e10vk
U.S. SECURITIES
AND EXCHANGE COMMISSION
Washington, D.C.
20549
Form 10-K
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the fiscal year ended
June 30, 2010
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OR
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the transition period
from to
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Commission File Number:
001-16633
Array BioPharma Inc.
(Exact Name of Registrant as
Specified in Its Charter)
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Delaware
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84-1460811
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(State of Incorporation)
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(I.R.S. Employer Identification No.)
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3200 Walnut Street
Boulder, Colorado
80301
(Address of Principal Executive
Offices)
(303) 381-6600
(Registrants Telephone
Number, Including Area Code)
Common Stock, Par Value $.001
per Share
(Securities Registered Pursuant to
Section 12(b) of the Act)
The NASDAQ Stock Market LLC
(NASDAQ Global Market)
(Name of Exchange on Which
Registered)
None
(Securities Registered Pursuant to
Section 12(g) of the Act)
Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act.
Yes
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No
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Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or 15(d) of the Exchange Act.
Yes
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No
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Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant
was required to file such reports) and (2) has been subject
to such filing requirements for the past 90 days.
Yes
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No
o
Indicate by check mark whether the registrant has submitted
electronically and posted on its corporate Web site, if any,
every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of
Regulation S-T
(§ 232.405 of this chapter) during the preceding
12 months (or for such shorter period that the registrant
was required to submit and post such files).
Yes
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No
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Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of
Regulation S-K
is not contained herein and will not be contained, to the best
of registrants knowledge, in definitive proxy or
information statements incorporated by reference in
Part III of this
Form 10-K
or any amendment to this
Form 10-K. o
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See the definitions of
large accelerated filer, accelerated
filer and smaller reporting company in
Rule 12b-2
of the Exchange Act. (Check one):
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Large accelerated filer
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Accelerated filer
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Non-accelerated filer (do not check if a smaller reporting
company)
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Smaller reporting company
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Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the Exchange Act).
Yes
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No þ
The aggregate market value of voting stock held by
non-affiliates of the registrant as of December 31, 2009
(based upon the closing sale price of such shares as of the last
trading day of the second fiscal quarter ended December 31,
2009, on the NASDAQ Global Market) was $85,599,182. Shares of
the Registrants common stock held by each executive
officer and director and by each entity that owns 5% or more of
the Registrants outstanding common stock have been
excluded in that such persons or entities may be deemed to be
affiliates. This determination of affiliate status is not
necessarily a conclusive determination for other purposes.
Number of shares outstanding of the registrants class of
common stock as of August 9, 2010: 53,475,730.
DOCUMENTS INCORPORATED BY
REFERENCE
Portions of the registrants definitive Proxy Statement to
be filed with the Securities and Exchange Commission on
Form 14A for the 2010 Annual Meeting of Stockholders are
incorporated by reference in Part III of this Annual Report
on
Form 10-K
to the extent stated therein.
PART I
Array BioPharma Inc., the Array BioPharma Inc. logo and the
marks ARRAY BIOPHARMA THE DISCOVERY RESEARCH
COMPANY, TURNING GENOMICS INTO BREAKTHROUGH
DRUGS, OPTIMER, and ARRAY DISCOVERY
PLATFORM are trademarks of Array BioPharma Inc. in the
United States of America (U.S.) and in other
selected countries. All other brand names or trademarks
appearing in this report are the property of their respective
holders. Unless the context requires otherwise, references in
this report to Array, we,
us, and our refer to Array BioPharma Inc.
FORWARD-LOOKING
STATEMENTS
This Annual Report filed on
Form 10-K
and other documents we file with the Securities and Exchange
Commission contain forward-looking statements within the meaning
of the Private Securities Litigation Reform Act of 1995 that
involve significant risks and uncertainties. In addition, we may
make forward-looking statements in our press releases or in
other oral or written communications with the public. These
forward-looking statements include, but are not limited to,
statements concerning the future drug development plans and
projected timelines for the initiation and completion of
preclinical and clinical trials by Array or our collaborators;
the potential for the results of ongoing preclinical or clinical
trials conducted by Array or our collaborators to support
regulatory approval or the marketing success of drug candidates;
our plans with respect to the timing and scope of the expansion
of our clinical and commercialization capabilities; other
statements regarding our future product development and
regulatory strategies, including with respect to specific
indications; the ability of third-party contract manufacturing
parties to support our drug development activities; any
statements regarding our future financial performance, results
of operations or sufficiency of capital resources to fund our
operating requirements; and any other statements which are other
than statements of historical fact.
Although we believe the assumptions upon which our
forward-looking statements are based currently to be reasonable,
our actual results could differ materially from those
anticipated in these forward-looking statements as a result of
many factors. These factors include, but are not limited to, our
ability to continue to fund and successfully progress internal
research and development efforts and to create effective,
commercially viable drugs; our ability to effectively and timely
conduct clinical trials in light of increasing costs and
difficulties in locating appropriate trial sites and in
enrolling patients who meet the criteria for certain clinical
trials; the extent to which the pharmaceutical and biotechnology
industries are willing to in-license drug candidates for their
product pipelines and to collaborate with and fund third parties
on their drug discovery activities; our ability to out-license
our proprietary candidates on favorable terms; risks associated
with our dependence on our collaborators for the clinical
development and commercialization of our out-licensed drug
candidates; the ability of our collaborators and of Array to
meet objectives tied to milestones and royalties; our ability to
attract and retain experienced scientists and management; our
ability to achieve and maintain profitability; and the risk
factors set forth below under the caption Item 1A. Risk
Factors. We are providing this information as of the date of
this report. We undertake no duty to update any forward-looking
statements to reflect the occurrence of events or circumstances
after the date of such statements or of anticipated or
unanticipated events that alter any assumptions underlying such
statements.
Our
Business
We are a biopharmaceutical company focused on the discovery,
development and commercialization of targeted small molecule
drugs to treat patients afflicted with cancer and inflammatory
diseases. Our proprietary drug development pipeline includes
clinical candidates that are designed to regulate
therapeutically important target pathways. In addition, leading
pharmaceutical and biotechnology companies partner with us to
discover and develop drug candidates across a broad range of
therapeutic areas.
1
The six most advanced programs that we are developing alone or
with a partner are as follows:
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Program
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Indication
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Partner
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Clinical Status
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1.
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AMG 151/ARRY-403
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Glucokinase activator for Type 2 diabetes
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Amgen Inc.
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Phase 1
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2.
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MEK162/ARRY-162
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MEK inhibitor for cancer
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Novartis International Pharmaceutical Ltd.
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Phase 1
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ARRY-380
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HER2 inhibitor for breast cancer
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None; Array owned
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Phase 1
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4.
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ARRY-520
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Kinesin spindle protein, or KSP, inhibitor for multiple myeloma,
or MM
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None; Array owned
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Phase 1/2
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5.
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ARRY-543
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HER2/EGFR inhibitor for solid tumors
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None; Array owned
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Phase 2
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ARRY-614
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p38/Tie2 dual inhibitor for
myelodysplastic syndrome, or MDS
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None; Array owned
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Phase 1
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In addition to these development programs, the seven most
advanced partnered drugs in clinical development are as follows:
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Program
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Indication
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Partner
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Clinical Status
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1.
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AZD6244/ARRY-886
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MEK inhibitor for cancer
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AstraZeneca, PLC
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Phase 2
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AZD8330
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MEK inhibitor for cancer
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AstraZeneca, PLC
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Phase 1
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3.
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Danoprevir/
RG7227/ITMN-191
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Hepatitis C virus
(HCV) protease inhibitor
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InterMune, Inc. (in partnership with Roche Holding AG)
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Phase 2
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4.
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GDC-0068
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AKT kinase inhibitor for cancer
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Genentech Inc.
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Phase 1
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5.
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LY2603618/IC83
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Checkpoint kinase, or Chk-1, inhibitor for cancer
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Eli Lilly and Company
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Phase 2
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VTX-2337
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Toll-like receptor for cancer
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VentiRx Pharmaceuticals, Inc.
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Phase 1
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7.
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VTX-1463
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Toll-like receptor for allergy
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VentiRx Pharmaceuticals, Inc.
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Phase 1
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Any information we report about the development plans or the
progress or results of clinical trials or other development
activities of our partners is based on information that has been
reported to us or is otherwise publicly disclosed by our
partners.
We also have a portfolio of proprietary and partnered drug
discovery programs that we believe will generate an average of
one to two Investigational New Drug, or IND, applications per
year. We have active, partnered drug discovery programs with
Amgen, Celgene and Genentech in which we may earn milestone
payments and royalties. Our internal discovery efforts have also
generated additional early-stage drug candidates and we may
choose to out-license select promising candidates through
research partnerships prior to filing an IND application. Our
internal drug discovery programs include an inhibitor that
targets the kinase Chk-1 for the treatment of cancer and a
program directed to discovering inhibitors of a family of
tyrosine kinase, or Trk, receptors for the treatment of pain.
Our Chk-1 inhibitor is a
first-in-class,
selective, oral drug candidate and in preclinical studies has
shown prolonged inhibition of the Chk-1 target.
Business
History
We have built our clinical and discovery pipeline programs
through spending $400.6 million from our inception through
June 30, 2010. In fiscal 2010, we spent $72.5 million
in research and development for proprietary drug discovery
expenses, compared to $89.6 million and $90.3 million
for fiscal years 2009 and 2008, respectively. During fiscal
2010, we signed strategic collaborations with Novartis and
Amgen. Together these collaborations provided Array with
$105 million in initial payments, over $1 billion in
potential milestone payments if all clinical and
commercialization milestones under the agreements are achieved,
double digit royalties and commercial co-detailing rights. We
have received a total of
2
$478.1 million in research funding and in up-front and
milestone payments from our collaboration partners since
inception through June 30, 2010. Under our existing
collaboration agreements, we have the potential to earn over
$2.7 billion in additional milestone payments if we or our
collaborators achieve all the drug discovery, development and
commercialization objectives detailed in those agreements, as
well as the potential to earn royalties on any resulting product
sales from 17 drug development programs.
Our significant collaborators include:
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Amgen, which entered into a worldwide strategic collaboration
with us to develop and commercialize our glucokinase activator,
AMG 151.
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AstraZeneca, which licensed three of our MEK inhibitors for
cancer, including AZD6244, which is currently in multiple Phase
2 clinical trials.
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Celgene Corporation, which entered into a worldwide strategic
collaboration agreement with us focused on the discovery,
development and commercialization of novel therapeutics in
cancer and inflammation.
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Genentech, which entered into a worldwide strategic
collaboration agreement with us focused on the discovery,
development and commercialization of novel therapeutics. One
drug, GDC-0068, an AKT inhibitor for cancer, entered a Phase 1
trial during the first half of 2010. The other programs are in
preclinical development.
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InterMune, which collaborated with us on the discovery of
danoprevir, a novel small molecule inhibitor of the Hepatitis C
Virus NS3/4A protease, which is currently in Phase 2b clinical
trials and which InterMune is developing in partnership with
Roche Holding AG.
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Novartis, which entered into a worldwide strategic collaboration
with us to develop and commercialize our MEK inhibitor, MEK162
and other MEK inhibitors identified in the agreement.
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Our
Strategy
We are building a fully integrated, commercial-stage
biopharmaceutical company that invents, develops and markets
safe and effective small molecule drugs to treat patients
afflicted with cancer and inflammatory diseases. We intend to
accomplish this through the following strategies:
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Invent targeted small molecule drugs that are either
first-in-class
or second generation drugs that demonstrate a competitive
advantage over drugs currently on the market or in clinical
development;
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Partner drugs for co-development and commercialization,
selectively retaining U.S. commercial
and/or
co-promotion rights for drugs that can be distributed through a
therapeutically specialized sales force;
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Partner select early-stage programs for continued research and
development under which we would receive research funding, plus
significant milestones and royalties; and
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Build a commercial capability to position our drugs to maximize
their overall value. As our first drug nears approval, we plan
to build a
U.S.-based
therapeutically-focused sales force to commercialize or
co-promote our drugs.
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We have a large number of research and development programs and
therefore partnering certain of these programs with
collaborators that will provide funding, development,
manufacturing and commercial resources is central to our
strategy over the next several years. These partnerships may
include co-development or co-commercialization and either may be
worldwide or limited to certain geographic areas. We plan to
advance our most promising development assets internally through
clinical
proof-of-concept
before partnering them, which we believe will maximize their
value. We are also identifying certain programs to partner
earlier during discovery or preclinical development with the
goal of optimizing the potential return for Array on these
programs. Our out-license and collaboration agreements with our
partners typically provide for up-front payments, research
funding, success-based milestone payments, co-detailing rights
and/or
royalties on product sales.
3
Discovery and
Development Programs
In addition to the development of our proprietary programs, we
have collaborations with leading pharmaceutical and
biotechnology companies under which we have out-licensed certain
proprietary drug programs for further research, development and
commercialization. Under some of these collaborations, such as
with Amgen for AMG 151 and Novartis for MEK162, we continue
development work that is funded all or in part by our
collaborators. Under our other partnered programs, the
development or research phase has ended but we retain the right
to receive clinical and commercialization milestones
and/or
royalties on sales of any products covered by the collaboration
that are approved for marketing and sale. We also have research
partnerships with leading pharmaceutical and biotechnology
companies, for which we design, create and optimize drug
candidates and conduct preclinical testing across a broad range
of therapeutic areas, on targets selected by our partners. In
certain of these partnerships, we also perform process research
and development, clinical development and manufacture clinical
supplies.
Our discovery and development collaborations provide funding for
the research and development activities we conduct and, in a
number of our current agreements, up-front fees, milestone
payments, co-detail rights
and/or
royalties based upon the success of the program. Our largest or
most advanced collaborations include our agreements with Amgen,
AstraZeneca, Celgene, Eli Lilly, Genentech, InterMune, Novartis
and VentiRx.
Information about our collaborators who comprise 10% or more of
our total revenue and information about revenue we receive
within and outside the U.S. can be found in
Note 2 Segments, Geographical Information
and Significant Collaborators to the accompanying audited
Financial Statements included elsewhere in this Annual Report.
Development
Programs
Below is a description of our six most advanced programs that we
are developing alone or with a partner, their stage in the drug
development process and our expected future development plans.
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Drug Candidates
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Current Development Status
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Future Development Plan
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AMG 151
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GKA
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Phase 1 multiple ascending dose trial in Type 2 diabetic
patients; partnered with Amgen.
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Complete Phase 1 trial after which Amgen will be responsible for
all future development.
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MEK162
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MEK
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Phase 1 expansion trial in patients with biliary tract cancer;
partnered with Novartis.
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Complete expansion trial in patients with biliary tract cancer,
initiate an expansion trial in patients with coloretal cancer
and initiate a Phase 2 trial in patients with KRAS mutant
colorectal cancer. In addition, Novartis currently plans to
initiate clinical trials in the coming year.
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ARRY-380
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HER2
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Phase 1 dose escalation trial in cancer patients.
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Expand Phase 1 trial in HER2 positive cancer patients.
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ARRY-520
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KSP
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Phase 1 trial in patients with solid tumors and two Phase 1/2
trials in patients with acute myelogenous leukemia and multiple
myeloma.
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Initiate a Phase 2 single-agent and a Phase 1b/2 combination
trial in patients with MM.
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ARRY-543
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HER2/EGFR
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Achieved the maximum tolerated dose of ARRY-543 in three Phase
1b trials of ARRY-543 in combination with
Xeloda®
(capecitabine),
Taxotere®
(docetaxel) and
Gemzar®
(gemcitabine).
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We are currently evaluating future study designs for this
program.
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ARRY-614
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P38/Tie2
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Phase 1 trial in MDS patients.
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Expand MDS trial at the maximum tolerated dose.
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1.
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AMG 151 -
Glucokinase Activator for Type 2 Diabetes Program Partnered with
Amgen
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In December 2009, we granted Amgen the exclusive worldwide
rights to our small molecule glucokinase activator program,
including, AMG 151. Under the Collaboration and License
Agreement with Amgen, we are responsible for completing certain
Phase 1 clinical trials of AMG 151. Array will also conduct
further research funded by Amgen to create second generation
glucokinase activators. Amgen is responsible for the further
development and commercialization of AMG 151 and any resulting
second generation compounds. The agreement also provides us with
an option to co-promote any approved drugs with Amgen in the
U.S. with certain limitations.
In partial consideration for the rights granted to Amgen under
the agreement, Amgen paid an up-front fee of $60 million.
Amgen will also fund an agreed upon number of full-time Array
employees as part of research collaboration intended to identify
and advance second-generation glucokinase activators. We are
also entitled to receive up to approximately $666 million
in aggregate milestone payments if all clinical and
commercialization milestones specified in the agreement for AMG
151 and at least one backup compound are achieved. We will also
receive royalties on sales of any approved drugs developed under
the agreement.
The agreement with Amgen will be in effect on a
product-by-product
and
country-by-country
basis until no further payments are due under the agreement with
respect to the applicable product in the applicable country,
unless terminated earlier. Either party may terminate the
agreement in the event of a material breach of a material
obligation under the agreement by the other party that remains
uncured after 90 days prior notice and Amgen may terminate
the agreement at any time upon notice of 60 or 90 days
depending on the development activities going on at the time of
such notice. The parties have also agreed to indemnify each
other for certain liabilities arising under the agreement.
Glucokinase activators, or GKAs, such as AMG 151, represent a
promising new class of drugs for the treatment of Type 2
diabetes. Glucokinase, or GK, is the enzyme that senses glucose
in the pancreas. GK also increases glucose utilization and
decreases glucose production in the liver. A reduction of GK
activity in the pancreas and the liver is typically observed in
diabetic patients. GKAs regulate glucose levels via a dual
mechanism of action - working in both the pancreas and the
liver. The activation of GK lowers glucose levels by enhancing
the ability of the pancreas to sense glucose, which leads to
increased insulin production. Simultaneously, GKAs increase the
net uptake of blood glucose by the liver. In multiple
well-established in vivo models of Type 2 diabetes, AMG
151 was highly efficacious in controlling both fasting and
non-fasting blood glucose, with rapid onset of effect and
maximal efficacy within five to eight once daily doses. When
combined with existing
standard-of-care
drugs (metformin, sitagliptin and pioglitazone), AMG 151
provided additional glucose control, which reached maximal
efficacy after five to seven days of once-daily dosing. AMG 151
did not increase body weight, plasma triglycerides or total
cholesterol, whether used as monotherapy or in combination with
other diabetes drugs.
Development Status: In 2009, we completed a
Phase 1 trial to evaluate AMG 151 in a single ascending dose
study in Type 2 diabetic patients. The study evaluated safety,
tolerability and exposure and blood glucose control. The study
included seven dose cohorts with a total of 41 patients.
AMG 151 was shown to be well tolerated at all doses. AMG 151 was
rapidly absorbed and exposure was dose-dependent. AMG 151
provided dose-dependent reduction in glucose excursions in
response to a standardized meal as well as reduction in fasting
blood glucose.
During fiscal 2010, we initiated two Phase 1 studies, a multiple
ascending dose, or MAD, trial in patients with Type 2 diabetes
to evaluate safety, exposure and glucose control over a
10-day
period and a relative bioavailability study assessing the effect
of food and formulation on exposure. Both trials are currently
ongoing. During fiscal 2011, we plan to complete the Phase 1
trial, at which point Amgen will be responsible for all future
development.
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2.
