units and 24,295,537 shares of common stock are available for
future grant under the 2007 Plan. The purpose of the 2007 Plan was to consolidate, conform and replace all of the Company's existing equity plans under which there were shares available for grant.
The
Company's 1993 Incentive Stock Plan (the "1993 Plan"), 1996 Equity Incentive Plan (the "1996 Plan"), and 1997 Equity Incentive Plan (the "1997 Plan"), allowed for the granting of
incentive and nonstatutory stock options for purchase of common stock of up to 21,600,000, 22,400,000, and 16,000,000 options, respectively. The Company's 2000 Incentive Stock Plan (the "2000 Plan")
allowed for the granting of incentive and nonstatutory stock options, restricted stock awards and other stock-
based awards, including the grant of shares based upon specified conditions, the grant of securities convertible into common stock and the grant of stock appreciation rights of up to 45,607,706 shares
of common stock. At December 31, 2007, a total of 61,977, 568,788, 760,549 and 17,601,788 shares of common stock have been reserved for exercise of options outstanding under the 1993, 1996,
1997 and 2000 Plans, respectively. No options are available for future grant under the 1993, 1996, 1997 and 2000 Plans.
In
connection with acquisitions prior to 2004, the Company assumed certain stock option plans of its acquired companies. The Plans, as assumed, allowed for the granting of incentive and
nonstatutory options to purchase up to 14,595,425 shares of Millennium common stock. At December 31, 2007, a total of 390,897 shares of common stock have been reserved for the exercise of
options outstanding under these assumed Plans. No options are available for future grant under these plans.
Under
the 1996 Employee Stock Purchase Plan, eligible employees may purchase common stock at a price per share equal to 85% of the lower of the fair market value of the common stock at
the beginning or end of each offering period. Participation in the offering is limited to 10% of the employee's compensation or $25,000 in any calendar year. The offering periods begin on May 1
and November 1 of each year. At December 31, 2007, subscriptions were outstanding for an estimated 74,356 shares at $9.96 per share.
87
Millennium Pharmaceuticals, Inc.
Notes to Consolidated Financial Statements December 31, 2007 (Continued)
The
following table presents the combined option activity of the Company's stock option plans for the year ended December 31, 2007:
|
|
Shares of Common Stock Attributable to Options
|
|
Weighted-Average Exercise Price Of Options
|
|
Weighted-Average Remaining Contractual Term (in years)
|
|
Aggregate Intrinsic Value (in thousands)
|
Outstanding at January 1, 2007
|
|
27,004,963
|
|
$
|
16.19
|
|
|
|
|
|
Granted
|
|
1,327,326
|
|
|
10.88
|
|
|
|
|
|
Exercised
|
|
(4,112,542
|
)
|
|
8.26
|
|
|
|
|
|
Forfeited or expired
|
|
(4,315,470
|
)
|
|
22.25
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2007
|
|
19,904,277
|
|
$
|
16.32
|
|
5.35
|
|
$
|
61,114
|
|
|
|
|
|
|
|
|
|
Vested or expected to vest at December 31, 2007
|
|
19,150,633
|
|
$
|
16.54
|
|
5.19
|
|
$
|
57,777
|
|
|
|
|
|
|
|
|
|
Exercisable at December 31, 2007
|
|
16,534,035
|
|
$
|
17.46
|
|
4.72
|
|
$
|
46,610
|
|
|
|
|
|
|
|
|
|
The
weighted-average grant-date fair value of options granted during 2007, 2006 and 2005 was $3.96, $3.93 and $4.56, respectively.
The
intrinsic value of options exercised during 2007, 2006 and 2005 was $15.7 million, $13.5 million and $9.4 million, respectively.
As
of December 31, 2007, the total remaining unrecognized compensation cost related to nonvested stock option awards amounted to approximately $6.6 million, including
estimated forfeitures, which will be recognized over the weighted-average remaining requisite service period of approximately one and one half years.