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MEK162 -
MEK Inhibitor for Cancer Program Allied with
Novartis
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In April 2010, we granted Novartis under a License Agreement the
exclusive worldwide right to develop and commercialize MEK162,
which is currently in a Phase 1 cancer trial, as well as
ARRY-300 and other specified MEK inhibitors. Under the
agreement, we are responsible for completing the on-going Phase
1 clinical trial of MEK162 and may conduct further development
of MEK162 in colorectal cancer. Novartis is responsible for all
other development activities. Novartis is also responsible for
the commercialization of products under the agreement, subject
to our option to co-detail approved drugs in the U.S.
In connection with signing the agreement, Novartis paid us
$45 million, comprising an upfront fee and an initial
milestone payment. We are also entitled under the agreement to
receive up to approximately $422 million in aggregate
milestone payments if all clinical, regulatory and commercial
milestones specified in the agreement are achieved for MEK162
and additional commercial milestone payments for ARRY-300 and
other MEK inhibitors Novartis elects to develop under the
agreement. Novartis will also pay us double digit royalties on
worldwide sales of any approved drugs, with royalties on
U.S. sales at a significantly higher level. We will pay a
percentage of development costs up to a maximum amount with
annual caps. We may opt out of paying such development costs
with respect to one or more products; in which case the
U.S. royalty rate would then be reduced for any such
product based on a specified formula, subject to a minimum that
equals the royalty rate on sales outside the U.S. and we
would no longer have the right to develop or detail such product.
The agreement with Novartis will be in effect on a
product-by-product
and
county-by-country
basis until no further payments are due with respect to the
applicable product in the applicable country, unless terminated
earlier. Either party may terminate the agreement in the event
of a material breach of a material obligation under the
agreement by the other party that remains uncured after
90 days prior notice. Novartis may terminate portions of
the agreement following a change in control of Array and may
terminate the agreement in its entirety or on a
product-by-product
basis with 180 days prior notice. Array and Novartis have
each further agreed to indemnify the other party for
manufacturing or commercialization activities conducted by it
under the agreement, negligence or willful misconduct or breach
of covenants, warranties or representations made by it under the
agreement.
Research suggests that the MEK pathway acts as an important axis
in the proliferation of some common human tumors including
melanoma, non-small cell lung, head, neck and pancreatic
cancers. Increasing evidence suggests that MEK inhibition,
either alone or in combination with other agents, may become an
important therapeutic strategy in treating cancer. We believe
MEK162 will be most effective in selected populations of cancer
patients, such as those with tumors having BRAF or KRAS
mutations as well as in targeted combinations. We also believe
MEK162 has advantages over other MEK inhibitors currently in
development, including greater potency and improved safety and
pharmacokinetics. MEK162 has been administered to more than
300 patients/volunteers in clinical trials for either
safety assessment or the treatment of oncology or inflammatory
disease. The drug has been well-tolerated and has demonstrated
significant pharmacodynamic responses in the completed trials.
Development Status: During fiscal 2010, we
initiated a Phase 1 dose escalation trial of MEK162 in cancer
patients and established the maximum tolerated dose. Over the
next fiscal year, we plan to continue an expansion trial in
patients with biliary tract cancer, initiate an expansion trial
in patients with colorectal cancer and initiate a Phase 2 trial
in patients with KRAS mutant colorectal cancer. In addition,
Novartis currently plans to initiate clinical trials in the
coming year.
|
|
3.
|
ARRY-380 -
HER2 Program Wholly-owned by Array
|
HER2, also known as ErbB2, is a receptor tyrosine kinase that is
over-expressed in breast cancer and other cancers such as
gastric and ovarian cancer.
Herceptin®
(trastuzumab), the intravenously-dosed protein inhibitor that
modulates HER2, has been approved for HER2 positive metastatic
breast cancer patients as well as an adjuvant to surgery in
early stage breast cancer patients. The second indication has
significantly expanded the number of breast cancer patients
eligible for an HER2 inhibitor. ARRY-380 is an orally active,
reversible and selective HER2 inhibitor. In multiple preclinical
tumor models, ARRY-380 was
6
well tolerated and demonstrated significant dose-related tumor
growth inhibition that was superior to Herceptin and
Tykerb®
(lapatinib). Additionally, in these models, ARRY-380 was well
tolerated and additive for tumor growth inhibition when dosed in
combination with the standard of care therapeutics Herceptin or
Taxotere.
Development Status: During fiscal 2010, we
continued dose escalation in a Phase 1 trial to evaluate the
safety, maximum tolerated dose and pharmacokinetics of ARRY-380
in patients with advanced cancer and plan to expand the trial at
the maximum tolerated dose in HER2 positive cancer patients
during the second half of calendar 2010.
|
|
4.
|
ARRY-520 -
KSP Program Wholly-owned by Array
|
ARRY-520 inhibits kinesin spindle protein, or KSP, which plays
an essential role in mitotic spindle formation. Like taxanes and
vinca alkaloids, KSP inhibitors inhibit tumor growth by
preventing mitotic spindle formation and cell division. However,
unlike taxanes and vinca alkaloids, KSP inhibitors do not
demonstrate certain side effects such as peripheral neuropathy
and alopecia.
ARRY-520 has demonstrated efficacy in preclinical hematological
tumor models, with significant response rates observed in models
of acute myeloid leukemia, or AML, and multiple myeloma, or MM.
Treatment with ARRY-520 in MM models resulted in the regression
of tumors that had previously progressed after treatment with
Velcade®
(bortezomib) or
Revlimid®
(lenalidomide). In addition, ARRY-520 was active in a wide range
of tumor models resistant to other molecules with different
mechanisms of action, such as the taxanes. Examination of
pharmacodynamic activity in preclinical models reinforced that
hematological cancers were among the most sensitive to ARRY-520.
Interim results of a Phase 1 trial of ARRY-520 as a single agent
have shown promising preliminary clinical activity in patients
with MM. Of 20 evaluable patients, one partial response has been
observed in a patient with eight prior lines of treatment who
has been on study for more than 13 months and two
unconfirmed minor responses also have been observed in patients
who only recently started protocol therapy. Nine patients remain
on study, five of whom have been treated for longer than six
months.
Development Status: Our clinical development
activities for ARRY-520 consisted of the following during fiscal
2010:
|
|
|
|
|
Completed enrollment in a Phase 1 trial in patients with solid
tumors;
|
|
|
Completed enrollment in a Phase 1 trial in patients with
AML; and
|
|
|
Continued a Phase 1/2 trial in patients with MM.
|
During fiscal 2011, we plan to initiate a Phase 2 single agent
trial and a Phase 1b/2 combination trial in patients with MM.
|
|
5.
|
ARRY-543 -
HER2 / EGFR Program Wholly-owned by Array
|
HER2 and EGFR are receptor kinase targets that are
over-expressed in a number of malignancies, including breast,
lung, pancreas, colon, head and neck cancers. ARRY-543 is a
novel, oral ErbB family inhibitor that, unlike approved ErbB
inhibitors, targets all members of the ErbB family, either
directly or indirectly and has potential advantages in treating
tumors that overexpress multiple ErbB family members. ARRY-543
was active in preclinical tumor models that overexpress multiple
ErbB family members. In addition, ARRY-543 was active in
preclinical models when compared to, and combined with,
Herceptin, Xeloda and Taxotere widely used
treatments for solid tumors.
In a Phase 1 trial, ARRY-543 produced prolonged stable disease
in patients with solid tumors who had previously failed prior
treatments. ARRY-543 was well-tolerated up to 400 mg twice
daily, or BID, dosing. Systemic concentrations of ARRY-543
increased with escalating doses at all dose levels tested. Sixty
percent of patients receiving doses of 200 mg BID and
higher had prolonged stable disease.
7
In a Phase 1b trial in patients with HER2-positive metastatic
breast cancer, or MBC, and ErbB-family cancer patients, ARRY-543
was generally well tolerated and demonstrated evidence of tumor
regression and prolonged stable disease in EGFR- and
HER2-expressing cancers. Twenty-one MBC patients were evaluated:
of the 12 with available biopsies, eight were confirmed HER2
positive. Of the confirmed patients with HER2-positive MBC in
this study, 63% had stable disease for 16 weeks or longer.
Clinical benefit (tumor regression or stable disease) was
demonstrated in five of the eight confirmed HER2 patients
and patients with confirmed co-expression of HER2 and EGFR
tended to have the best clinical benefit. In patients with other
cancers shown to over-express HER2 and EGFR, three patients,
with ovarian cancer, cervical cancer and cholangiocarcinoma,
respectively, treated with ARRY-543 also achieved stable disease
for 16 weeks or more; the patient with cholangiocarcinoma
experienced a tumor marker response that was accompanied by a
25% regression of target lesions.
Development Status: During fiscal 2010, we
achieved the maximum tolerated dose and completed enrollment in
three Phase 1b studies of ARRY-543 in combination with Xeloda,
Taxotere and Gemzar in patients with solid tumors. We are
currently evaluating future study designs for this program.
|
|
6.
|
ARRY
614 - p38 / Tie2 for Cancer Program Wholly-owned by
Array
|
P38 regulates the production of numerous cytokines, such as TNF,
IL-1 and IL-6, the increased production of which can cause
inflammation and aberrant tissue proliferation. Tie2 plays an
important role in angiogenesis, the growth, differentiation and
maintenance of new blood vessels. ARRY-614, an orally active
compound that inhibits both p38 and Tie2, has been found in
preclinical models to block angiogenesis, to inhibit
inflammation and to antagonize tumor growth, with a low side
effect profile after prolonged dosing.
In preclinical hematological tumor models, ARRY-614 was active
both as a single agent and in combination with Revlimid.
ARRY-614 was well-tolerated and effective in inhibiting
cytokines, including IL-6 and TNF, which play a role in the
regulation of growth and survival in a number of cancers,
particularly hematological cancers. As a single agent, ARRY-614
effectively inhibited angiogenesis in vivo and inhibited
tumor growth in preclinical models of MM, and combining ARRY-614
with
standard-of-care
agents, lenalidomide and
Decadron®
(dexamethasone), in MM models was shown to provide additional
anti-tumor effects.
Development Status: During fiscal 2010, we
continued a Phase 1 trial in patients with myelodysplastic
syndrome, or MDS, patients to determine the safety, maximum
tolerated dose, pharmacokinetics and to obtain preliminary
efficacy data of ARRY-614 in this patient population. Over the
next fiscal year, we plan to expand this trial at the maximum
tolerated dose.
Other Partnered
Development Programs
Below are summaries of our most advanced ongoing partnered
discovery and development programs, which are in addition to
programs Array is currently developing alone or in partnership
with collaborators, such as Amgen and Novartis, which are
discussed above under the Development Programs section of this
report. Any information we report about the development plans or
the progress or results of clinical trials or other development
activities of our partners is based on information that has been
reported to us or is otherwise publicly disclosed by our
collaboration partners.
|
|
1.
|
AstraZeneca -
AZD6244 - MEK Program
|
We initiated a MEK program in July 2001 and quickly identified
AZD6244, an orally active clinical candidate. In December 2003,
we entered into an out-licensing and collaboration agreement
with AstraZeneca to develop our MEK program solely in the field
of oncology. Under the agreement, AstraZeneca acquired exclusive
worldwide rights to our clinical development candidate, AZD6244
together with two other compounds including AZD8330 we developed
during the collaboration, for oncology indications. We retained
the rights to all non-oncology therapeutic indications for MEK
compounds not selected by AstraZeneca for development. In April
2009, the exclusivity of the parties relationship ended
and both companies are now free to independently research,
develop and commercialize small molecule MEK inhibitors in the
field of oncology. To date, we have earned $21.5 million in
up-front and milestone payments. The agreement also provides for
research funding,
8
which is now complete and potential additional development
milestone payments of approximately $75 million and
royalties on product sales.
Under our collaboration with AstraZeneca, we conducted Phase 1
clinical testing in 2004. The trial evaluated tolerability and
pharmacokinetics of AZD6244 following oral administration to
patients with advanced cancer. In addition, the trial examined
patients for indications of biological activity as well as
pharmacodynamic and tumor biomarkers. AZD6244 inhibited the MEK
pathway in tumor tissue at the dose that was later selected for
Phase 2 studies and provided prolonged disease stabilization in
a number of cancer patients who had previously received numerous
other cancer therapies. AstraZeneca is responsible for further
clinical development and commercialization for AZD6244 and for
clinical development and commercialization for the other two
compounds it licensed.
In June 2006, AstraZeneca initiated a Phase 2 study for AZD6244
in malignant melanoma, resulting in a $3 million milestone
payment to us. The trial was a randomized Phase 2 study that
compared AZD6244 to
Temodar®
(temozolomide) in the treatment of patients with stage III/IV
melanoma patients. AstraZeneca enrolled approximately
180 patients at 40 centers worldwide. AstraZeneca also
initiated additional Phase 2 studies for AZD6244 in colorectal,
pancreatic and non-small cell lung cancer during 2006. In March
2007, AstraZeneca reported that it dosed its first cancer
patient in a Phase 1 clinical trial with AZD8330, triggering a
$2 million milestone payment to us. The trial is ongoing.
In 2008, AstraZeneca presented Phase 1 clinical trial results at
the American Society of Clinical Oncology, or ASCO, annual
meeting of a new AZD6244 capsule formulation that replaces the
mix/drink formulation used in all prior trials to that time.
AstraZeneca reported that the new capsules maximum
tolerated dose was 25% lower yet provided, on average, higher
exposure than historical values for the mix/drink formulation.
The study also reported a complete response in one of the
patients. AstraZeneca also presented the following Phase 2
clinical trial results of AZD6244 at ASCO:
|
|
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|
|
AZD6244 compared to
Alimta®
(pemetrexed) in 84 non-small cell lung cancer, or NSCLC,
patients, neither of these drugs demonstrated superior efficacy.
|
|
|
|
|
|
AZD6244 compared to Temodar in patients with advanced melanoma;
results showed no difference between the two treatment arms in
the overall population comparing the safety and tolerability
profile for AZD6244 and were consistent with the results
reported from the Phase 1 trial.
|
|
|
|
|
|
AZD6244 compared to Xeloda in patients with metastatic
colorectal cancer; results showed that AZD6244 was generally
well tolerated, with neither of these drugs demonstrating
superior efficacy.
|
|
|
In patients suffering from melanomas with RAF mutations in
clinical trials, AZD6244 provided partial responses in two out
of 14 patients using the Phase 2 mix and drink formulation
and a complete response in one out of eight patients using the
Phase 1 new capsule formulation.
|
Further, AstraZeneca presented at the 2009 American Association
for Cancer Research annual meeting results on a Phase 2 trial of
AZD6244 that showed a 12% overall response rate among patients
with biliary cancer.
In 2010, AstraZeneca presented Phase 1 clinical trial results at
the ASCO annual meeting with the new AZD6244 capsule
formulation. This study evaluated two doses of AZD6244
(50 mg BID and 75 mg BID) in combination with four
different chemotherapies:
DTIC®
(dacarbazine)
(1000 mg/m2),
docetaxel
(75 mg/m2),
erlotinib (100 mg daily) or temsirolimus (25 mg
weekly). The study enrolled 25 melanoma patients, 18 of which
had evaluable tumors. Fourteen out of the 18 patients were
treated with AZD6244 plus DTIC, three with AZD6244 plus
docetaxel and one with AZD6244 plus temsirolimus. Sixty-seven
percent of these patients had previously failed at least one
prior systemic treatments. Of the 18 patients, nine had
BRAF mutations and nine had wild-type BRAF. Of those patients
with BRAF mutations, five had a partial response, four had
stable disease with a median
time-to-progression
of 31 weeks. Of the nine patients with wild-type BRAF, five
had stable disease and four had progressive disease with a
median
time-to-progression
of eight weeks. The median time to progression difference
between BRAF mutant and wild type BRAF was statistically
significant (p=0.01, Wilcoxon rank-sum test). AZD6244 plus
chemotherapy had a 56% response rate in patients with BRAF
mutations, whereas no responses were observed in patients with
wild-type BRAF. Therefore, BRAF mutation-status appears to
predict
9
clinical response in this combination. This is the first
disclosed efficacy data with the new formulation of AZD6244,
which provides twice the drug exposure at the preferred dose.
AstraZeneca has reported that it is currently recruiting
patients for the following Phase 2 trials:
|
|
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|
|
AZD6244 in combination with DTIC versus DTIC alone in patients
with BRAF mutation positive melanoma. This trial has completed
enrollment of 80 patients.
|
|
|
AZD6244 in combination with Taxotere and versus Taxotere alone
in patients with KRAS mutation positive NSCLC. This trial has
completed enrollment of 80 patients.
|
|
|
AZD6244 or temozolomide in patients with metastatic melanoma of
the eye. One hundred fifty nine patients are anticipated to
enroll in this trial.
|
|
|
AZD6244 in combination with irinotecan in 2nd line patients
with KRAS or BRAF mutation positive advanced or metastatic
colorectal cancer. Fifty seven patients are anticipated to
enroll in this trial.
|
In addition, AZD6244 is being investigated in a number of
studies conducted by the National Cancer Institute in
collaboration with AstraZeneca. And in June 2009, AstraZeneca
and Merck & Co., Inc. announced a collaboration to
research AZD6244 in combination with MK-2206 from Merck in a
Phase 1 trial in patients with solid tumors. Preclinical
evidence indicates that combined administration of these
compounds could enhance their anticancer properties. This is the
first time that two large pharmaceutical companies have
established a collaboration to evaluate the potential for
combining drug candidates at such an early stage of development.
The collaboration will more quickly advance a potentially
promising anticancer treatment. In general, such combinations
would only be studied when one or both of the drugs has entered
late-stage development or received marketing approval.
|
|
2.
|
Celgene -
Oncology and Inflammation Programs
|
In September 2007, we entered into a worldwide strategic
collaboration with Celgene focused on the discovery, development
and commercialization of novel therapeutics in cancer and
inflammation. Under the agreement, Celgene made an upfront
payment of $40 million to us to provide research funding
for activities conducted by Array. We are responsible for all
discovery and clinical development through Phase 1 or Phase 2a.
Celgene has an option to select a limited number of drugs
developed under the collaboration that are directed to up to two
of four mutually selected discovery targets and will receive
exclusive worldwide rights to the drugs, except for limited
co-promotional rights in the U.S. Celgenes option may
be exercised with respect to drugs directed at any of the four
targets at any time until the earlier of completion of Phase 1
or Phase 2a trials for the drug or September 2014. Additionally,
we are entitled to receive, for each drug, potential milestone
payments of $200 million, if certain discovery, development
and regulatory milestones are achieved and an additional
$300 million if certain commercial milestones are achieved.
We will also receive royalties on net sales of any drugs. We
retain all rights to the other programs. In June 2009, the
parties amended the agreement to substitute a new discovery
target in place of an existing target and Celgene paid Array an
up-front fee of $4.5 million in consideration for the
amendment. In September 2009, Celgene notified us that it was
waiving its rights to one of the programs leaving it the option
to select two of the remaining three targets. In April 2010,
Celgene announced names of three of our collaborative research
programs: cFMS (oncology), TYK2 (inflammation) and PDGFR
(fibrosis). Celgene reported that all three programs have the
possibility of entering clinical development over the next 12 to
24 months.
Celgene may terminate the agreement in whole, or in part with
respect to individual drug development programs for which
Celgene has exercised its option, upon six months written
notice to us. In addition, either party may terminate the
agreement, following certain cure periods, in the event of a
breach by the other party of its obligations under the
agreement. Celgene can also choose to terminate any drug
development program for which they have not exercised an option
at any time, provided that they must give us prior notice,
generally less than 30 days. In this event, all rights to
the program remain with Array and we would no longer be entitled
to receive milestone payments for further development or
regulatory milestones we achieve if we choose to continue
development of the program.