A
summary of the status of nonvested shares of restricted stock and restricted stock units as of December 31, 2007, and changes during the year then ended, is presented below:
|
|
Shares
|
|
Weighted-Average Grant Date Fair Value
|
Nonvested at January 1, 2007
|
|
1,659,100
|
|
$
|
10.31
|
Granted
|
|
2,300,786
|
|
|
10.90
|
Vested
|
|
(509,819
|
)
|
|
10.36
|
Forfeited
|
|
(370,526
|
)
|
|
10.58
|
|
|
|
|
|
|
Nonvested at December 31, 2007
|
|
3,079,541
|
|
$
|
10.70
|
|
|
|
|
|
The
total fair value of shares of restricted stock that vested was approximately $5.3 million and $0.4 million during the periods ended December 31,
2007 and 2006, respectively. No shares of restricted stock vested in 2005.
As
of December 31, 2007, the total remaining unrecognized compensation cost related to nonvested restricted stock awards and restricted stock units amounted to approximately
$12.1 million, including estimated forfeitures, which will be recognized over the weighted-average remaining requisite service period of approximately one and one half years.
88
Millennium Pharmaceuticals, Inc.
Notes to Consolidated Financial Statements December 31, 2007 (Continued)
11. Income Taxes
The difference between the Company's expected tax provision (benefit), as computed by applying the U.S. federal corporate tax rate of 35% to income (loss) before
provision for income taxes, and actual tax is reconciled as follows (in thousands):
|
|
2007
|
|
2006
|
|
2005
|
|
Income (loss) before provision for income taxes
|
|
$
|
14,909
|
|
$
|
(43,953
|
)
|
$
|
(198,249
|
)
|
|
|
|
|
|
|
|
|
Expected income tax (benefit) at 35% statutory rate
|
|
$
|
5,218
|
|
$
|
(15,384
|
)
|
$
|
(69,387
|
)
|
Change in valuation allowance allocated to tax expense
|
|
|
(7,172
|
)
|
|
13,236
|
|
|
68,694
|
|
Nondeductible compensation including stock plans
|
|
|
1,089
|
|
|
1,324
|
|
|
|
|
Other permanent items
|
|
|
865
|
|
|
824
|
|
|
693
|
|
|
|
|
|
|
|
|
|
Income tax provision
|
|
$
|
|
|
$
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
At
December 31, 2007, the Company had unused net operating loss carryforwards of approximately $1.4 billion available to reduce federal taxable income,
expiring in 2008 through 2027, and $266.0 million available to reduce state taxable income, expiring in 2008 through 2012. The Company also has federal and net state tax credits of
approximately $112.2 million available to offset federal and state income taxes, both of which begin to expire in 2008. Due to the degree of uncertainty related to the ultimate use of the loss
carryforwards and tax credits, the Company has fully reserved these tax benefits.
Deferred
income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used
for income tax purposes. Significant components of the Company's deferred tax assets as of December 31 are as follows (in thousands):
|
|
2007
|
|
2006
|
|
Net operating loss carryforwards
|
|
$
|
261,512
|
|
$
|
276,830
|
|
Tax credit carryforwards
|
|
|
77,727
|
|
|
104,291
|
|
Capitalized research costs
|
|
|
377,374
|
|
|
388,219
|
|
Property and other intangible assets
|
|
|
58,987
|
|
|
65,898
|
|
Deferred revenue
|
|
|
5,053
|
|
|
7,769
|
|
Stock compensation
|
|
|
18,023
|
|
|
14,216
|
|
Accrued restructuring
|
|
|
19,761
|
|
|
27,005
|
|
Unrealized loss on marketable securities
|
|
|
|
|
|
143
|
|
Other
|
|
|
12,522
|
|
|
13,625
|
|
|
|
|
|
|
|
Gross deferred tax assets
|
|
|
830,959
|
|
|
897,996
|
|
Valuation allowance
|
|
|
(710,037
|
)
|
|
(765,646
|
)
|
|
|
|
|
|
|
Total deferred tax assets
|
|
|
120,922
|
|
|
132,350
|
|
|
|
|
|
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
Other intangible assets
|
|
|
(118,965
|
)
|
|
(132,350
|
)
|
Unrealized gain on marketable securities
|
|
|
(1,957
|
)
|
|
|
|
|
|
|
|
|
|
Total deferred tax liabilities
|
|
|
(120,922
|
)
|
|
(132,350
|
)
|
|
|
|
|
|
|
Net deferred taxes
|
|
$
|
|
|
$
|
|
|
|
|
|
|
|
|
89
Millennium Pharmaceuticals, Inc.
Notes to Consolidated Financial Statements December 31, 2007 (Continued)
The valuation allowance decreased by $55.6 million during 2007 due primarily to the Company's adoption of FIN 48, as more fully described below,
which resulted in a net derecognition of approximately $33.7 million of deferred tax assets from tax credit carryforwards and the related valuation allowance. In addition, there were net
reductions of approximately $14.9 million due to temporary items arising from changes in the differences of costs for financial accounting and tax purposes, especially for capitalized research
costs, property and other intangible assets, accrued restructuring and amortized intangible assets. Net operating loss carryforwards decreased by approximately $15.3 million as the amount of
losses expiring during the year exceeded current net operating losses from operations.
All
of the Company's deferred tax assets that are not offset with reversing deferred tax liabilities have a full valuation allowance recorded against them as, pursuant to the criteria
under SFAS 109, it is "more likely than not" that they will not be realized based on the Company's historical accumulated loss position. Should the Company continue to have profitable
operations in the future, some or all of the deferred tax assets may be considered realizable. If and when the Company concludes that the realization of the deferred tax assets is more likely than
not, the Company will record a reduction in the valuation allowance in the period such determination is made.
Any
subsequently recognized tax benefits relating to the valuation allowance for deferred tax assets as of December 31, 2007 would be allocated as follows (in thousands):
Reported in the statement of operations
|
|
$
|
694,052
|
|
Reported as a decrease to goodwill
|
|
|
17,942
|
|
Reported in other comprehensive income (loss)
|
|
|
(1,957
|
)
|
|
|
|
|
|
Total valuation allowance
|
|
$
|
710,037
|
|
|
|
|
|
As
discussed in Note 2, the Company adopted SFAS 123R effective January 1, 2006 for stock-based compensation plans. Generally, tax return deductions are allowable on
such arrangements, but, may arise in different amounts and periods from compensation costs recognized on financial statements. Pursuant to SFAS 123R, if the tax return deduction for an award
exceeds the cumulative compensation cost recognized in the financial statements, any excess tax benefit shall be recognized as additional paid-in capital when the deduction reduces taxes
payable. Prior to adoption, the Company recognized deferred tax assets, along with an offsetting valuation allowance, for net operating loss carryforwards that included deductions for excess tax
benefits from stock-based compensation. On adoption, the Company chose to derecognize the deferred tax asset for these excess tax deductions in the net operating loss carryforwards, along with the
offsetting valuation allowance. The net tax amount of the unrealized excess tax benefits that are no longer included and disclosed as deferred tax assets for December 31, 2007, is approximately
$234.0 million.
Effective
January 1, 2007, the Company adopted FIN 48. Upon implementation, the Company derecognized $33.7 million, net, of deferred tax assets related to research
and development and investment tax credit carryforwards that did not meet the more-likely-than-not recognition threshold under FIN 48. The adjustment did not
impact retained earnings or the statement of operations, as there is a full valuation allowance recorded against these deferred tax assets. There would be no affect on the Company's effective tax rate
upon a recognition of this tax benefit because any increase in the benefit would result an increase in a deferred tax asset and a corresponding increase in the Company's valuation allowance. The
Company does not expect that the unrecognized tax benefit will materially increase or decrease in the next year. It is the Company's accounting policy to treat interest and penalties related to
unrecognized tax benefits as a component of income tax expense. The Company
90
Millennium Pharmaceuticals, Inc.