10
|
|
3.
|
Eli
Lilly - LY2603618/IC83/CHK-1 Program
|
In 1999 and 2000, Array entered into collaboration agreements
involving small molecule
Chk-1
inhibitors with ICOS Corporation. IC83 resulted from the
collaboration between Array and ICOS. Eli Lilly and Company
(Lilly) acquired ICOS in 2007. Array received a
$250 thousand milestone payment after the first patient was
dosed with IC83, now LY2603618, in a Phase 1 clinical trial
in early 2007. The agreements provided research funding, which
has now ended. Array is entitled to receive additional milestone
payments totaling $3.5 million based on Lillys
achievement of clinical and regulatory milestones with
LY2603618. LY2603618 is currently in multiple Phase 1/2
clinical trials including non-small cell lung and pancreatic
cancers.
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4.
|
Genentech -
GDC-0068 and other Oncology Programs
|
We entered into a licensing and collaboration agreement with
Genentech in December 2003 to develop small molecule drugs
against multiple therapeutic targets in the field of oncology.
We initiated this collaboration to advance two of our
proprietary oncology programs into clinical development. These
programs included small molecule leads we had developed along
with additional, related intellectual property. Under the
agreement, Genentech made an up-front payment, provides research
funding and paid a milestone to us for nominating a clinical
candidate and advancing it into regulated safety assessment
testing. In addition, Genentech has agreed to make additional
potential development milestone payments and pay us royalties on
any resulting product sales. Genentech is solely responsible for
clinical development and commercialization of the resulting
products.
In 2005, 2008 and 2009, we expanded our collaboration with
Genentech to develop clinical candidates directed against an
additional third, fourth and fifth target, respectively. Under
the agreement, we receive additional research funding, as well
as potential research and development milestone payments and
product royalties based on the success of each new program.
Genentech has paid Array a total of $12.25 million in
up-front and milestone payments and we have the potential to
earn an additional $60.8 million for all programs if
Genentech continues development and achieves the remaining
clinical milestones set forth in the agreement.
In July 2008, Genentech extended the agreement for an additional
two years of funded research through January 2011. Genentech may
terminate its agreement with us upon 120 days notice.
In June 2010, Genentech disclosed that one collaborative drug,
GDC-0068, an AKT inhibitor, had entered Phase 1 clinical testing.
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5.
|
InterMune -
Danoprevir Hepatitis C Virus NS3/4 Protease
Program
|
From 2002 to 2007, scientists from Array and InterMune
collaborated on the discovery of novel small molecule inhibitors
of the Hepatitis C Virus, or HCV, NS3/4A protease. During the
collaboration, the companies jointly discovered danoprevir,
which InterMune is now developing in partnership with Roche.
Under the terms of the collaboration agreement, InterMune funded
certain drug discovery efforts, preclinical testing, process
development and manufacturing in conformity with current Good
Manufacturing Practices, or cGMP. InterMune will make milestone
payments to us based on the selection and progress of clinical
drug candidates, as well as royalties on sales of any products
derived from the collaboration. To date, we have received
$1.8 million in milestone payments and have the potential
to earn an additional $16.5 million if all clinical and
commercialization milestones are achieved under the agreement.
Research funding under this agreement ended in June 30,
2007.
During 2006, we produced and delivered cGMP clinical supplies of
danoprevir, and InterMune initiated a Phase 1 clinical trial,
triggering a milestone payment to Array. The Phase 1 trial was a
randomized, double-blind, placebo controlled study and
danoprevir demonstrated substantial antiviral activity (median
HCV RNA reductions up to 3.8 log10) when administered as
monotherapy for 14 days to patients with chronic HCV
genotype 1 infection.
11
During 2008, InterMune advanced danoprevir in a Phase 1b
multiple ascending dose clinical trial evaluating danoprevir in
combination with standard of care therapies in treatment-naive
patients with chronic HCV genotype 1 infection. InterMune
reported the following results from the trial:
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Danoprevir in combination with standard of care resulted in
rapid and persistent reductions in HCV RNA in the patients.
|
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|
Viral rebound was not observed in any patients receiving the
treatment and danoprevir in combination with standard of care
was safe and generally well-tolerated over 14 days.
|
During 2009, InterMune initiated a Phase 2b trial evaluating
danoprevir in combination with standard of care therapies. In
April 2010, InterMune announced top-line results from a planned
interim analysis of the trial. Danoprevir was administered at
either 300 mg three times daily, 600 mg twice daily or 900 mg
twice daily for 12 weeks in combination with
PEGASYS®
(pegylated interferon alfa-2a) and
COPEGUS®
(ribavirin), compared with placebo for the same duration plus
PEGASYS and COPEGUS. In November 2009, InterMune reported that
due to a safety signal, dosing in the 900 mg group had been
stopped. InterMune reported that results from the study indicate
danoprevir plus PEGASYS and COPEGUS are capable of achieving
complete early virologic response rates as high as 90% compared
to 43% in the placebo group.
In addition, InterMune completed a Phase 1b trial (INFORM-1) of
danoprevir and a polymerase inhibitor, RG7128 and they are
planning a sustained virologic response-seeking study in the
INFORM program. InterMune is continuing a phase 1b multiple
ascending dose trial of ritonavir-boosted danoprevir, and
currently plans to launch a Phase 2b study of retonavir-boosted
danoprevir plus standard of care, PEGASYS and COPEGUS, during
the second half of 2010.
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6.
|
VentiRx -
VTX-2337 and VTX-1463 / Toll-Like Receptor (TLR)
Program
|
In February 2007, we entered into a licensing and collaboration
agreement with the privately held biopharmaceutical company
VentiRx, under which we granted VentiRx exclusive worldwide
rights to certain molecules from our toll-like receptor, or TLR,
program. The program contains a number of compounds targeting
TLRs to activate innate immunity. VentiRx has reported that it
is conducting Phase 1 clinical trials on its first two
candidates, VTX-2337 and VTX-1463, in cancer and allergy,
respectively. We received equity in VentiRx as well as an
up-front payment and the right to receive potential milestone
payments and royalties on product sales. To date, we have
received $1.1 million in milestone payments and have the
potential to earn $57.5 million if VentiRx achieves the
remaining clinical and commercial milestones under the
agreement. See Note 5 Equity Investment
to the accompanying Financial Statements included elsewhere in
this Annual Report on
Form 10-K
for a description of the equity interest we received in VentiRx
as a result of this agreement.
Market
Opportunity
We believe there is a substantial opportunity in creating drugs
for debilitating and life-threatening diseases, especially in
cancer, pain and immune/inflammatory diseases. The medical
community is seeking targeted therapies that treat both the
underlying disease as well as control symptoms more effectively
and/or more
safely than drugs that are currently available. We believe
future patient care will improve with the use of screening to
select targeted therapies for more effective disease treatment.
Also, clinical trials aimed at well-defined patient populations
may show improved response rates and may thereby increase the
chances for U.S. Food and Drug Administration, or FDA,
approval. This approach may result in a greater number of
marketed drugs each aimed at a smaller subset of patients.
Our proprietary pipeline is primarily directed at drugs that
treat cancer and inflammatory diseases. The worldwide market for
targeted cancer drugs the cancer drug markets
fastest growing segment is expected to grow from
$30.7 billion in 2009 to $64.4 billion in 2016. The
inflammatory disease market is highly diverse and includes
rheumatoid arthritis, or RA, osteoarthritis, asthma, chronic
obstructive pulmonary disease, or COPD, psoriasis and
inflammatory bowel diseases. According to EvaluatePharma, the
worldwide market for injectable targeted therapies for RA and
prescription
12
nonsteroidal anti-inflammatory drugs, or NSAIDS, and opioids are
expected to grow from $23.7 billion in 2009 to
$26.7 billion in 2016. Additionally, with the safety
concerns over the class of pain medications known as COX-2
inhibitors, new markets are expected to emerge for drugs with
novel mechanisms to treat chronic pain associated with arthritis
as well as other painful inflammatory disorders. In addition,
there remains a large need to address patients with acute or
subacute pain, such as post-operative pain. The Type 2 diabetes
market is projected to have strong growth, with an increase from
approximately $19 billion in 2009 to $35 billion in
the U.S., Germany, France, Italy, Spain, the United Kingdom, or
U.K., and Japan in 2018. The primary growth drivers are expected
to be an expanding drug-treated population and the launch of
numerous novel agents.
In addition, the pharmaceutical industry has an ongoing need to
fill clinical development pipelines with new drugs to drive
future revenue growth. Despite increased spending on internal
research, the industry has been unable to meet this demand. As a
result, it has become increasingly reliant on biotech companies
to acquire new drugs. Due to the scarcity of later-stage
clinical assets available for in-licensing, these companies are
willing to enter into licensing deals at early stages, including
the preclinical stage. However, once a drug has entered clinical
development, companies generally require
proof-of-concept
data, which includes both efficacy and safety, before they will
consider licensing a drug candidate. Accordingly, we believe
there is an opportunity to license drugs at several stages
during the drug development process.
Cancer
Market
Despite a wide range of available cancer therapies, patient
treatment responses remain limited and variable. As a result,
oncologists are increasingly using combination therapies and
drug dosing regimens tailored for individual tumor types and
patients. Targeted therapies hold the promise of being more
efficacious with fewer side effects than cytotoxic chemotherapy
drugs, as they are able to specifically target the underlying
mechanisms of the disease by regulating discrete aspects of
cellular function affecting cancer cells to a greater extent
than normal cells. We believe certain cancers will eventually
become chronic diseases, treated with a combination of targeted
therapies. Our research strategy in the cancer market is to
build a pipeline of targeted therapies.
According to estimates contained in the American Cancer Society,
Cancer Facts and Figures 2010, in the U.S. there
will be an estimated 1.5 million new cases of cancer in
2010 and nearly 600 thousand cancer related deaths. The
five-year relative survival rate for all cancers diagnosed
between 1999 and 2005 was 68%. This represents an 18%
improvement from 1975 to 1977. Earlier diagnosis and the use of
new and/or
improved treatments have driven this improvement.
The following table shows estimated new cases diagnosed and
estimated deaths in the U.S. for 2010 by major cancer type
and types of interest to Array:
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|
|
Estimated 2010
|
|
Type of Cancer
|
|
New Cases
|
|
|
Deaths
|
|
|
Lung
|
|
|
222,520
|
|
|
|
157,300
|
|
Breast
|
|
|
209,060
|
|
|
|
40,230
|
|
Prostate
|
|
|
217,730
|
|
|
|
32,050
|
|
Colorectal
|
|
|
142,570
|
|
|
|
51,370
|
|
Myelodysplastic Syndrome
|
|
|
76,000
|
|
|
|
unknown
|
|
Melanoma
|
|
|
68,130
|
|
|
|
8,700
|
|
Pancreas
|
|
|
43,140
|
|
|
|
36,800
|
|
Liver and Intrahepatic Bile Duct
|
|
|
24,120
|
|
|
|
18,910
|
|
Multiple Myeloma
|
|
|
20,180
|
|
|
|
10,650
|
|
Acute Myelogenous Leukemia
|
|
|
12,330
|
|
|
|
8,950
|
|
Gallbladder and Other Biliary
|
|
|
9,760
|
|
|
|
3,320
|
|
Bones and Joints
|
|
|
2,650
|
|
|
|
1,460
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,048,190
|
|
|
|
369,740
|
|
|
|
|
|
|
|
|
|
|
13
The use of targeted therapies has the potential to change the
focus of cancer treatment away from categorization and treatment
modality by organ type and towards categorization and treatment
modalities by level of gene expression in individual patients,
or personalized medicine. It is believed that
targeted therapies and personalized medicine will result in
increased survival with improved quality of life. However, a
potential implication of personalized medicine is smaller market
opportunities.
Oncology, both in treating cancer itself and palliative therapy,
has been a major therapeutic category for biotechnology
companies since the inception of the industry. Recently, major
pharmaceutical companies have increased their research and
development and in-licensing investment in this market,
particularly the targeted cancer therapy market. Some of the
targeted therapies currently on the market that have been
successful include
Avastin®
(bevacizumab),
Gleevec®
(imatinib mesylate), Herceptin and
Rituxan®
(rituximab).
Breast Cancer
(ARRY-380 - HER2 inhibitor)
Breast Cancer is the second largest cancer type in the
U.S. with an incidence of 209 thousand cases per year.
Approximately 30% of all breast cancer patients are HER2
positive. Herceptin is an intravenously-dosed monoclonal
antibody currently on the market for the treatment of breast
cancers that over express HER2 and is approved as adjuvant
therapy for HER2 positive breast cancer and all lines of HER2
positive metastatic breast cancer.
Tykerb, a small molecule drug that modulates HER2 and EGFR, was
approved in March 2007 for the treatment of patients with
metastatic HER2 positive breast cancer whose tumors have failed
to respond to Herceptin and chemotherapy in second and
third-line treatment. Tykerb in combination with Xeloda is
currently being used in 5% of all treated breast cancer
patients, approximately 15% of the HER2 positive subpopulation.
Tykerbs sales during 2009 were $265 million, with
2010 worldwide sales projected at $381 million.
We believe the broad use of Herceptin in HER2 positive settings
and the increasing usage of Tykerb/Xeloda combinations in
metastatic HER2 positive settings suggest a high potential value
for an orally active drug that regulates HER2 and can be
conveniently dosed for extended periods of time. ARRY-380 is an
orally active, reversible and selective HER2 inhibitor currently
in a Phase 1 study to evaluate the safety and pharmacokinectics
and determine the maximum tolerated dose in patients with
advanced HER2 positive cancer. We believe ARRY-380 has the
potential to treat this patient population.
Colorectal
Cancer (AZD6244 and MEK162 - MEK inhibitors)
Colon and rectal cancers, collectively referred to as colorectal
cancer, is one of the most common forms of cancer. From 2009 to
2016, the number of newly diagnosed incident cases of colon
cancer is projected to increase by 9% to 10% across the seven
major pharmaceutical markets (U.S., France, Germany, Italy,
Spain, the U.K. and Japan). Also during this period, there is
projected to be an 18% growth in the number of all those living
with a history of colon cancer. The risk of colorectal cancer
increases exponentially with age. For this reason, the aging
population in the U.S., Western Europe and Japan may result in
an increase in the incidence of colorectal cancer.
Treatment of colorectal cancer is closely linked to disease
stage. Treatment modalities include surgery, radiotherapy and
chemotherapy. Surgical resection of the primary tumor and
regional lymph nodes is the only curative treatment and may cure
up to 50% of patients. Pharmaceutical therapies play an
important adjunctive and palliative role in most cases of
stage III and IV colorectal cancer by helping reduce
the incidence of recurrence, prolonging survival and improving
quality of life. Three biological agents have been approved for
metastatic colorectal cancer Avastin,
Erbitux®
(cetuximab) and
Vectibix®
(panitumumab). Use of these biologics is confined to the
metastatic setting, although they are being tested in the
adjuvant setting.
The roles of epidermal growth factor receptor, or EGFR, and
vascular endothelial growth factor receptor, or VEGF, are well
established and the focus of many current pharmaceutical
therapies in development for the
14
treatment of colorectal cancer. Treatment of colorectal cancer
is becoming more individualized, however, following recent data
showing that patients with mutated KRAS genes do not respond to
anti-EGFR therapy. Consequently, pharmaceutical and
biotechnology companies have begun to develop therapies that are
based on the testing of the presence of biomarkers, such as KRAS
and, to a lesser extent, BRAF mutations, to estimate the
efficacy of drugs. Testing for biomarkers is a new paradigm in
the treatment of colorectal cancer and we expect biomarkers for
drug efficacy to play an ever-increasing role in colorectal
cancer treatment. KRAS and BRAF mutations are thought to play a
critical role in colorectal cancer progression and maintenance
due to activation of the RAS/mitogen-activating protein kinase,
or MAPK, pathway. We believe that a therapeutic approach to
block this pathway with a MEK inhibitor may provide an effective
therapy in patients with cancers that have these mutations.
Lung Cancer
(AZD6244 - MEK inhibitor)
According to the National Cancer Institute, lung cancer forms in
the tissues of the lung, usually in the cells lining air
passages. The two main types are non-small cell lung cancer, or
NSCLC, which represents about 81% of lung cancer and small cell
lung cancer, which represents about 17%. In 2010, the estimated
new cases and deaths from lung cancer (non-small cell, small
cell and unspecified other combined) in the U.S. were
222,520 and 157,300, respectively. Lung cancer is the leading
cause of cancer-related mortality in the U.S. The five-year
relative survival rate for the period of 1995 to 2001 for
patients with lung cancer was 15.7%. The five-year relative
survival rate varies markedly depending on the stage at
diagnosis, from 49% to 16% to 2% for patients with local,
regional and distant stage disease, respectively. Patients with
resectable disease may be cured by surgery or surgery with
adjuvant chemotherapy. Local control can be achieved with
radiation therapy in a large number of patients with
unresectable disease, but cure is seen only in a small number of
patients. Patients with locally advanced, unresectable disease
may have long-term survival with radiation therapy combined with
chemotherapy. Patients with advanced metastatic disease may
achieve improved survival and palliation of symptoms with
chemotherapy. However metastatic NSCLC is a fatal disease and
the need for more effective and less toxic therapies that can be
used as alternatives to or in combination with chemotherapy has
led to the investigation of targeted therapies. In NSCLC, major
components of cell signaling pathways such as the RAS/MAPK
pathway and components of the normal cell cycle are frequently
altered and provide the rationale for the evaluation of
therapies that target these aberrant pathways including MEK
inhibitors.
Melanoma
(AZD6244 - MEK inhibitor)
According to the National Cancer Institute, the estimated new
cases and deaths from melanoma in the U.S. in 2010 were
68,130 and 8,700, respectively. Melanoma is a malignant tumor of
cells that make the pigment melanin and are derived from the
neural crest. Although most melanomas arise in the skin, they
may also arise from mucosal surfaces or at other sites to which
neural crest cells migrate. Melanoma occurs predominantly in
adults and more than 50% of the cases arise in apparently normal
areas of the skin. Early signs in a nevus that would suggest
malignant change include darker or variable discoloration,
itching, an increase in size, or the development of satellites.
Ulceration or bleeding are later signs. Melanoma in women occurs
more commonly on the extremities and in men on the trunk or head
and neck, but it can arise from any site on the skin surface.
The incidence of malignant melanoma is increasing at a rate
greater than any other human cancer. The optimal treatment for
melanoma varies with the stage of the disease. In patients with
early disease, surgical excision is the treatment of choice with
some of these patients receiving adjuvant therapy with
interferon alfa (IFNa). Surgical excision of limited distant
metastatic disease can occasionally produce durable benefit, but
most patients with distant metastases require systemic therapy.
Systemic therapies include chemotherapy and immunotherapy, used
either alone or in combination. Several novel targeted therapies
are under study including several that target specific molecular
abnormalities such as BRAF mutation. The BRAF inhibitor, PLX4032
has shown promising results in patients with metastatic
melanoma. As MEK inhibitors target the MAPK pathway which is
activated with BRAF mutation, they may also have the potential
for activity in BRAF mutant melanoma.
15
Multiple
Myeloma (ARRY-520 - KSP inhibitor)
Multiple myeloma, or MM, is a hematological cancer in which
malignant plasma cells are overproduced in the bone marrow.
Normal plasma cells are white blood cells that produce
antibodies that fight infection and disease. MM plasma cells
replace normal plasma cells and other white blood cells which
are important to maintaining the immune system.
MM is the second most common hematologic malignancy and garners
significant sales due to the cost of treatment regimens and
relatively long life expectancies among patients. It primarily
afflicts the elderly with median age at diagnosis occurring
between the ages of 67 to 72 in the U.S. The annual incidence of
newly diagnosed MM patients is approximately 44 thousand in the
seven major global markets with approximately 19 thousand in the
U.S. Survival has increased in recent years to anywhere
from five to seven years for patients able to undergo stem cell
transplant in combination with high-dose targeted drug therapy.
Market growth of therapies that treat MM is expected to be
strong, with sales across the seven major pharmaceutical markets
(U.S., France, Germany, Italy, Spain, the U.K. and Japan)
forecasted to grow annually by 10.7% from $2.6 billion in
2009 to $5.3 billion in 2018. This growth will be driven by
three factors:
|
|
|
|
1.
|
Increased efficacy of current treatments, notably the leading
targeted therapies of Velcade, Revlimid and
Thalomid®
(thalidomide), leading to longer life expectancy and allowing
for more drug therapy to be administered;
|
|
2.
|
Increased use of existing and new drug combinations,
particularly combinations with Velcade and Revlimid, leading to
higher overall regimen costs; and
|
|
3.
|
Introduction and uptake of new, higher cost therapies,
particularly greater uptake of Revlimid and anticipated launch
of premium priced next generation proteasome inhibitors and
immunomodulatory drugs such as carfilzomib and pomalidomide.
|
Despite progress in treating MM, current treatments do not cure
the disease and are highly toxic. Therefore, there exists
opportunities for drug therapies with novel mechanisms of action
and/or drugs
that act synergistically with existing leading therapies. We
believe ARRY-520 has potential in treating MM since these tumors
depend on the survival protein MCL-1, which is frequently
over-expressed in MM and may be the most sensitive KSP
inhibitor to date.
Myelodysplastic
Syndromes (ARRY-614 - p38/Tie2 inhibitor)
According to an article published by Elsevier Global Medical
News in December 2008, there were about 76 thousand new cases of
myelodysplastic syndromes, or MDS, each year in the
U.S. This is about eight times greater than previous
estimates of MDS incidence based on the National Cancer
Institute Surveillance, Epidemiology and End Results Program.
The analysis also concluded that patients with MDS have many
comorbidities, such as cardiac complications, dyspnea, diabetes
and kidney complications. Indeed, 74% of newly diagnosed MDS
patients developed cardiac complications and 51% developed
dyspnea. Over a three-year period, 39% of MDS patients died.
Patients with MDS were significantly older, with 72% of them
aged 70 years or above.
MDS is forecast to grow modestly by approximately 1% annually
from 2009 to 2018; total sales of existing therapies are
projected to increase from $470 million in 2009 to
$500 million in 2018. This forecast does not include
additional potential growth resulting from any novel, emerging
therapies. Current therapies on the market include
Vidaza®
(azacitidine), Revlimid and
Dacogen®
(decitabine). Vidaza and Revlimid will capture approximately 70%
of the market by 2012. Launch of these agents will also drive an
increase in the overall drug-treated population because access
to these agents will encourage treatment and because there are
few other therapies currently available. Research continues on
new therapies to treat MDS, the most promising of which are the
histone deacetylase, or HDAC, inhibitors. One goal of ARRY-614
is to provide hematological improvement in low to intermediate
grade MDS (increase in red blood cells, neutrophil cells and
platelets), thereby reducing the need for transfusions.
16
Diabetes
(AMG151 - Glucokinase Activator)
Diabetes is an epidemic, with approximately 21 million Type
2 diabetics in the U.S. alone in 2009. The total annual
U.S. economic cost of diabetes in 2007 was estimated to be
$174 billion. Approximately 180 million people
worldwide suffer from diabetes. Of these, roughly 90% to 95%
have Type 2 diabetes and this population is predicted to double
over the next two decades. Type 2 diabetes leads to significant
increases in long-term disability (blindness, kidney disease,
cardiovascular disease and amputations) and is the seventh
leading cause of death in the U.S., primarily due to
cardiovascular disease caused by diabetes. Current therapies do
not adequately treat the disease, thereby providing the
opportunity for effective new drugs to address this unmet
medical need.
The Type 2 diabetes market is expected to have strong growth,
increasing from $19 billion in 2009 to $31 billion in
the U.S., France, Germany, Italy, Spain, the U.K. and Japan in
2018. The primary growth drivers are expected to be an expanding
drug-treated population and the launch of several novel agents.
AMG151 represents a promising new class of drugs for the
treatment of Type 2 diabetes called glucokinase (GK) activators.
GK activators are believed capable of more effective glucose
lowering combined with a superior side-effect profile than
current therapies. GK activators lower blood glucose levels by a
dual mechanism of enhancing glucose-stimulated insulin release
from pancreatic β-cells and suppressing net hepatic glucose
production in the liver. In clinical studies in patients with
Type 2 diabetes, AMG151 has demonstrated dose-dependent
reductions in both post-meal glucose excursions as well as
reductions in fasting blood glucose.
Inflammation
and Pain Market (Trk)
Inflammation is a natural biologic response to injury or
infectious attack to the human body. Unregulated inflammation
results in a broad range of conditions, most of which are
classified by the tissue or organ where the inflammation occurs.
These conditions include RA in the joints, psoriasis in the
skin, asthma and COPD in the lung, fibrotic disease in the liver
and kidney, Crohns disease and ulcerative colitis in the
intestine and atherosclerosis in the arteries. Currently, many
of these patients are treated with injectable protein
therapeutics, such as
Enbrel®
(etanercept),
Remicade®
(infliximab),
Humira®
(adalimumab) and
Kineret®
(anakinra), which bind to
and/or
modulate the activity of the inflammatory cytokines TNF or IL-1.
These injectable protein therapeutics have significant cost,
safety and patient compliance issues. The major pain therapies
currently on the market, including NSAIDs and opioids, have side
effect and efficacy issues.
Few innovative therapeutics for pain have emerged in the past
several decades and there is a significant unmet medical need
for safer and more efficacious drugs for the treatment of both
acute and chronic pain. Emerging evidence for the involvement of
the neurotrophins NGF and BDNF in acute and chronic pain has
provided the basis for novel pain treatment strategies by
targeting these pathways. Several antibodies to NGF are in
clinical development and significant efficacy has been
demonstrated in the absence of many of the side effect issues
observed with NSAIDs and opioids.
Over 315 million patients in the U.S. alone are
treated for acute pain annually. Acute pain occurs under a broad
set of circumstances ranging from bone fractures, post-operative
pain in planned surgical or trauma/emergency settings, severe
migraine attacks and breakthrough cancer pain. For example,
surgical patients typically experience moderate to severe pain
for a few days or a few weeks after the procedure and primarily
use analgesics, including opiods
and/or
NSAIDs, to manage the pain.
Opioids have been shown to be efficacious in the management of
pain. However, they also have a number of side effects including
nausea, vomiting, constipation and respiratory and psychological
dysfunction. Additionally, drug abuse is a major concern with
the use of opioids. NSAIDs have demonstrated modest pain
reduction, but they are less effective than opioids. Although
NSAIDS have a more favorable safety profile than opioids, renal
toxicity and gastrointestinal bleeding are associated with their
use. Cardiovascular side effects are linked with COX-2
inhibitors. This presents an opportunity for a drug with
comparable or better efficacy than NSAIDS, including COX-2
inhibitors and opioids.
17
In contrast to these injectable biologics, Array is developing
oral small molecule drugs that selectively inhibit the tyrosine
kinase, or Trk, activity of members of the Trk family of
neurotrophin receptors. Oral drugs targeting the neurotrophin
pathway will provide patient convenience and may have safety
advantages relative to antibodies. In addition to an inhibitor
that targets a family of Trk receptors, we are developing drugs
that modulate important biological targets in key intracellular
pathways that control inflammation, potentially providing the
ability to treat multiple diseases and conditions with a single
oral agent.
Research and
Development for Proprietary Drug Discovery
Our primary research efforts are centered on the treatment of
cancer, inflammatory disease and pain. Our research focuses on
biologic functions, or pathways, that have been identified as
important in the treatment of human disease based on human
clinical, genetic or preclinical data. Within these pathways, we
seek to create
first-in-class
drugs regulating important therapeutic targets to treat patients
with serious or life-threatening conditions, primarily in
cancer, inflammatory disease and other important disease areas.
In addition, we seek to identify opportunities to improve upon
existing therapies or drugs in clinical development by creating
clinical candidates with superior, or
best-in-class,
drug characteristics, including efficacy, tolerability or dosing
to provide safer, more effective drugs. During fiscal years
2010, 2009 and 2008, we spent $72.5 million,
$89.6 million and $90.3 million, respectively, on
research and development for proprietary drug discovery, which
consist of costs associated with our proprietary drug programs
for, among other things, salaries and benefits for scientific
personnel, consulting and outsourced services, laboratory
supplies, allocated facilities costs and depreciation.
Drug Discovery
and Development Timeline
The drug development process is highly uncertain, is subject to
a number of risks that are beyond our control and takes many
years to complete. The following table outlines each phase in
the drug development process. Completion times are difficult to
estimate and can vary greatly based on the drug and indication.
Therefore, the duration times shown in the table below are
estimates only.
|
|
|
|
|
Phase
|
|
Objective
|
|
Estimated Duration
|
|
|
|
|
|
|
Discovery
|
|
Lead identification and target validation
|
|
2 to 4 years
|
|
|
|
|
|
Preclinical
|
|
Initial toxicology for preliminary identification of risks for
humans; gather early pharmacokinetic data
|
|
1 to 2 years
|
|
|
|
|
|
Phase 1
|
|
Evaluate safety in humans; study how the drug works, metabolizes
and interacts with other drugs
|
|
1 to 2 years
|
|
|
|
|
|
Phase 2
|
|
Establish effectiveness of the drug and its optimal dosage;
continue safety evaluation
|
|
2 to 4 years
|
|
|
|
|
|
Phase 3
|
|
Confirm efficacy, dosage regime and safety profile of the drug;
submit New Drug Application
|
|
2 to 4 years
|
|
|
|
|
|
FDA Approval
|
|
Approval by the FDA to sell and market the drug under approved
labeling
|
|
6 months to 2 years
|
Animal and other non-clinical studies are often conducted during
each phase of human clinical studies. Proof-of-concept for a
drug candidate generally occurs during Phase 2, after safety and
efficacy data is established.
Our Research and
Development Technologies and Expertise
We are continuing to improve our comprehensive research and
development capabilities, consisting of four integrated areas of
expertise:
|
|
|
|
|
Discovery Research Biology, Chemistry and
Translational Medicine
|
|
|
Process Research, Development, Formulation and Manufacturing
|
18
|
|
|
|
|
Clinical Development
|
|
|
Information Technology
|
Discovery
Research
We have a broad drug discovery platform with all the necessary
capabilities to efficiently invent new chemical compounds. We
continue to add to our breadth of knowledge, refine our
processes and hire key scientists who enhance our current
capabilities. We have expanded our translational medicine team,
which designs and runs mechanistic studies in cell biology and
pharmacology to provide insight into clinical development
strategy, product differentiation and biomarker support for
clinical development. Today, we are recognized as having one of
the premier small molecule drug discovery capabilities in the
biotech industry in its comprehensiveness, scale and expertise.
To date, our average cost to invent a new chemical entity and
file an IND application is less than $15 million, compared
to estimates of up to $100 million spent by major
pharmaceutical companies. The discovery group has created high
quality clinical assets with every wholly-owned and to our
knowledge, every partnered, drug to reach the clinic to date
having been shown to modulate its mechanistic target, as
measured by an appropriate clinical biomarker.
Process
Research, Development, Formulation and
Manufacturing
We have built and we continue to enhance our process research
and development and cGMP manufacturing capabilities to
accommodate the productivity of our research platform and
support our clinical development plans. Our capabilities include
formulations, physical form characterization and certain aspects
of clinical supply manufacturing. We are growing and improving
our abilities to manage the work of contract manufacturing
organizations we retain to perform certain of these functions.
Clinical
Development
Our current key capabilities within clinical development include
clinical operations, safety monitoring, biostatistics,
programming and data management, regulatory strategy and program
management. This group leads the development and implementation
of our clinical and regulatory strategies. The clinical group
works closely with the discovery and translational medicine
groups to select disease indications in which our drugs are
studied in clinical trials. The clinical group designs, directs
and implements all clinical operations, including identifying
and selecting clinical investigators, recruiting study subjects
to participate in our clinical trials, biostatistics, data
management, drug safety evaluation and adverse event reporting.
The clinical group also is responsible for ensuring that our
development programs are conducted in compliance with applicable
regulatory requirements. The group also works closely with the
cross functional project and clinical teams to facilitate the
appropriate and efficient development of our diverse product
pipeline.
Our near term focus is on bringing our drugs through
proof-of-concept
clinical trials. Our
proof-of-concept
strategy is to efficiently conduct studies to demonstrate the
value of each program in a therapeutic area so that decisions to
continue, modify or cease development of a program can be made
early in the development process. We believe that our broad
development pipeline and productive discovery platform provide
an incentive to design trials for each program with high hurdles
to demonstrate the potential of the drug or to fail
early.
Information
Technology
We believe that our information technology, or IT, capabilities
provide a competitive advantage in each aspect of our business.
Our IT capabilities are essential to increasing our productivity
through capturing, organizing and providing appropriate
information to improve decision making. Several years ago, we
accomplished our goal of creating a paperless discovery research
environment, which has empowered our scientists to improve real
time decision-making at the bench. Array has recently completed
a proprietary clinical information system that parallels the
comprehensive capabilities of our discovery system, providing
company-wide access to real-time information for each clinical
trial as well as the entire drug portfolio. In
19
addition to real-time study data, the systems information
includes planned and actual screening/enrollment at the site
level, budget and actual costs by types of activities, important
events and milestones. We believe Array now has one of the most
advanced clinical IT systems in the entire drug industry.
Arrays IT achievements were recently recognized through
being selected as a recipient of the 2009 CIO 100 award. This
award recognizes organizations around the world that exemplify
the highest level of operational and strategic excellence in IT.
We were the only biotechnology company selected for this award.
Competitors
The pharmaceutical and biotechnology industries are
characterized by rapid and continuous technological innovation.
We compete with companies worldwide that are engaged in the
research and discovery, licensing, development and
commercialization of drug candidates, including large
pharmaceutical companies with internal discovery and development
functions, biotech companies with competing products in the
therapeutic areas we are targeting and contract research
organizations that perform many of the functions we perform
under our collaborations. In addition, we face competition from
other pharmaceutical and biotechnology companies seeking to
out-license drugs targeting the same disease class or condition
as our drug candidates are based on, among other things, patent
position, product efficacy, safety, reliability, availability,
patient convenience, price and reimbursement potential.
Therefore, we may be unable to enter into collaboration,
partnering, or out-licensing agreements on terms that are
acceptable to us, or at all. We also compete with other clinical
trials for patients who are eligible to be enrolled in clinical
trials we or our collaborators are conducting, which may limit
the number of patients who meet the criteria for enrollment and
delay or prevent us or our collaborators from completing trials
when anticipated. Because the timing of entry of a drug in the
market presents important competitive advantages, the speed with
which we are able to complete drug development and clinical
trials, obtain regulatory approval and supply commercial
quantities of drugs to the market will affect our competitive
position. Some of our competitors have a broader range of
capabilities and have greater access to financial, technical,
scientific, regulatory, business development, recruiting and
other resources than we do. Their access to greater resources
may allow them to develop processes or products that are more
effective, safer or less costly, or gain greater market
acceptance, than products we develop or for which they obtain
FDA approval more rapidly than we do. We anticipate that we will
face increased competition in the future as new companies enter
the market and advanced technologies become available.
Government
Regulation
Biopharmaceutical companies are subject to substantial
regulation by governmental agencies in the U.S. and other
countries. Virtually all pharmaceutical products are subject to
rigorous preclinical and clinical testing and other approval
procedures by the FDA and by foreign regulatory agencies. Before
a drug product is approved by the FDA for commercial marketing,
three phases of human clinical trials are usually conducted to
test the safety and effectiveness of the product. Phase 1
clinical trials most typically involve testing the drug on a
small number of healthy volunteers to assess the safety profile
of the drug at different dosage levels. Phase 2 clinical trials,
which may also enroll a relatively small number of patient
volunteers, are designed to further evaluate the drugs
safety profile and to provide preliminary data as to the
drugs effectiveness in humans. Phase 3 clinical trials
consist of larger, well-controlled studies that may involve
several hundred or even several thousand patient volunteers
representing the drugs targeted population. During any of
these phases, the clinical trial can be placed on clinical hold,
or temporarily or permanently stopped for a variety of reasons,
principally for safety concerns. In addition, the failure to
comply with applicable regulatory requirements in the U.S.,
including Good Clinical Practices, or GCP, and in other
countries in which we conduct development activities could
result in failure to obtain approval, as well as a variety of
fines and sanctions, such as warning letters, product recalls,
product seizures, suspension of operations, fines and civil
penalties or criminal prosecution.
The approval process is time-consuming and expensive and there
are no assurances that approval will be granted on a timely
basis, or at all. Even if regulatory approvals are granted, a
marketed product is subject
20
to continual review under federal, state and foreign laws and
regulations. Post-marketing requirements include reporting
adverse events, recordkeeping and compliance with cGMP and
marketing requirements. Adverse events reported after marketing
of a drug can result in additional restrictions being placed on
the use of a drug and, possibly, in withdrawal of the drug from
the market. The FDA or similar agencies in other countries may
also require labeling changes to products at any time based on
new safety information.
If drug candidates we develop are approved for commercial
marketing under a New Drug Application, or NDA, by the FDA, they
would be subject to the provisions of the Drug Price Competition
and Patent Term Restoration Act of 1984, known as the
Hatch-Waxman Act. The Hatch-Waxman Act provides
companies with marketing exclusivity for new chemical entities
and allows companies to apply to extend patent protection for up
to five additional years. It also provides a means for approving
generic versions of a drug product once the marketing
exclusivity period has ended and all relevant patents have
expired (or have been successfully challenged and defeated). The
period of exclusive marketing may be shortened, however, by a
successful patent challenge. The laws of other key markets
likewise create both opportunities for exclusivity periods and
patent protections and the possibility of generic competition
once such periods or protections either have reached expiry or
have been successfully challenged by generic entrants.
All facilities and manufacturing processes used in the
production of Active Pharmaceutical Ingredients for clinical use
in the U.S. must be operated in conformity with cGMP as
established by the FDA. Our production takes place at a
manufacturing facility that complies with cGMP, which allows us
to produce cGMP compliant compounds. In our facility, we have
the capacity to produce Active Pharmaceutical Ingredients for
early clinical testing. We have validated this capability for
compliance with FDA regulations and began our first cGMP
manufacturing campaign in 2002. Our cGMP facility is subject to
periodic regulatory inspections to ensure compliance with cGMP
requirements. We could also be required to comply with specific
requirements or specifications of other countries or of our
collaborators, which may be more stringent than regulatory
requirements and which can delay timely progress in our clinical
development programs. If we fail to comply with applicable
regulations, the FDA could require us to cease ongoing research
or disqualify the data submitted to regulatory authorities.
Other countries have similar regulatory powers. A finding that
we had materially violated cGMP requirements could result in
additional regulatory sanctions and, in severe cases, could
result in a mandated closing of our cGMP facility, which would
materially and adversely affect our business, financial
condition and results of operations.
In the course of our business, we handle, store and dispose of
chemicals and biological samples. We are subject to various
federal, state and local laws and regulations relating to the
use, manufacture, storage, handling and disposal of hazardous
materials and waste products. These environmental laws generally
impose liability regardless of the negligence or fault of a
party and may expose us to liability for the conduct of, or
conditions caused by, others.