Notes to Consolidated Financial Statements December 31, 2007 (Continued)
has
not recognized any interest and penalties related to uncertain tax positions to date since adoption of FIN 48.
A
reconciliation of the beginning and ending gross amount of unrecognized tax benefits is as follows (in thousands):
Balance at January 1, 2007
|
|
$
|
40,013
|
Additions based on tax positions related to current year
|
|
|
1,040
|
Other additions or reductions
|
|
|
|
|
|
|
|
Total valuation allowance
|
|
$
|
41,053
|
|
|
|
The
Company files income tax returns in the United States federal jurisdiction and various state, local, and foreign jurisdictions. The Company is no longer subject to any tax assessment
from an income tax examination in major taxing jurisdictions for years before 2004, except to the extent that in the future it utilizes net operating losses or tax credit carryforwards that originated
before 2004. The Company currently is not under examination by the Internal Revenue Service or other jurisdictions for any tax years.
12. Related Party Transactions
In November 2003, the Company sold specified assets, including intellectual property to Portola Pharmaceuticals, Inc. ("Portola"), a company founded and
owned in part by a member of Millennium's board of directors. In exchange for these assets, the Company received Portola Series A preferred convertible stock, representing less than a 5%
ownership in Portola. The investment in Portola is accounted for using the cost method and is included in other assets on the balance sheet at December 31, 2007 and 2006. In addition,
commencing in June 2004, Portola sub-leased specified research facilities of the Company in South San Francisco, CA. In August 2004, the Company entered into an additional transaction with
Portola to license to Portola the Company's Factor Xa inhibitor program in return for milestone and royalty payments upon achievement of certain events. In December 2007, the Company recorded
$5.0 million in strategic alliance revenue for the achievement of a clinical development milestone under the Factor Xa inhibitor program. In December 2005, the Company entered into a
transaction with Portola to license to Portola the Company's Aggregometer system in exchange for cash and Portola Series B preferred stock, which combined with the previous stock issued,
maintains the Company's ownership in Portola at less than 5%.
91
Millennium Pharmaceuticals, Inc.
Notes to Consolidated Financial Statements December 31, 2007 (Continued)
13. Quarterly Financial Information (unaudited)
|
|
First Quarter
Ended
March 31, 2007
|
|
Second Quarter
Ended
June 30, 2007
|
|
Third Quarter
Ended
September 30, 2007
|
|
Fourth Quarter
Ended
December 31, 2007
|
|
|
|
(In Thousands, Except Per Share Amounts)
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net product sales
|
|
$
|
58,640
|
|
$
|
62,550
|
|
$
|
70,360
|
|
$
|
73,691
|
|
|
Revenue under strategic alliances
|
|
|
15,714
|
|
|
11,826
|
|
|
10,628
|
|
|
57,249
|
|
|
Royalties
|
|
|
36,370
|
|
|
38,903
|
|
|
41,344
|
|
|
50,250
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
110,724
|
|
|
113,279
|
|
|
122,332
|
|
|
181,190
|
|
|
|
|
|
|
|
|
|
|
|
Costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales (excludes amortization of acquired intangible assets)
|
|
|
5,358
|
|
|
5,379
|
|
|
6,931
|
|
|
10,712
|
|
|
Research and development
|
|
|
69,206
|
|
|
71,374
|
|
|
70,152
|
|
|
76,362
|
|
|
Selling, general and administrative
|
|
|
41,548
|
|
|
49,040
|
|
|
45,348
|
|
|
53,126
|
|
|
Restructuring
|
|
|
5,611
|
|
|
5,772
|
|
|
1,667
|
|
|
(164
|
)
|
|
Amortization of intangibles
|
|
|
8,487
|
|
|
8,487
|
|
|
8,488
|
|
|
8,488
|
|
|
|
|
|
|
|
|
|
|
|
|
Total costs and expenses
|
|
|
130,210
|
|
|
140,052
|
|
|
132,586
|
|
|
148,524
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations
|
|
|
(19,486
|
)
|
|
(26,773
|
)
|
|
(10,254
|
)
|
|
32,666
|
|
Other income, net
|
|
|
12,708
|
|
|
9,092
|
|
|
8,561
|
|
|
8,395
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(6,778
|
)
|
$
|
(17,681
|
)
|
$
|
(1,693
|
)
|
$
|
41,061
|
|
|
|
|
|
|
|
|
|
|
|
Amounts per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) per share, basic and diluted
|
|
$
|
(0.02
|
)
|
$
|
(0.06
|
)
|
$
|
(0.01
|
)
|
$
|
0.13
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average shares, basic
|
|
|
316,072
|
|
|
317,799
|
|
|
318,871
|
|
|
320,089
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average shares, diluted
|
|
|
316,072
|
|
|
317,799
|
|
|
318,871
|
|
|
340,668
|
|
|
|
|
|
|
|
|
|
|
|
Refer
to Note 2 for the calculation of diluted earnings per share for the quarter ended December 31, 2007.