Most health care providers, including research institutions from
whom we or our collaborators obtain patient information, are
subject to privacy rules under the Health Insurance Portability
and Accountability Act of 1996, or HIPAA. Additionally, strict
personal privacy laws in other countries affect pharmaceutical
companies activities in other countries. Such laws include
the EU Directive 95/46-EC on the protection of individuals with
regard to the processing of personal data as well as individual
EU Member States implementing laws and additional laws. Although
our clinical development efforts are not barred by these privacy
regulations, we could face substantial criminal penalties if we
knowingly receive individually identifiable health information
from a health care provider that has not satisfied HIPAAs
disclosure standards. Failure by EU clinical trial partners to
obey requirements of national laws on private personal data,
including laws implementing the EU Data Protection Directive,
might result in liability
and/or
adverse publicity. In addition, certain privacy laws and genetic
testing laws may apply directly to our operations
and/or those
of our collaborators and may impose restrictions on the use and
dissemination of individuals health information.
21
Our clinical development activities involve the production and
use of intermediate and bulk active pharmaceutical ingredients,
or API. We frequently contract with third-party manufacturers to
produce larger quantities of API for us. Some of these
manufacturers are located outside the U.S. and may obtain
ingredients from suppliers in other foreign countries before
shipping the bulk API to Array in the U.S. Cross-border
shipments of pharmaceutical ingredients and products are subject
to regulation in the U.S. by the FDA and in foreign
jurisdictions, including, in the EU, under laws adopted by the
EU Member States implementing the Community Code on Medicinal
Products Directive 2001/83, as amended. These regulations
generally impose various requirements on us
and/or our
third-party manufacturers. In some cases, for example in the EU,
there are cGMP requirements that exceed the requirements of the
FDA. In other cases, we must provide confirmation that we are
registered with the FDA and have either a Notice of a Claimed
Exception for an IND application, an approved New Drug
Application or an approved Biologics License Application.
We are subject to other regulations, including regulations under
the Occupational Safety and Health Act, regulations promulgated
by the U.S. Department of Agriculture, or USDA, and
regulations under other federal, state and local laws.
Violations of any of these requirements could result in
penalties being assessed against us.
Intellectual
Property
Our success depends in part on our ability to protect our
potential drug candidates, other intellectual property rights
and our proprietary software technologies. To establish and
protect our proprietary technologies and products, we rely on a
combination of patent, copyright, trademark and trade secret
laws, as well as confidentiality provisions in our contracts
with collaborators.
We attempt to protect our trade secrets by entering into
confidentiality agreements with our employees, third parties and
consultants. Our employees also sign agreements requiring that
they assign to us their interests in inventions, original
expressions and any corresponding patents and copyrights arising
from their work for us. However, it is possible that these
agreements may be breached, invalidated or rendered
unenforceable and if so, we may not have an adequate remedy
available. Despite the measures we have taken to protect our
intellectual property, parties to our agreements may breach the
confidentiality provisions or infringe or misappropriate our
patents, copyrights, trademarks, trade secrets and other
proprietary rights. In addition, third parties may independently
discover or invent competing technologies or reverse-engineer
our trade secrets or other technology.
Our patent strategy is designed to protect inventions,
technology and improvements to inventions that are commercially
important to our business. We have numerous U.S. patents
and patent applications on file with the U.S. Patent and
Trademark Office and around the world. The source code for our
proprietary software programs is protected both as a trade
secret and as a copyrighted work.
U.S. patents issued from applications filed on or after
June 8, 1995, have a term of 20 years from the
application filing date or earlier claimed priority. All of our
patent applications were filed after June 8, 1995. Patents
in most other countries have a term of 20 years from the
date of filing of the patent application. Because the time from
filing patent applications to issuance of patents is often
several years, this process may result in a period of patent
protection significantly shorter than 20 years, which may
adversely affect our ability to exclude competitors from our
markets. Currently, none of our patents covering drugs currently
under development will expire prior to 2023. Our success will
depend in part upon our ability to develop proprietary products
and technologies and to obtain patent coverage for these
products and technologies. We intend to continue to file patent
applications covering newly developed products and technologies.
We may not, however, commercialize the technology underlying any
or all of our existing or future patent applications.
Patents provide some degree of protection for our proprietary
technology. However, the pursuit and assertion of patent rights,
particularly in areas like pharmaceuticals and biotechnology,
involve complex legal and factual determinations and, therefore,
are characterized by some uncertainty. In addition, the laws
governing patentability and the scope of patent coverage
continue to evolve, particularly in
22
biotechnology. As a result, patents may not be issued from any
of our patent applications or from applications licensed to us.
The scope of any of our patents, if issued, may not be
sufficiently broad to offer meaningful protection. In addition,
our patents or patents licensed to us, if they are issued, may
be successfully challenged, invalidated, circumvented or
rendered unenforceable so that our patent rights might not
create an effective competitive barrier. Moreover, the laws of
some foreign countries may not protect our proprietary rights to
the same extent as do the laws of the U.S. Any patents
issued to us or our strategic partners may not provide a legal
basis for establishing an exclusive market for our products or
provide us with any competitive advantages. Moreover, the
patents held by others may adversely affect our ability to do
business or to continue to use our technologies freely. In view
of these factors, our intellectual property positions bear some
degree of uncertainty.
Employees
As of June 30, 2010, we had 340 permanent full-time
employees, including 220 scientists and 52 clinical and
regulatory employees, of whom 112 have PhDs or MDs. None of our
employees are covered by collective bargaining agreements and we
consider our employee relations to be good.
Our Corporate
Information
Our principal executive offices are located at 3200 Walnut
Street, Boulder, Colorado 80301 and our phone number is
(303) 381-6600.
We were founded in 1998 and became a public company in November
2000. Our stock is listed on the NASDAQ Global Market under the
symbol ARRY.
Available
Information
Electronic copies of our Annual Reports on
Form 10-K,
Quarterly Reports on
Form 10-Q,
Current Reports on
Form 8-K
and other documents we file with or furnish to the SEC are
available free of charge (i) on the Investor
Relations section of our website at
http://www.arraybiopharma.com
or (ii) by sending a written request to Investor Relations
at our corporate headquarters. Information on our website is not
incorporated by reference into this report.
Additionally, the documents we file or furnish with the SEC are
available free of charge at the SECs Public Reference Room
at 100 F Street, NE, Washington D.C. 20549. Other
information on the operation of the Public Reference Room is
available by calling the SEC at (800) SEC-0330.
In addition to the other factors discussed elsewhere in this
report and in other reports we file with the SEC, the following
factors could cause our actual results or events to differ
materially from those contained in any forward-looking
statements made by us or on our behalf. In addition, other risks
and uncertainties not presently known to us or that we currently
deem immaterial may impair our business operations. If any of
the following risks or such other risks occur, it could
adversely affect our business, operating results and financial
condition, as well as cause the value of our common stock to
decline.
Risks Related to
Our Business
We expect to
continue to incur significant research and development expenses,
which may make it difficult for us to attain
profitability.
We have expended substantial funds to discover and develop our
drug candidates and additional substantial funds will be
required for further development, including preclinical testing
and clinical trials of any product candidates we develop
internally. Additional funds will be required to manufacture and
market any products we own or retain rights to commercialize
that are approved for commercial sale. Because the successful
development of our products is uncertain, we are unable to
precisely estimate the actual funds we will require to develop
and potentially commercialize them. We currently believe that
our existing cash resources, will enable us to continue to fund
our current operations for at least the next
23
12 months. However, our ability to obtain additional
funding when needed, changes to our operating plans, our
existing and anticipated working capital needs, the acceleration
or modification of our planned research and development
activities or expenditures, increased expenses or other events
may affect our need for additional capital in the future.
Additional funding may include milestone payments under existing
collaborations, up-front fees or research funding through new
out-licensing transactions, sales of debt or equity securities
and/or
securing additional credit facilities.
If we are unable to generate enough revenue or secure additional
sources of funding
and/or
reduce our current rate of research and development spending or
further reduce our expenses, we may be unable to continue to
fund our current operations. Even if we are able to secure the
additional sources of funding, it may not be on terms that are
favorable or satisfactory to us and may result in significant
dilution to our stockholders. These events may result in an
inability to maintain a level of liquidity necessary to continue
operating our business and the loss of all or part of the
investment of our stockholders in our common stock. In addition,
if we are unable to maintain certain levels of cash and
marketable securities, our obligations under our credit
facilities with Deerfield Private Design Fund, L.P. and
Deerfield Private Design International Fund, L.P. (who we refer
to collectively as Deerfield) and our loan agreement with
Comerica Bank may be accelerated.
We have a
history of operating losses and may not achieve or sustain
profitability.
We are at an early stage of executing our business plan and we
have a limited history of developing and out-licensing our
proprietary drug candidates and offering our drug discovery
capabilities. We have incurred significant operating and net
losses and negative cash flows from operations since our
inception. As of June 30, 2010, we had an accumulated
deficit of $490.8 million. We had net losses of
$77.6 million, $127.8 million and $96.3 million
for the fiscal years ended June 30, 2010, 2009 and 2008,
respectively. We expect to incur additional losses and negative
cash flows in the future and these losses may continue or
increase due in part to anticipated increases in expenses for
research and development for proprietary drug discovery,
particularly clinical development, expansion of our clinical and
scientific capabilities, development of commercial capabilities
and acquisitions of complementary technologies. Moreover, if we
do achieve profitability, the level of any profitability cannot
be predicted and may vary significantly.
We may not be
successful in entering into additional out-license agreements on
favorable terms, which may adversely affect our liquidity or
require us to change our spending priorities on our proprietary
programs.
We are committing significant resources to create our own
proprietary drug candidates and to build a commercial-stage
biopharmaceutical company. Although spending in fiscal 2010 of
$72.5 million in research and development for proprietary
drug discovery expenses was down from fiscal years 2009 and
2008, during which we spent $89.6 million and
$90.3 million, respectively, we invested and expect to
continue to invest significantly in proprietary research. Our
proprietary drug discovery programs are in their early stage of
development and are unproven. Our ability to continue to fund
our planned investment in our proprietary drug programs and in
building our commercial capabilities depends to a large degree
on up-front fees, milestone payments and other revenue we
receive as a result of our partnered programs. To date, we have
entered into seven out-licensing agreements for the development
and commercialization of our drug candidate and we plan to
continue to pursue opportunities in calendar 2011 to partner
select clinical candidates to obtain additional capital. We may
not be successful, however, in entering into additional
out-licensing agreements with favorable terms as a result of
factors, many of which are outside of our control and which
include:
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Our ability to create valuable proprietary drug candidates
targeting large market opportunities;
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Research and spending priorities of potential licensing partners;
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Willingness of and the resources available to, pharmaceutical
and biotechnology companies to in-license drug candidates to
fill their clinical pipelines; and
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Our ability or inability to generate
proof-of-concept
data and to agree with a potential partner on the value of
proprietary drug candidates we are seeking to out-license, or on
the related terms.
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If we are unable to enter into out-licensing agreements and
realize milestone, license
and/or
upfront fees when anticipated, it may adversely affect our
liquidity and we may be forced to curtail or delay development
of all or some of our proprietary programs, which in turn may
harm our business and the value of our stock.
We may not
receive royalty or milestone revenue under our collaboration
agreements for several years, or at all.
Much of our current revenue is non-recurring in nature and
unpredictable as to timing and amount. Several of our
out-license and collaboration agreements provide for royalties
on product sales. However, because none of our drug candidates
have been approved for commercial sale, our drug candidates are
at early stages of development and drug development entails a
high risk of failure, we do not expect to receive any royalty
revenue for several years, if at all. For the same reasons, we
may never realize much of the milestone revenue provided for in
our out-license and collaboration agreements. Similarly, drugs
we select to commercialize ourselves or partner for later-stage
co-development and commercialization may not generate revenue
for several years, or at all.
Our drug
candidates are at early stages of development and we may not
successfully develop a drug candidate that becomes a
commercially viable drug.
The drug discovery and development process is highly uncertain
and we have not developed and may never develop, a drug
candidate that ultimately leads to a commercially viable drug.
All of our most advanced drug candidates are in the early stages
of development, in either Phase 1 or Phase 2 and we do not have
any drugs approved for commercial sale. Before a drug product is
approved by the FDA, for commercial marketing, it is tested for
safety and effectiveness in clinical trials that can take up to
six years or longer. Promising results in preclinical
development or clinical trials may not be predictive of results
obtained in later clinical trials. A number of pharmaceutical
companies have experienced significant setbacks in advanced
clinical trials, even after obtaining promising results in
earlier preclinical and clinical trials. At any time, the FDA
may place a clinical trial on clinical hold, or temporarily or
permanently stop the trial, for a variety of reasons,
principally for safety concerns. We or our collaborators may
experience numerous unforeseen events during, or as a result of,
the clinical development process that could delay or prevent our
drug candidates from being approved, including:
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Failure to achieve clinical trial results that indicate a
candidate is effective in treating a specified condition or
illness in humans;
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Presence of harmful side effects;
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Determination by the FDA that the submitted data do not satisfy
the criteria for approval;
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Lack of commercial viability of the drug;
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Failure to acquire, on reasonable terms, intellectual property
rights necessary for commercialization; and
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Existence of therapeutics that are more effective.
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We or our
collaborators may choose not to commercialize a drug candidate
at any time during development, which would reduce or eliminate
our potential return on investment for that drug.
At any time, we or our collaborators may decide to discontinue
the development of a drug candidate or not to commercialize a
candidate. If we terminate a program in which we have invested
significant resources, we will not receive any return on our
investment and we will have missed the opportunity to have
allocated those resources to potentially more productive uses.
Even if one of our drug candidates receives regulatory approval
for marketing, physicians or consumers may not find that its
effectiveness, ease of use, side effect profile, cost or other
factors make it effective in treating disease or more beneficial
than or preferable to other drugs on the market. Additionally,
third-party payors, such as government health plans and health
insurance plans or maintenance organizations, may choose not to
include our drugs on their formulary lists for reimbursement. As
a result, our drugs may not be used or may be used only for
restricted applications.
25
Our capital
requirements could significantly increase if we choose to
develop more of our proprietary programs
internally.
We believe that the maximum value for certain proprietary drug
candidates is best achieved by retaining the rights to develop
and commercialize the candidate and not seeking a partner or by
waiting until later in the development process to seek a partner
to co-develop and commercialize or co-promote a product. It is
difficult to predict which of our proprietary programs are
likely to yield higher returns if we elect to develop them
further before seeking a partner or to not seek a partner at all
as a result of many factors, including the competitive position
of the product, our capital resources, the perceived value among
potential partners of the product and other factors outside of
our control. Therefore, we may undertake and fund, solely at our
expense, further development, clinical trials, manufacturing and
marketing activities for a greater number of proprietary
candidates than we planned. In addition, we may choose not to
out-license certain of our proprietary programs if we are unable
to do so on terms that are favorable to us. As a result, our
requirements for capital could increase significantly. We may be
unable to raise additional required capital on favorable terms,
or at all, however, or we may be required to substantially
reduce our development efforts, which would delay, limit or
prevent our ability to commercialize and realize revenue from
our drug candidates.
We may not
out-license our proprietary programs at the most appropriate
time to maximize the total value or return of these programs to
us.
A critical aspect of our business strategy is to out-license
drug candidates for later-stage development, co-development
and/or
commercialization to obtain the highest possible value while
also evaluating earlier out-licensing opportunities to maximize
our risk-adjusted return on our investment in proprietary
research. Because the costs and risk of failure of bringing a
drug to market are high, the value of out-licensing a drug
candidate generally increases as it successfully progresses
through clinical trials. We may choose or be forced to
out-license a drug candidate or program on terms that require us
to relinquish commercial or market rights or at a point in the
research and development process that does not provide as great
a value or return than what might have been obtained if we had
further developed the candidate or program internally. Likewise,
we may decline, or be unable to obtain favorable, early
out-licensing opportunities in programs that do not result in a
commercially viable drug, which could leave the resulting
program with little or no value even though significant
resources were invested in its development. Our inability to
successfully out-license our programs on favorable terms could
materially adversely affect our results of operations and cash
flows.
Because we
rely on a small number of collaborators for a significant
portion of our revenue, if one or more of our major
collaborators terminates or reduces the scope of their agreement
with us, our revenue may significantly decrease.
A relatively small number of collaborators account for a
significant portion of our revenue. Genentech, Amgen and Celgene
accounted for 38.6%, 28.2% and 26.1%, respectively, of our total
revenue for fiscal 2010. We expect that revenue from Genentech,
Amgen and Celgene will continue to account for a large portion
of our revenue in future periods. Additionally, Novartis will
begin accounting for a large portion of our revenue in future
periods. In general, our collaborators may terminate their
contracts with us upon 90 to 180 days notice for any
reason. In addition, some of our major collaborators can
determine the scope of research or development activities and
whether to continue development of programs we out license under
these agreements. As a result, if any one of our major
collaborators cancels, declines to renew or reduces the scope of
its contract with us, we may not receive milestone, royalties or
other payments we anticipate under these agreements and our
revenue may significantly decrease.
If we need,
but are unable to obtain, additional funding to support our
operations, we could be unable to successfully execute our
operating plan or be forced to reduce our
operations.
We have historically funded our operations through revenue from
our collaborations, the issuance of equity securities and debt
financing. Operating activities provided $17.6 million in
cash flows in fiscal 2010.
26
However, excluding the $100 million in up-front fees
received from Amgen and Novartis under agreements we entered
into with them in fiscal 2010, we used $82.4 million in our
operating activities in fiscal 2010, while we used
$92.9 million and $45.7 million in our operating
activities in fiscal 2009 and 2008, respectively. In addition, a
portion of our cash flow is dedicated to the payment of
principal and interest to and possibly to fund increased
compensating and restricted cash balances with, Comerica Bank on
our existing senior secured credit facility and to the payment
of principal and interest on our credit facility with Deerfield.
Our debt obligations could therefore render us more vulnerable
to competitive pressures and economic downturns and imposes some
restrictions on our operations.
Although we anticipate that we will use more cash in our
operating activities in future periods, we believe that our
existing cash, cash equivalents and marketable securities, will
be sufficient to support our current operating plan for at least
the next 12 months. However, our current operating plan and
assumptions could change as a result of many factors and we
could require additional funding sooner than anticipated. In
addition, we are currently restricted in our ability to
liquidate the auction rate securities, or ARS, we hold. Our ARS
have an aggregate cost of $26.3 million and fair value as
of June 30, 2010 of $16.6 million. If we are unable to
meet our capital requirements from cash generated by our future
operating activities and are unable to obtain additional funds
when needed, we may be required to curtail operations
significantly or to obtain funds through other arrangements on
unattractive terms, which could prevent us from successfully
executing our operating plan. If we raise additional capital
through the sale of equity or debt securities, the issuance of
those securities would result in dilution to our stockholders.
Recent
disruptions in the financial markets could affect our ability to
obtain financing for development of our proprietary drug
programs and other purposes on reasonable terms and have other
adverse effects on us and the market price of our common
stock.
The U.S. stock and credit markets have been experiencing
significant price volatility, dislocations and liquidity
disruptions, which have caused market prices of many stocks to
fluctuate substantially and the spreads on prospective debt
financings to widen considerably. These circumstances have
materially impacted liquidity in the financial markets, making
terms for certain financings less attractive and in some cases
have resulted in the unavailability of financing. Continued
uncertainty in the stock and credit markets may negatively
impact our ability to access additional financing for our
research and development activities and other purposes on
reasonable terms, which may cause us to curtail or delay our
discovery and development efforts and harm our business. In
January 2009, we announced plans designed to conserve our
existing capital and to allow us to obtain additional capital
outside the financial markets by accelerating partnering
opportunities and focusing resources on advancing the
development of our most advanced clinical programs. As part of
these efforts we also reduced our workforce by approximately
40 employees. A prolonged downturn in the financial
markets, however, may cause us to seek alternative sources of
potentially less attractive financing and may require us to make
further adjustments to our business plan. These events also may
make it more difficult or costly for us to raise capital through
the issuance of equity or debt. The disruptions in the financial
markets may have a material adverse effect on the market value
of our common stock and other adverse effects on us and our
business.
In addition, if we are unable to obtain financing when needed,
or to fund our operations from funds received through
collaboration agreements, our level of cash, cash equivalents
and marketable securities may fall below thresholds specified in
our debt agreements, requiring us to pay interest at a higher
interest rate. Such higher interest rates could also result in a
significant increase in the estimated fair value of the embedded
derivative liability, which would adversely impact our reported
results of operations.
Our
investments in ARS are not currently liquid and our inability to
access these funds may adversely affect our liquidity, capital
resources and results of operations. If the issuers of our ARS
are unable to successfully close future auctions and credit
ratings continue to deteriorate, we may be required to further
adjust the carrying value of our investments through additional
impairment charges.
A portion of our investment portfolio is invested in ARS. During
the fiscal year ended June 30, 2008, auctions for all of
the ARS were unsuccessful. During fiscal 2009 and 2010, the
auctions continued to be
27
unsuccessful. As a result, these securities are no longer
readily convertible to cash. In the event we need to access
these funds, we will not be able to sell these securities for
cash until a future auction on these investments is successful,
the original issuers retire these securities or a secondary
market develops for these securities. We can make no assurances
that any of these events will occur prior to the time that we
may need to access these investments or, if they do, what value
we will realize on our ARS. In addition, as currently there is
not an active market for these securities, we estimated the fair
value of these securities using a discounted cash flow model
based on assumptions that management believes to be reasonable.
Based on the continual decline in fair value and the magnitude
of the discount of fair value from par value for these
securities, we have recorded
other-than-temporary
impairment charges as described in Note 3
Marketable Securities to the audited financial statements
included in this annual report on
Form 10-K.
If the market makers in these securities are unable to
successfully conduct future auctions or the issuers credit
ratings deteriorate, or if our estimates of fair value later
prove to be inaccurate, we may be required to further adjust the
carrying value of some or all of these investments through an
impairment charge and we may be required to sell them. In
addition, if we are required to liquidate these ARS prior to the
time auctions for them are successful or the issuer redeems
them, we may be required to sell them in a distressed sale in a
secondary market most likely for a value that may be lower than
their current fair value.
If our drug
discovery and development programs do not progress as
anticipated, our revenue and stock price could be negatively
impacted.
We estimate the timing of a variety of preclinical, clinical,
regulatory and other milestones for planning purposes, including
when a drug candidate is expected to enter clinical trials, when
a clinical trial will be completed, when and if additional
clinical trials will commence, or when an application for
regulatory approval will be filed. Some of our estimates are
included in this report. We base our estimates on facts that are
currently known to us and on a variety of assumptions that may
prove not to be correct for a variety of reasons, many of which
are beyond our control. For example, delays in the development
of drugs by Array or our collaborators may be caused by
regulatory or patent issues, negative or inconclusive interim or
final results of on-going clinical trials, scheduling conflicts
with participating clinics and the availability of patients who
meet the criteria for and the rate of patient enrollment in,
clinical trials and the development priorities of our
collaborators. In addition, in preparing these estimates we rely
on the timeliness and accuracy of information and estimates
reported or provided to us by our collaborators concerning the
timing, progress and results of clinical trials or other
development activities they conduct under our collaborations
with them. If we or our collaborators do not achieve milestones
when anticipated, we may not achieve our planned revenue and our
stock price could decline. In addition, any delays in obtaining
approvals to market and sell drugs may result in the loss of
competitive advantages in being on the market sooner than, or in
advance of, competing products, which may reduce the value of
these products and the potential revenue we receive from the
eventual sale of these products, either directly or under
agreements with our partners.
We may not
realize anticipated benefits from future acquisitions,
investments and strategic partnerships.
As part of our business strategy, we may acquire, invest in or
form strategic partnerships with businesses with complementary
products, services
and/or
technologies. Acquisitions, investments and strategic
partnerships involve numerous risks, including, but not limited
to:
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Difficulties and increased costs in connection with integration
of the personnel, operations, technologies and products of
acquired companies;
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Diversion of managements attention from other operational
matters;
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Potential loss of key employees;
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Potential loss of key collaborators;
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Lack of synergy, or the inability to realize expected synergies,
resulting from the acquisition or partnership; and
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Impairment of acquired intangible assets as a result of
technological advancements or
worse-than-expected
clinical results or performance of the acquired company or the
partnered assets.
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Acquisitions, investments and strategic partnerships are
inherently risky and involve significant investments in time and
resources to effectively manage these risks and integrate an
acquired business or create a successful drug with a strategic
partner. Even with investments in time and resources, an
acquisition or strategic partnership may not produce the
revenues, earnings or business synergies we anticipate. An
acquisition or strategic partnership that fails to meet our
expectations could materially and adversely affect our business,
financial condition and results of operations.
We may not be
able to recruit and retain the experienced scientists and
management we need to compete in the drug research and
development industry.
We have 340 employees as of June 30, 2010 and our
future success depends upon our ability to attract, retain and
motivate highly skilled scientists and management. Our ability
to achieve our business strategies, including progressing drug
candidates through later stage development or commercialization,
attracting new collaborators and retaining, renewing and
expanding existing collaborations, depends on our ability to
hire and retain high caliber scientists and other qualified
experts, particularly in clinical development and
commercialization. We compete with pharmaceutical and
biotechnology companies, contract research companies and
academic and research institutions to recruit personnel and face
significant competition for qualified personnel, particularly
clinical development personnel. We may incur greater costs than
anticipated, or may not be successful, in attracting new
scientists or management or in retaining or motivating our
existing personnel.
Our future success also depends on the personal efforts and
abilities of the principal members of our senior management and
scientific staff to provide strategic direction, manage our
operations and maintain a cohesive and stable environment. In
particular, we rely on the services of Robert E. Conway, our
Chief Executive Officer; Dr. Kevin Koch, our President and
Chief Scientific Officer; Dr. David L. Snitman, our Chief
Operating Officer and Vice President, Business Development; R.
Michael Carruthers, our Chief Financial Officer; and John R.
Moore, our Vice President and General Counsel. We have
employment agreements with all of the above personnel that are
terminable upon 30 days prior notice.
Risks Related to
Our Clinical Development Activities and Obtaining Regulatory
Approval for Our Programs
We have
limited clinical development and commercialization
experience.
One of our business strategies is to develop select drug
candidates through later stage clinical trials before
out-licensing them to a pharmaceutical or biotechnology partner
for further clinical development and commercialization and to
commercialize select drug candidates ourselves. We have not yet
conducted a Phase 3 or later stage clinical trial ourselves, nor
have we commercialized a drug. We have limited experience
conducting clinical trials and obtaining regulatory approvals
and we may not be successful in some or all of these activities.
We have no experience as a company in the sales, marketing and
distribution of pharmaceutical products and do not currently
have a sales and marketing organization. We expect to expend
significant amounts to recruit and retain high quality personnel
with clinical development experience. Developing
commercialization capabilities would be expensive and
time-consuming and could delay any product launch and we may
never be able to develop this capacity. To the extent we are
unable to or determine not to develop these resources
internally, we may be forced to rely on third-party clinical
investigators, or clinical research or marketing organizations,
which could subject us to costs and to delays that are outside
our control. If we are unable to establish adequate capabilities
independently or with others, we may be unable to generate
product revenues for certain candidates.
29
If we fail to
adequately conduct clinical trials, we may not obtain regulatory
approvals necessary for the sale of drugs when anticipated, or
at all, which would reduce or eliminate our potential return on
that program.
Before any of our drug candidates can be sold commercially, we
or our collaborators must conduct clinical trials that
demonstrate that the drug is safe and effective for use in
humans for the indications sought. The results of these clinical
trials are used as the basis to obtain regulatory approval from
government authorities such as the FDA. Conducting clinical
trials is a complex, time-consuming and expensive process that
requires an appropriate number of trial sites and patients to
support the product label claims being sought. The length of
time, number of trial sites and number of patients required for
clinical trials vary substantially according to their type,
complexity, novelty and the drug candidates intended use
and therefore, we may spend as much as several years completing
certain trials. Further, the time within which we can complete
our clinical trials depends in large part on the ability to
enroll eligible patients that meet the enrollment criteria and
who are in proximity to the trial sites. We and our
collaborators also face competition with other clinical trials
for eligible patients. As a consequence, there may be limited
availability of eligible patients, which can result in increased
development costs, delays in regulatory approvals and associated
delays in drug candidates reaching the market. Patients may also
suffer adverse medical events or side effects in the course of
our clinical trials that may delay or prohibit regulatory
approval of our drug candidates. Even if we or our collaborators
successfully conduct clinical trials, we or our collaborators
may not obtain favorable clinical trial results and may not be
able to obtain regulatory approval on this basis.
In addition, to execute our clinical development plans, we need
to accelerate the growth of our clinical development
organization and increase dependence on third-party clinical
trial service providers. We anticipate that we will be required
to contract with clinical sites and enroll patients in a number
of new geographic locations where our experience conducting
clinical trials is more limited, including some countries in
Eastern Europe, South America and in India. We are conducting
and plan to conduct, further clinical trial activities in
territories outside the U.S. through third-party clinical
trial service providers. Some of these foreign jurisdictions may
impose requirements on us or our third-party clinical trial
service providers or contract manufacturers that are more
stringent than those imposed by the FDA, which may delay the
development and approval of our drug candidates.
If we or our collaborators fail to adequately manage the
increasing number, size and complexity of clinical trials, the
clinical trials and corresponding regulatory approvals may be
delayed or we or our collaborators may fail to gain approval for
our drug candidates altogether. If we or our collaborators are
unable to market and sell our drug candidates or are unable to
obtain approvals in the timeframe needed to execute our product
strategies, our business and results of operations would be
materially adversely affected.
Delays in the
commencement or completion of clinical testing could result in
increased costs to us and delay or limit our ability to generate
revenues.
Delays in the commencement or completion of clinical testing of
our products could significantly affect our product development
costs and our ability to generate revenue from these products.
We do not know whether planned clinical trials will begin on
time or be completed on schedule, if at all. The commencement
and completion of clinical trials can be delayed for a number of
reasons, including delays related to our ability to do the
following:
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Obtain regulatory approval to commence a clinical trial;
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Reach agreement on acceptable terms with prospective clinical
research organizations, or CROs, and trial sites, the terms of
which can be subject to extensive negotiation and may vary
significantly among different CROs and trial sites;
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Select CROs, trial sites and, where necessary, contract
manufacturers that do not encounter any regulatory compliance
problems;
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Manufacture sufficient quantities of a product candidate for use
in clinical trials;
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Obtain institutional review board, or IRB, approval to conduct a
clinical trial at a prospective site;
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Recruit and enroll patients to participate in clinical trials,
which can be impacted by many factors outside our control,
including competition from other clinical trial programs for the
same or similar indications; and
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Retain patients who have initiated a clinical trial but may be
prone to withdraw due to side effects from the therapy, lack of
efficacy or personal issues.
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Clinical trials may also be delayed as a result of ambiguous or
negative interim results. In addition, a clinical trial may be
suspended or terminated by us, the FDA, the IRB overseeing the
clinical trial at issue, any of our clinical trial sites with
respect to that site, or other regulatory authorities due to a
number of factors, including:
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Failure to conduct the clinical trial in accordance with
regulatory requirements (including Good Clinical Practices, or
GCP) or our clinical protocols;
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Inspection of the clinical trial operations, trial sites or
manufacturing facility by the FDA or other regulatory
authorities resulting in findings of non-compliance and the
imposition of a clinical hold;
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Unforeseen safety issues or results that do not demonstrate
efficacy; and
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Lack of adequate funding to continue the clinical trial.
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Additionally, changes in regulatory requirements and guidance
may occur and we may need to amend clinical trial protocols to
reflect these changes. Amendments may require us to resubmit our
clinical trial protocols to IRBs for reexamination, which may
impact the costs, timing or successful completion of a clinical
trial. If we experience delays in completion of, or if we
terminate, any of our clinical trials, the commercial prospects
for our product candidates may be harmed and our ability to
generate product revenues will be delayed
and/or
reduced. In addition, many of the factors that cause, or lead
to, a delay in the commencement or completion of clinical trials
may also ultimately lead to the denial of regulatory approval of
a product candidate.
Drug
candidates that we develop with our collaborators or on our own
may not receive regulatory approval.
The development and commercialization of drug candidates for our
collaborators and our own internal drug discovery efforts are
subject to regulation. Pharmaceutical products require lengthy
and costly testing in animals and humans and regulatory approval
by governmental agencies prior to commercialization. It takes
several years to complete testing and failure can occur at any
stage of the testing. Results attained in preclinical testing
and early clinical trials for any of our drug candidates may not
be indicative of results that are obtained in later studies and
significant setbacks in advanced clinical trials may arise, even
after promising results in earlier studies. Clinical trials may
not demonstrate sufficient safety and efficacy to obtain the
requisite regulatory approvals or result in marketable products.
Furthermore, data obtained from preclinical and clinical studies
are susceptible to varying interpretations that may delay, limit
or prevent regulatory approval. In addition, the administration
of any drug candidate we develop may produce undesirable side
effects or safety issues that could result in the interruption,
delay or suspension of clinical trials, or the failure to obtain
FDA or other regulatory approval for any or all targeted
indications. Based on results at any stage of testing, we or our
collaborators may decide to repeat or redesign a trial or
discontinue development of a drug candidate.
Approval of a drug candidate as safe and effective for use in
humans is never certain and regulatory agencies may delay or
deny approval of drug candidates for commercialization. These
agencies may also delay or deny approval based on additional
government regulation or administrative action, on changes in
regulatory policy during the period of clinical trials in humans
and regulatory review or on the availability of alternative
treatments. Similar delays and denials may be encountered in
foreign countries. None of our collaborators have obtained
regulatory approval to manufacture and sell drug candidates
owned by us or identified or developed under an agreement with
us. If we or our collaborators cannot obtain this approval, we
will not realize milestone or royalty payments based on
commercialization goals for these drug candidates.
31
In light of widely publicized events concerning the safety of
certain drug products, such as
Avandia®
(rosiglitazone), regulatory authorities, members of Congress,
the Government Accountability Office, medical professionals and
the general public have raised concerns about potential
postmarketing drug safety issues. These events have resulted in
the withdrawal of drug products, revisions to drug labeling that
further limit use of the drug products and establishment of risk
evaluations and mitigation strategies, or REMS, that may, for
instance, restrict distribution of drug products and impose
burdensome implementation requirements on the company. Although
drug safety concerns have occurred over time, the increased
attention to this issue may result in a more cautious approach
by the FDA. As a result, data from clinical trials may receive
greater scrutiny with respect to safety. Safety concerns may
result in the FDA or other regulatory authorities terminating
clinical trials before completion or requiring longer or
additional clinical trials that may result in substantial
additional expense and a delay or failure in obtaining approval
or approval for a more limited indication than originally sought.
Even if our
drug candidates obtain regulatory approval, we and our
collaborators will be subject to ongoing government
regulation.
Even if regulatory authorities approve any of our drug
candidates, the manufacture, labeling, storage, recordkeeping,
distribution, marketing and sale of these drugs will be subject
to strict and ongoing regulation. Compliance with this
regulation consumes substantial financial and management
resources and may expose us and our collaborators to the
potential for other adverse circumstances. For example, approval
for a drug may be conditioned on costly post-marketing
follow-up
studies. Based on these studies, if a regulatory authority does
not believe that the drug demonstrates a clinical benefit to
patients, it could limit the indications for which a drug may be
sold or revoke the drugs marketing approval. In addition,
identification of certain side effects after a drug is on the
market may result in the subsequent withdrawal of approval,
reformulation of a drug, additional preclinical and clinical
trials, changes in labeling or distribution, or we may be
required by FDA to develop and implement a REMS to ensure the
safe use of our products. Any of these events could delay or
prevent us from generating revenue from the commercialization of
these drugs and cause us to incur significant additional costs.
Given the number of high profile safety events with certain drug
products, the FDA may require, as a condition of approval, a
REMS that includes costly risk management programs with
components including safety surveillance, restricted
distribution and use, patient education, enhanced labeling,
special packaging or labeling, expedited reporting of certain
adverse events, pre-approval of promotional materials and
restrictions on
direct-to-consumer
advertising. Furthermore, heightened Congressional scrutiny on
the adequacy of the FDAs drug approval process and the
agencys efforts to assure the safety of marketed drugs has
resulted in the proposal of new legislation addressing drug
safety issues. If enacted, any new legislation could result in
delays or increased costs for manufacturers and drug sponsors
during the period of product development, clinical trials and
regulatory review and approval, as well as increased costs to
assure compliance with any new post-approval regulatory
requirements.
In addition, the marketing of these drugs by us or our
collaborators will be regulated by federal and state laws
pertaining to health care fraud and abuse, such as
the federal anti-kickback law prohibiting bribes, kickbacks or
other remuneration for the order, purchase or recommendation of
items or services reimbursed by federal health care programs.
Many states have similar laws applicable to items or services
reimbursed by commercial insurers. Violations of fraud and abuse
laws can result in fines
and/or
imprisonment.
If our drug
candidates do not gain market acceptance, we may be unable to
generate significant revenue.
Even if our drug candidates are approved for sale, they may not
be successful in the marketplace. Market acceptance of any of
our drug candidates will depend on a number of factors including:
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Demonstration of clinical effectiveness and safety;
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Potential advantages of our drug candidates over alternative
treatments;
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32
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Ability to offer our drug candidates for sale at competitive
prices;
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Availability of adequate third-party reimbursement; and
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Effectiveness of marketing and distribution methods for the
products.
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If our drug candidates do not gain market acceptance among
physicians, patients and others in the medical community, our
ability to generate meaningful revenues from our drug candidates
would be limited.
Our
collaborators have substantial control and discretion over the
timing and the continued development and marketing of drug
candidates we create for them.
Our collaborators have significant discretion in determining the
efforts and amount of resources that they dedicate to our
collaborations. Our collaborators may decide not to proceed with
clinical development or commercialization of a particular drug
candidate for any number of reasons that are beyond our control,
even under circumstances where we might have continued such a
program. In addition, our ability to generate milestone payments
and royalties from our collaborators depends on our
collaborators abilities to establish the safety and
efficacy of our drug candidates, obtain regulatory approvals and
achieve market acceptance of products developed from our drug
candidates. We also depend on our collaborators to manufacture
clinical scale quantities of some of our drug candidates and
would depend on them in the future for commercial scale
manufacture, distribution and direct sales. Our collaborators
may not be successful in manufacturing our drug candidates on a
commercial scale or in successfully commercializing them.