92
Millennium Pharmaceuticals, Inc.
Notes to Consolidated Financial Statements December 31, 2007 (Continued)
|
|
First Quarter
Ended
March 31, 2006
|
|
Second Quarter
Ended
June 30, 2006
|
|
Third Quarter
Ended
September 30, 2006
|
|
Fourth Quarter
Ended
December 31, 2006
|
|
|
|
(In Thousands, Except Per Share Amounts)
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net product sales
|
|
$
|
53,373
|
|
$
|
58,786
|
|
$
|
53,161
|
|
$
|
55,132
|
|
|
Revenue under strategic alliances
|
|
|
38,629
|
|
|
27,165
|
|
|
17,196
|
|
|
48,685
|
|
|
Royalties
|
|
|
30,473
|
|
|
34,172
|
|
|
33,737
|
|
|
36,321
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
122,475
|
|
|
120,123
|
|
|
104,094
|
|
|
140,138
|
|
|
|
|
|
|
|
|
|
|
|
Costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales (excludes amortization of acquired intangible assets)
|
|
|
15,828
|
|
|
14,102
|
|
|
6,730
|
|
|
8,785
|
|
|
Research and development
|
|
|
80,839
|
|
|
77,439
|
|
|
71,764
|
|
|
80,868
|
|
|
Selling, general and administrative
|
|
|
37,224
|
|
|
39,261
|
|
|
36,037
|
|
|
50,371
|
|
|
Restructuring
|
|
|
2,831
|
|
|
1,554
|
|
|
1,352
|
|
|
14,656
|
|
|
Amortization of intangibles
|
|
|
8,487
|
|
|
8,487
|
|
|
8,488
|
|
|
8,488
|
|
|
|
|
|
|
|
|
|
|
|
|
Total costs and expenses
|
|
|
145,209
|
|
|
140,843
|
|
|
124,371
|
|
|
163,168
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(22,734
|
)
|
|
(20,720
|
)
|
|
(20,277
|
)
|
|
(23,030
|
)
|
Other income, net
|
|
|
1,893
|
|
|
3,053
|
|
|
6,560
|
|
|
31,302
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(20,841
|
)
|
$
|
(17,667
|
)
|
$
|
(13,717
|
)
|
$
|
8,272
|
|
|
|
|
|
|
|
|
|
|
|
Amounts per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) per share, basic and diluted
|
|
$
|
(0.07
|
)
|
$
|
(0.06
|
)
|
$
|
(0.04
|
)
|
$
|
0.03
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average shares, basic
|
|
|
311,823
|
|
|
313,321
|
|
|
314,228
|
|
|
315,481
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average shares, diluted
|
|
|
311,823
|
|
|
313,321
|
|
|
314,228
|
|
|
318,468
|
|
|
|
|
|
|
|
|
|
|
|
93