We face additional risks in connection with our collaborations,
including the following:
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Collaborators may develop and commercialize, either alone or
with others, products and services that are similar to, or
competitive with, the products that are the subject of the
collaboration with us;
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Collaborators may under-fund or not commit sufficient resources
to the testing, marketing, distribution or other development of
our drug candidates;
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Collaborators may not properly maintain or defend our
intellectual property rights or they may utilize our proprietary
information in such a way as to invite litigation that could
jeopardize or potentially invalidate our intellectual property
or proprietary information or expose us to potential liability;
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Collaborators may encounter conflicts of interest, changes in
business strategy or other business issues which could adversely
affect their willingness or ability to fulfill their obligations
to us (for example, pharmaceutical and biotechnology companies
historically have re-evaluated their priorities following
mergers and consolidations, which have been common in recent
years in these industries); and
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Disputes may arise between us and our collaborators delaying or
terminating the research, development or commercialization of
our drug candidates, resulting in significant litigation or
arbitration that could be time-consuming and expensive, or
causing collaborators to act in their own self-interest and not
in the interest of our stockholders.
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Our cGMP and
Pharmacology facilities and practices may fail to comply with
government regulations.
All facilities and manufacturing processes used in the
production of drug products, including APIs for clinical use in
the U.S., must be operated in conformity with cGMP as
established by the FDA. Similar requirements in other countries
exist for manufacture of drug products for clinical use. These
requirements include, among other things, quality control,
quality assurance and the maintenance of records and
documentation. If we or any contract manufacturers we use fail
to comply with these requirements, we may not be able to
continue the production of our products and we could be subject
to civil and criminal fines and penalties, suspension of
production, suspension or delay in product approval, product
seizure or recall, or withdrawal of product approval. We operate
a clinical-scale manufacturing facility that we believe conforms
to cGMP requirements. This facility and our cGMP practices are
subject to periodic regulatory inspections to ensure compliance
with cGMP requirements. In addition, we could be required to
comply with specific
33
requirements or specifications of other countries
and/or of
our collaborators, which may exceed applicable regulatory
requirements. Failure on our part to comply with applicable
regulations and specific requirements or specifications of other
countries
and/or our
collaborators could result in the termination of ongoing
research, disqualification of data for submission to regulatory
authorities, delays or denials of new product approvals, warning
letters, fines, consent decrees restricting or suspending
manufacturing operations, injunctions, civil penalties, recall
or seizure of products and criminal prosecution. Material
violations of cGMP requirements could result in regulatory
sanctions and, in severe cases, could result in a mandated
closing of our cGMP facility.
In connection with our application for commercial approvals and,
if any drug candidate is approved by the FDA or other regulatory
agencies for commercial sale, a significant
scale-up in
manufacturing may require additional validation studies. If we
are unable to successfully increase the manufacturing capacity
for a drug candidate, the regulatory approval or commercial
launch of that drug candidate may be delayed, or there may be a
shortage of supply, which could limit our ability to
commercialize the drug.
In addition, our pharmacology facility may be subject to FDA
Good Laboratory Practices, or GLP, and the USDA regulations for
certain animal species. Failure on our part to comply with
applicable regulations and specific requirements of our
collaborators could result in the termination of ongoing
pharmacology research. Material violations of GLP and USDA
requirements could result in additional regulatory sanctions
and, in severe cases, could result in a mandated closing of our
pharmacology facility for certain species.
Our
development, testing and manufacture of drug candidates may
expose us to product liability and other lawsuits.
We develop, test and manufacture drug candidates that are
generally intended for use in humans. Our drug discovery and
development activities, including clinical trials we or our
collaborators conduct, that result in the future manufacture and
sale of drugs by us or our collaborators expose us to the risk
of liability for personal injury or death to persons using these
drug candidates. We may be required to pay substantial damages
or incur legal costs in connection with defending any of these
product liability claims, or we may not receive revenue from
expected royalty or milestone payments if the commercialization
of a drug is limited or ceases as a result of such claims. We
have product liability insurance that contains customary
exclusions and provides coverage up to $10 million per
occurrence and in the aggregate, which we believe is customary
in our industry for our current operations. However, our product
liability insurance does not cover every type of product
liability claim that we may face or loss we may incur and may
not adequately compensate us for the entire amount of covered
claims or losses or for the harm to our business reputation. We
may be unable to acquire or maintain additional or maintain our
current insurance policies at acceptable costs or at all.
If our use of
chemical and hazardous materials violates applicable laws or
regulations or causes personal injury we may be liable for
damages.
Our drug discovery activities, including the analysis and
synthesis of chemical compounds, involve the controlled use of
chemicals, including flammable, combustible, toxic and
radioactive materials that are potentially hazardous. Our use,
storage, handling and disposal of these materials is subject to
federal, state and local laws and regulations, including the
Resource Conservation and Recovery Act, the Occupational Safety
and Health Act and local fire codes and regulations promulgated
by the Department of Transportation, the Drug Enforcement
Agency, the Department of Energy, the Colorado Department of
Public Health and Environment and the Colorado Department of
Human Services, Alcohol and Drug Abuse Division. We may incur
significant costs to comply with these laws and regulations in
the future. In addition, we cannot completely eliminate the risk
of accidental contamination or injury from these materials,
which could result in material unanticipated expenses, such as
substantial fines or penalties, remediation costs or damages, or
the loss of a permit or other authorization to operate or engage
in our business. Those expenses could exceed our net worth and
limit our ability to raise additional capital.
34
Our operations
could be interrupted by damage to our specialized laboratory
facilities.
Our operations depend on the continued use of our highly
specialized laboratories and equipment in Boulder and Longmont,
Colorado. Catastrophic events, including fires or explosions,
could damage our laboratories, equipment, scientific data, work
in progress or inventories of chemical compounds and may
materially interrupt our business. We employ safety precautions
in our laboratory activities in order to reduce the likelihood
of the occurrence of these catastrophic events; however, we
cannot eliminate the chance that such an event will occur. The
availability of laboratory space in these locations is limited
and rebuilding our facilities could be time consuming and result
in substantial delays in fulfilling our agreements with our
collaborators. We maintain business interruption insurance in
the amount of $18 million to cover continuing expenses and
lost revenue caused by such occurrences. However, this insurance
does not compensate us for the loss of opportunity and potential
harm to customer relations that our inability to meet our
collaborators needs in a timely manner could create.
Due to our
reliance on contract research organizations and other third
parties to conduct our clinical trials, we are unable to
directly control the timing, conduct and expense of our clinical
trials.
We rely primarily on third parties to conduct our clinical
trials. As a result, we have had and will continue to have less
control over the conduct of our clinical trials, the timing and
completion of the trials, the required reporting of adverse
events and the management of data developed through the trial
than would be the case if we were relying entirely upon our own
staff. Communicating with outside parties can also be
challenging, potentially leading to mistakes as well as
difficulties in coordinating activities. Outside parties may
have staffing difficulties, may undergo changes in priorities or
may become financially distressed, adversely affecting their
willingness or ability to conduct our trials. We may experience
unexpected cost increases that are beyond our control. Problems
with the timeliness or quality of the work of a contract
research organization may lead us to seek to terminate the
relationship and use an alternative service provider. However,
making this change may be costly and may delay our trials and
contractual restrictions may make such a change difficult or
impossible. Additionally, it may be impossible to find a
replacement organization that can conduct our trials in an
acceptable manner and at an acceptable cost.
Controls we or
our third-party service providers have in place to ensure
compliance with laws may not be effective to ensure compliance
with all applicable laws and regulations.
The discovery and development of our products, together with our
general operations, are subject to extensive regulation in the
U.S. by state and federal agencies and, as we begin to
conduct clinical trials and other activities outside the U.S.,
in foreign countries. Due to escalating costs and difficulties
associated with conducting certain types of clinical trials in
the U.S., we expect that we will be required to conduct certain
clinical trials in foreign locations where we have little
experience, including countries in Eastern Europe, South America
and India. We expect that we typically will conduct these trials
through third-party clinical trial service providers. In
addition, we purchase from third-party suppliers and
manufacturers that are located outside the U.S., principally
countries in Europe, intermediate and bulk API that are used in
our development efforts. As a result, we and our contractors are
subject to regulations in the U.S. and in the foreign
countries in which the API is sourced and manufactured relating
to the cross-border shipment of pharmaceutical ingredients.
Although we have developed and instituted controls based on what
we believe to be current best practices, we, our employees, our
consultants or our contractors may not be in compliance with all
potentially applicable U.S. federal and state regulations
and/or laws
or all potentially applicable foreign regulations
and/or laws.
Further, we have a limited ability to monitor and control the
activities of third-party service providers, suppliers and
manufacturers to ensure compliance by such parties with all
applicable regulations
and/or laws.
We may be subject to direct liabilities or be required to
indemnify such parties against certain liabilities arising out
of any failure by them to comply with such regulations
and/or laws.
If we or our employees, consultants or contractors fail to
comply with any of these regulations
and/or laws
a range of actions could result, including, but not limited to,
the termination of clinical trials, the failure to approve a
product candidate, restrictions on our products or manufacturing
35
processes, including withdrawal of our products from the market,
significant fines, exclusion from government healthcare programs
or other sanctions or litigation.
Risks Related to
Our Drug Discovery Activities
Revenue from
collaborations depends on the extent to which the pharmaceutical
and biotechnology industries collaborate with other companies
for one or more aspects of their drug discovery
process.
Our capabilities include aspects of the drug discovery process
that pharmaceutical and biotechnology companies have
traditionally performed internally. The willingness of these
companies to expand or continue drug discovery collaborations to
enhance their research and development process is based on
several factors that are beyond our control, any of which could
cause our revenue to decline. These include their ability to
hire and retain qualified scientists, the resources available
for entering into drug discovery collaborations and the spending
priorities among various types of research activities. In
addition, our ability to convince these companies to use our
drug discovery capabilities, rather than develop them
internally, depends on many factors, including our ability to:
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Develop and implement drug discovery technologies that will
result in the identification of higher-quality drug candidates;
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Attract and retain experienced, high caliber scientists;
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Achieve timely, high-quality results at an acceptable
cost; and
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Design, create and manufacture our chemical compounds in
quantities, at purity levels and at costs that are acceptable to
our collaborators.
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The importance of these factors varies depending on the company
and type of discovery program and we may be unable to meet any
or all of them in the future. Even if we are able to address
these factors, these companies may still decide to perform these
activities internally or retain other companies that provide
drug research and development expertise similar to ours.
Our research
and development capabilities may not produce viable drug
candidates.
We have entered into several research and development
collaborations under which we provide drug discovery and
development services to identify drug candidates for our
collaborators. We also seek to identify and develop drug
candidates for our proprietary programs. It is uncertain whether
we will be able to provide drug discovery more efficiently or
create high quality drug candidates that are suitable for our or
our collaborators purposes, which may result in delayed or
lost revenue, loss of collaborators or failure to expand our
existing relationships. Our ability to create viable drug
candidates for ourselves and our collaborators depends on many
factors, including the implementation of appropriate
technologies, the development of effective new research tools,
the complexity of the chemistry and biology, the lack of
predictability in the scientific process and the performance and
decision-making capabilities of our scientists. Our
information-driven technology platform, which we believe allows
our scientists to make better decisions, may not enable our
scientists to make correct decisions or develop viable drug
candidates.
Risks Related To
Our Industry
The
concentration of the pharmaceutical and biotechnology industry
and any further consolidation could reduce the number of our
potential collaborators.
There are a limited number of pharmaceutical and biotechnology
companies and these companies represent a significant portion of
the market for our capabilities. The number of our potential
collaborators could decline even further through consolidation
among these companies. If the number of our potential
collaborators declines even further, they may be able to
negotiate greater rights to the intellectual property they
license from us, price discounts or other terms that are
unfavorable to us.
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Capital market
conditions may reduce our biotechnology collaborators
ability to fund research and development.
Traditionally, many unprofitable biotechnology companies have
funded their research and development expenditures through
raising capital in the equity markets. Declines and
uncertainties in these markets have severely restricted their
ability to raise new capital and to continue to expand or fund
existing research and development efforts. If our current or
future biotechnology collaborators are unable to raise
sufficient capital to fund research and development
expenditures, we may not be able to expand or maintain current
revenue.
Health care
reform, including those based on recently enacted legislation
and cost control initiatives by third-party payors could reduce
the prices that can be charged for drugs, which could limit the
commercial success of our drug candidates.
In March 2010, the President signed the Patient Protection and
Affordable Care Act, as amended by the Health Care and Education
Affordability Reconciliation Act, or the Healthcare Reform
Act. This law substantially changes the way health care is
financed by both governmental and private insurers and
significantly impacts the pharmaceutical industry. The
Healthcare Reform Act contains a number of provisions that will
be expected to impact our business and operations, in some cases
in ways we cannot currently predict. Changes that may affect our
business include those governing enrollment in federal
healthcare programs, reimbursement changes and fraud and abuse
enforcement. These changes will impact existing government
healthcare programs and will result in the development of new
programs, including Medicare payment for performance initiatives
and improvements to the physician quality reporting system and
feedback program.
Additional provisions of the Healthcare Reform Act, some of
which become effective in 2011, may negatively affect any
associated product revenues and prospects for continued
profitability in the future. For example, the Healthcare Reform
Act imposes a non-deductible excise tax on pharmaceutical
manufacturers or importers that sell branded prescription drugs
to U.S. government programs that may impact any associated
product revenue and therefore revenue we are entitled to receive
from royalties on product sales. In addition, as part of the
Healthcare Reform Acts provisions closing a funding gap
that currently exists in the Medicare Part D prescription
drug program (commonly known as the donut hole),
manufacturers of branded prescription drugs will be required to
provide a 50% discount on drugs dispensed to beneficiaries
within this donut hole. We expect that the Healthcare Reform Act
and other healthcare reform measures that may be adopted in the
future could have a material adverse effect on our industry
generally and on the ability of Array or our collaborators to
successfully commercialize product candidates or could limit or
eliminate our future spending on development projects.
In addition to the Healthcare Reform Act, there will continue to
be proposals by legislators at both the federal and state
levels, regulators and third-party payors to keep healthcare
costs down while expanding individual healthcare benefits.
Certain of these changes could limit the prices that can be
charged for drugs we develop or the amounts of reimbursement
available for these products from governmental agencies or
third-party payors, or may increase the tax obligations on
pharmaceutical companies, increase our rebate liability and may
limit our commercial opportunity and reduce any associated
revenue and profits. For example, federal laws require drug
manufacturers to pay specified rebates to each state Medicaid
program for medicines reimbursed by Medicaid and to provide
discounts for out-patient medicines purchased by certain public
health service entities and disproportionate share
hospitals and for purchases by some federal governmental
departments such as the Department of Veterans Affairs and the
Department of Defense. Rebates are based on pricing data
reported by us on a monthly and quarterly basis to the Centers
for Medicare and Medicare Services, the federal agency which
administers the Medicaid drug rebate program. These data include
the average manufacturer price, or AMP, and in the case of
innovator products, the best price for each drug. As a result of
the enactment of the Healthcare Reform Act, rebates now also
will be due on the utilization of Medicaid managed care
organizations, effective March 23, 2010.
37
Pursuant to the Healthcare Reform Act, the amount of the
Medicaid rebate for each unit of a drug has been increased. For
innovator products, in general a drug marketed under a new drug
application, or NDA, the minimum rebate has been increased from
15.1% to 23.1% of the AMP for that product, or if it is greater,
the difference between the AMP and the best price for the drug.
The Medicaid rebate for innovator products also includes an
additional rebate amount if price increases for the drug exceed
the rate of inflation since the products launch. The
Healthcare Reform Act also caps the total rebate amount for
innovator drugs at 100% of the AMP for the drug. In addition,
the Healthcare Reform Act changes the definition of AMP and
there is additional legislation that is currently pending that
would further amend the AMP definition. Regulations have not
been adopted to implement any of the enacted statutory changes.
There may be additional increases in rebates or other costs and
charges from government agencies. Regulations continue to be
issued and coverage expanded by various governmental agencies
relating to these programs, increasing the cost and complexity
of compliance.
It is possible that health reform will expand the number of
public health service entities that receive discounted product
and increase our rebate liability on drugs reimbursed by
Medicaid. In some countries other than the U.S., reimbursement,
pricing and profitability of prescription pharmaceuticals and
biopharmaceuticals are subject to government control. We are
unable to predict what additional legislation or regulation, if
any, relating to the healthcare industry or third-party coverage
and reimbursement may be enacted in the future or what effect
such legislation or regulation would have on our business.
Also, we expect managed care plans will continue to put pressure
on the pricing of pharmaceutical and biopharmaceutical products
due to a trend toward managed health care, the increasing
influence of health maintenance organizations and additional
legislative proposals. Cost control initiatives could decrease
the price that we, or any potential collaborators, receive for
any of our future products, which could adversely affect our
profitability. These initiatives may also have the effect of
reducing the resources that pharmaceutical and biotechnology
companies can devote to in-licensing drug candidates and the
research and development of new drugs, which could reduce our
resulting revenue. Any cost containment measures or other
reforms that are adopted could have a negative impact on our
ability to commercialize successfully our products or could
limit or eliminate our spending on development of new drugs and
affect our profitability.
We, or our
collaborators, may not obtain favorable reimbursement rates for
our drug candidates.
The commercial success of our drug candidates will depend on the
availability and adequacy of coverage and reimbursement from
third-party payors, including government and private insurance
plans. Third-party payors are increasingly challenging the
prices charged for pharmaceuticals and other medical products.
Our products may be considered less cost-effective than existing
products and, as such, coverage and reimbursement to the patient
may not be available or be sufficient to allow the sale of our
products on a competitive basis.
In addition, the market for our drug candidates will depend
significantly on access to third-party payors drug
formularies, or lists of medications for which third-party
payors provide coverage and reimbursement. Industry competition
to be included in such formularies can result in downward
pricing pressures on pharmaceutical companies. As such, we
cannot provide assurances that our products will be placed on
third-party payors formularies. To the extent that our
products are listed on third-party payors formularies, we
or our collaborators may not be able to negotiate favorable
reimbursement rates for our products. If we, or our
collaborators, fail to obtain an adequate level of reimbursement
for our products by third-party payors, sales of the drugs would
be adversely affected or there may be no commercially viable
market for the products.
38
The drug
research and development industry has a history of patent and
other intellectual property litigation and we may be involved in
costly intellectual property lawsuits.
The drug research and development industry has a history of
patent and other intellectual property litigation and we believe
these lawsuits are likely to continue. Legal proceedings
relating to intellectual property would be expensive, take
significant time and divert managements attention from
other business concerns. Because we produce drug candidates for
a broad range of therapeutic areas and provide many different
capabilities in this industry, we face potential patent
infringement suits by companies that control patents for similar
drug candidates or capabilities or other suits alleging
infringement of their intellectual property rights. There could
be issued patents of which we are not aware that our products
infringe or patents that we believe we do not infringe that we
are ultimately found to infringe. Moreover, patent applications
are in many cases maintained in secrecy for 18 months after
filing or even until patents are issued. The publication of
discoveries in the scientific or patent literature frequently
occurs substantially later than the date on which the underlying
discoveries were made and patent applications were filed.
Because patent applications can take many years to issue, there
may be currently pending applications of which we are unaware
that may later result in issued patents that we infringe with
our products. In addition, technology created under our research
and development collaborations may infringe the intellectual
property rights of third parties, in which case we may not
receive milestone or royalty revenue from those collaborations.
If we do not prevail in an infringement lawsuit brought against
us, we might have to pay substantial damages, including triple
damages and we could be required to stop the infringing activity
or obtain a license to use the patented technology or redesign
our products so as not to infringe the patent. We may not be
able to enter into licensing arrangements at a reasonable cost
or effectively redesign our products. Any inability to secure
licenses or alternative technology could delay the introduction
of our products or prevent us from manufacturing or selling
products.
The
intellectual property rights we rely on to protect our
proprietary drug candidates and the technology underlying our
tools and techniques may be inadequate to prevent third parties
from using our technology or developing competing capabilities
or to protect our interests in our proprietary drug
candidates.
Our success depends in part on our ability to protect patents
and maintain the secrecy of proprietary processes and other
technologies we develop for the testing and synthesis of
chemical compounds in the drug discovery process. We currently
have numerous U.S. patents and patent applications on file
with the U.S. Patent and Trademark Office as well as around
the world.
Any patents that we may own or license now or in the future may
not afford meaningful protection for our drug candidates or our
technology and tools. In order to protect or enforce our
intellectual property rights, we may have to initiate legal
proceedings against third parties. Our efforts to enforce and
maintain our intellectual property rights may not be successful
and may result in substantial costs and diversion of management
time. In addition, other companies may challenge our patents
and, as a result, these patents could be narrowed, invalidated
or rendered unenforceable, or we may be forced to stop using the
technology covered by these patents or to license the technology
from third parties. In addition, current and future patent
applications on which we depend may not result in the issuance
of patents in the U.S. or foreign countries. Even if our
rights are valid, enforceable and broad in scope, competitors
may develop drug candidates or other products based on similar
research or technology that is not covered by our patents.
Patent applications relating to or affecting our business may
have been filed by a number of pharmaceutical and
biopharmaceutical companies and academic institutions. A number
of the technologies in these applications or patents may
conflict with our technologies, patents or patent applications,
which could reduce the scope of patent protection we could
otherwise obtain. We could also become involved in interference
proceedings in connection with one or more of our patents or
patent applications to determine priority of inventions. We
cannot be certain that we are the first creator of inventions
covered by pending patent applications, or that we were the
first to file patent applications for any such inventions.
39
Drug candidates we develop that are approved for commercial
marketing by the FDA would be eligible for market exclusivity
for varying time periods during which generic versions of a drug
may not be marketed and we could apply to extend patent
protection for up to five additional years under the provisions
of the Hatch-Waxman Act. The Hatch-Waxman Act provides a means
for approving generic versions of a drug once the marketing
exclusivity period has ended and all relevant patents have
expired. The period of exclusive marketing, however, may be
shortened if a patent is successfully challenged and defeated,
which could reduce the amount of royalties we receive on the
product.
Agreements we
have with our employees, consultants and collaborators may not
afford adequate protection for our trade secrets, confidential
information and other proprietary information.
In addition to patent protection, we also rely on copyright and
trademark protection, trade secrets, know-how, continuing
technological innovation and licensing opportunities. In an
effort to maintain the confidentiality and ownership of our
trade secrets and proprietary information, we require our
employees, consultants and advisors to execute confidentiality
and proprietary information agreements. However, these
agreements may not provide us with adequate protection against
improper use or disclosure of confidential information and there
may not be adequate remedies in the event of unauthorized use or
disclosure. Furthermore, we may from time to time hire
scientific personnel formerly employed by other companies
involved in one or more areas similar to the activities we
conduct. In some situations, our confidentiality and proprietary
information agreements may conflict with, or be subject to, the
rights of third parties with whom our employees, consultants or
advisors have prior employment or consulting relationships.
Although we require our employees and consultants to maintain
the confidentiality of all proprietary information of their
previous employers, these individuals, or we, may be subject to
allegations of trade secret misappropriation or other similar
claims as a result of their prior affiliations. Finally, others
may independently develop substantially equivalent proprietary
information and techniques or otherwise gain access to our trade
secrets. Our failure or inability to protect our proprietary
information and techniques may inhibit or limit our ability to
compete effectively, or exclude certain competitors from the
market.
The drug
research and development industry is highly competitive and we
compete with some companies that offer a broader range of
capabilities and have better access to resources than we
do.
The pharmaceutical and biotechnology industries are
characterized by rapid and continuous technological innovation.
We compete with many companies worldwide that are engaged in the
research and discovery, licensing, development and
commercialization of drug candidates. Some of our competitors
have a broader range of capabilities and have greater access to
financial, technical, scientific, regulatory, business
development, recruiting and other resources than we do. Their
access to greater resources may allow them to develop processes
or products that are more effective, safer or less costly, or
gain greater market acceptance, than products we develop or for
which they obtain FDA approval more rapidly than we do. We
anticipate that we will face increased competition in the future
as new companies enter the market and advanced technologies
become available.
We face
potential liability related to the privacy of health information
we obtain from research institutions.
Most health care providers, including research institutions from
which we or our collaborators obtain patient information, are
subject to privacy regulations promulgated under HIPAA. Our
clinical research efforts are not directly regulated by HIPAA.
However, conduct by a person that may not be prosecuted directly
under HIPAAs criminal provisions could potentially be
prosecuted under aiding and abetting or conspiracy laws.
Consequently, depending on the facts and circumstances, we could
face substantial criminal penalties if we receive individually
identifiable health information from a health care provider or
research institution that has not satisfied HIPAAs
disclosure standards. In addition, international data protection
laws including the EU Data Protection Directive and member state
implementing legislation may
40
apply to some or all of the clinical data obtained outside of
the U.S. Furthermore, certain privacy laws and genetic
testing laws may apply directly to our operations
and/or those
of our collaborators and may impose restrictions on our use and
dissemination of individuals health information. Moreover,
patients about whom we or our collaborators obtain information,
as well as the providers who share this information with us, may
have contractual rights that limit our ability to use and
disclose the information. Claims that we have violated
individuals privacy rights or breached our contractual
obligations, even if we are not found liable, could be expensive
and time-consuming to defend and could result in adverse
publicity that could harm our business.
Risks Related To
Our Stock
Our officers
and directors have significant control over us and their
interests may differ from those of our
stockholders.
As of June 30, 2010, our directors and officers
beneficially owned or controlled approximately 10.8% of our
issued and outstanding common stock. Individually and in the
aggregate, these stockholders significantly influence our
management, affairs and all matters requiring stockholder
approval. These stockholders may vote their shares in a way with
which other stockholders do not agree. In particular, this
concentration of ownership may have the effect of delaying,
deferring or preventing an acquisition of us or entrenching
management and may adversely affect the market price of our
common stock.
Our quarterly
operating results could fluctuate significantly, which could
cause our stock price to decline.
Our quarterly operating results have fluctuated in the past and
are likely to fluctuate in the future. Entering into licensing
or drug discovery collaborations typically involves significant
technical evaluation
and/or
commitment of capital by our collaborators. Accordingly,
negotiation can be lengthy and is subject to a number of
significant risks, including collaborators budgetary
constraints and internal acceptance reviews and a significant
portion of our revenue from these collaborations is attributable
to up-front payments and milestones that are non-recurring.
Further, some of our collaborators can influence when we deliver
products and perform services and therefore receive revenue,
under their contracts with us. Due to these factors, our
operating results could fluctuate significantly from quarter to
quarter. In addition, we may experience significant fluctuations
in quarterly operating results due to factors such as general
and industry-specific economic conditions that may affect the
research and development expenditures of pharmaceutical and
biotechnology companies.
Due to the possibility of fluctuations in our revenue and
expenses, we believe that
quarter-to-quarter
comparisons of our operating results are not a good indication
of our future performance. Our operating results in some
quarters may not meet the expectations of stock market analysts
and investors. If we do not meet analysts
and/or
investors expectations, our stock price could decline.
Because our
stock price may be volatile, our stock price could experience
substantial declines.
The market price of our common stock has historically
experienced and may continue to experience volatility. The high
and low closing bids for our common stock were $4.45 and $1.72,
respectively, in fiscal 2010; $8.79 and $2.51, respectively, in
fiscal 2009; and $12.91 and $4.66, respectively, in fiscal 2008.
Our quarterly operating results, the success or failure of our
internal drug discovery efforts, changes in general conditions
in the economy or the financial markets and other developments
affecting our collaborators, our competitors or us could cause
the market price of our common stock to fluctuate substantially.
This volatility coupled with market declines in our industry
over the past several years have affected the market prices of
securities issued by many companies, often for reasons unrelated
to their operating performance and may adversely affect the
price of our common stock. In the past, securities class action
litigation has often been instituted following periods of
volatility in the market price of a companys securities. A
securities class action suit against us could result in
potential liabilities, substantial costs and the diversion of
managements attention and resources, regardless of whether
we win or lose.
41
Because we do
not intend to pay dividends, stockholders will benefit from an
investment in our common stock only if it appreciates in
value.
We have never declared or paid any cash dividends on our common
stock and are restricted in our ability to do so under our
current credit agreement. We currently intend to retain our
future earnings, if any, to finance the expansion of our
business and do not expect to pay any cash dividends in the
foreseeable future. As a result, the success of an investment in
our common stock will depend entirely upon any future
appreciation. There is no guarantee that our common stock will
appreciate in value or even maintain the price at which
stockholders have purchased their shares.
The ability of
our stockholders to control our policies and effect a change of
control of our company is limited, which may not be in the best
interests of our stockholders.
There are provisions in our certificate of incorporation and
bylaws that may discourage a third-party from making a proposal
to acquire us, even if some of our stockholders might consider
the proposal to be in their best interests. These include the
following provisions in our certificate of incorporation:
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Our certificate of incorporation provides for three classes of
directors with the term of office of one class expiring each
year, commonly referred to as a staggered board. By
preventing stockholders from voting on the election of more than
one class of directors at any annual meeting of stockholders,
this provision may have the effect of keeping the current
members of our Board of Directors in control for a longer period
of time than stockholders may desire; and
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Our certificate of incorporation authorizes our Board of
Directors to issue shares of preferred stock without stockholder
approval and to establish the preferences and rights of any
preferred stock issued, which would allow the board to issue one
or more classes or series of preferred stock that could
discourage or delay a tender offer or change in control.
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In addition, our Board of Directors approved a Rights Agreement
on August 2, 2001, which could prevent or deter a potential
unsolicited takeover of us by causing substantial dilution of an
acquirer of 15% or more of our outstanding common stock. We are
also subject to the business combination provisions of
Section 203 of the Delaware General Corporation Law, which,
in general, imposes restrictions upon acquirers of 15% or more
of our stock. As a result, it is difficult for a third-party to
acquire control of us without the approval of the Board of
Directors and, therefore, mergers and acquisitions of us that
our stockholders may consider in their best interests may not
occur.
ITEM 1B. UNRESOLVED
STAFF COMMENTS
None.
ITEM 2. PROPERTIES
We are headquartered in Boulder, Colorado, where we lease 150
thousand square feet of office and laboratory space under a
lease that expires in July 2016. We lease 78 thousand square
feet of laboratory space in Longmont, Colorado under a lease
that expires in August 2016. We lease 11 thousand square feet of
office space in Morrisville, North Carolina under a lease that
expires in October 2014. We have options to extend each of the
leases for up to two terms of five years each. In addition, we
lease five thousand square feet of storage space in Boulder,
Colorado under a lease that expires in March 2013.
ITEM 3. LEGAL
PROCEEDINGS
We may be involved, from time to time, in various claims and
legal proceedings arising in the ordinary course of our
business. We are not currently a party to any such claims or
proceedings that, if decided adversely to us, would either
individually or in the aggregate have a material adverse effect
on our business, financial condition or results of operations.
ITEM 4. REMOVED
AND RESERVED
42
PART II
Common Stock
Sales Prices
Our common stock trades on the NADSAQ Global Market under the
symbol ARRY. The following table sets forth, for the
periods indicated, the range of the closing high and low sales
prices for our common stock as reported by the NASDAQ Global
Market.
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Fiscal Year Ended June 30,
2010
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High
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Low
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First Quarter
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$
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4.45
|
|
|
$
|
2.38
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Second Quarter
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$
|
2.81
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|
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$
|
1.72
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Third Quarter
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|
$
|
2.83
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|
|
$
|
2.24
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Fourth Quarter
|
|
$
|
4.02
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|
|
$
|
2.66
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|
|
|
|
|
|
|
|
|
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Fiscal Year Ended June 30,
2009
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High
|
|
|
Low
|
|
|
First Quarter
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|
$
|
8.79
|
|
|
$
|
4.90
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Second Quarter
|
|
$
|
7.41
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|
|
$
|
2.93
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Third Quarter
|
|
$
|
4.57
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|
|
$
|
2.51
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Fourth Quarter
|
|
$
|
3.49
|
|
|
$
|
2.67
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As of August 9, 2010, there were approximately 72 holders of
record of our common stock. This does not include the number of
persons whose stock is in nominee or street name
accounts through brokers.
Dividends
We have never declared nor paid any cash dividends on our common
stock and we do not intend to pay any cash dividends in the
foreseeable future. In addition, the terms of our loan
agreements restrict our ability to pay cash dividends to our
stockholders. We currently intend to retain all available funds
and any future earnings for use in the operations of our
business and to fund future growth.
Stock Performance
Graph
This stock performance graph shall not be deemed
filed for purposes of Section 18 of the
Securities Exchange Act of 1934, as amended, or otherwise
subject to the liabilities under that Section and shall not be
deemed to be incorporated by reference into any filing of ours
under the Securities Act of 1933, as amended.
The following graph compares the cumulative total stockholder
return for our common stock, the NASDAQ Global Markets
Composite (U.S. companies) Index, the NASDAQ Pharmaceutical
Index and the NASDAQ Biotechnology Index for the five-year
period ended June 30, 2010. The graph assumes that $100 was
invested on June 30, 2005 in the common stock of Array, the
NASDAQ Composite Index, the NASDAQ Pharmaceutical Index and the
NASDAQ Biotechnology Index. It also assumes that all dividends
were reinvested.
The stock price performance on the following graph is not
necessarily indicative of future stock price performance.
43
COMPARISON OF
FIVE YEAR CUMULATIVE TOTAL RETURNS
Among
Array BioPharma Inc., the NASDAQ Composite Index,
the NASDAQ Pharmaceutical Index and the NASDAQ Biotechnology
Index
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NASDAQ
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NASDAQ
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NASDAQ
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Array
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Composite
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Pharmaceutical
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Biotechnology
|
Date
|
|
BioPharma Inc.
|
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Index
|
|
Index
|
|
Index
|
|
6/30/2005
|
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$
|
100.00
|
|
|
$
|
100.00
|
|
|
$
|
100.00
|
|
|
$
|
100.00
|
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9/30/2005
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|
$
|
113.97
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|
|
$
|
105.26
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|
|
$
|
121.43
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|
|
$
|
119.82
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|
12/31/2005
|
|
$
|
111.27
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|
|
$
|
107.58
|
|
|
$
|
122.59
|
|
|
$
|
124.73
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|
3/31/2006
|
|
$
|
145.08
|
|
|
$
|
114.17
|
|
|
$
|
129.55
|
|
|
$
|
129.57
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|
6/30/2006
|
|
$
|
136.51
|
|
|
$
|
107.08
|
|
|
$
|
116.57
|
|
|
$
|
115.67
|
|
9/30/2006
|
|
$
|
135.24
|
|
|
$
|
112.01
|
|
|
$
|
122.00
|
|
|
$
|
121.75
|
|
12/31/2006
|
|
$
|
205.08
|
|
|
$
|
120.84
|
|
|
$
|
124.05
|
|
|
$
|
124.53
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|
3/31/2007
|
|
$
|
201.59
|
|
|
$
|
121.32
|
|
|
$
|
117.82
|
|
|
$
|
121.53
|
|
6/30/2007
|
|
$
|
185.24
|
|
|
$
|
130.99
|
|
|
$
|
121.31
|
|
|
$
|
127.09
|
|
9/30/2007
|
|
$
|
178.25
|
|
|
$
|
134.02
|
|
|
$
|
130.18
|
|
|
$
|
135.36
|
|
12/31/2007
|
|
$
|
133.65
|
|
|
$
|
131.77
|
|
|
$
|
121.47
|
|
|
$
|
128.71
|
|
3/31/2008
|
|
$
|
111.27
|
|
|
$
|
112.92
|
|
|
$
|
117.30
|
|
|
$
|
124.88
|
|
6/30/2008
|
|
$
|
74.60
|
|
|
$
|
114.02
|
|
|
$
|
120.57
|
|
|
$
|
126.58
|
|
9/30/2008
|
|
$
|
121.90
|
|
|
$
|
101.67
|
|
|
$
|
124.60
|
|
|
$
|
131.35
|
|
12/31/2008
|
|
$
|
64.29
|
|
|
$
|
78.16
|
|
|
$
|
113.02
|
|
|
$
|
120.05
|
|
3/31/2009
|
|
$
|
41.90
|
|
|
$
|
75.62
|
|
|
$
|
102.49
|
|
|
$
|
111.27
|
|
6/30/2009
|
|
$
|
49.84
|
|
|
$
|
90.79
|
|
|
$
|
110.65
|
|
|
$
|
119.57
|
|
9/30/2009
|
|
$
|
37.78
|
|
|
$
|
105.19
|
|
|
$
|
122.54
|
|
|
$
|
131.61
|
|
12/31/2009
|
|
$
|
44.60
|
|
|
$
|
112.82
|
|
|
$
|
120.22
|
|
|
$
|
132.68
|
|
3/31/2010
|
|
$
|
43.49
|
|
|
$
|
119.35
|
|
|
$
|
129.51
|
|
|
$
|
144.43
|
|
6/30/2010
|
|
$
|
48.41
|
|
|
$
|
105.54
|
|
|
$
|
111.36
|
|
|
$
|
122.89
|
|
44
ITEM 6.
SELECTED FINANCIAL DATA
The following selected financial data items are derived from our
audited financial statements. These historical results do not
necessarily indicate future results. When you read this
information, it is important that you also read our financial
statements and related notes, as well as the section entitled
Managements Discussion and Analysis of Financial Condition
and Results of Operations appearing elsewhere in this Annual
Report on
Form 10-K.
Amounts are in thousands except per share data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended June 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Collaboration revenue
|
|
$
|
21,395
|
|
|
$
|
17,228
|
|
|
$
|
21,513
|
|
|
$
|
30,106
|
|
|
$
|
37,738
|
|
License and milestone revenue
|
|
|
32,485
|
|
|
|
7,754
|
|
|
|
7,295
|
|
|
|
6,864
|
|
|
|
7,265
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
|
53,880
|
|
|
|
24,982
|
|
|
|
28,808
|
|
|
|
36,970
|
|
|
|
45,003
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenue
|
|
|
28,322
|
|
|
|
19,855
|
|
|
|
21,364
|
|
|
|
24,936
|
|
|
|
39,611
|
|
Research and development for
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
proprietary drug discovery
|
|
|
72,488
|
|
|
|
89,560
|
|
|
|
90,347
|
|
|
|
57,464
|
|
|
|
33,382
|
|
General and administrative
|
|
|
17,121
|
|
|
|
18,020
|
|
|
|
15,591
|
|
|
|
13,644
|
|
|
|
13,683
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
117,931
|
|
|
|
127,435
|
|
|
|
127,302
|
|
|
|
96,044
|
|
|
|
86,676
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(64,051
|
)
|
|
|
(102,453
|
)
|
|
|
(98,494
|
)
|
|
|
(59,074
|
)
|
|
|
(41,673
|
)
|
Other income (expense)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain (loss) on auction rate securities
|
|
|
1,305
|
|
|
|
(17,742
|
)
|
|
|
(1,872
|
)
|
|
|
-
|
|
|
|
-
|
|
Interest income
|
|
|
864
|
|
|
|
2,116
|
|
|
|
6,064
|
|
|
|
4,610
|
|
|
|
2,729
|
|
Interest expense
|
|
|
(15,749
|
)
|
|
|
(10,024
|
)
|
|
|
(1,986
|
)
|
|
|
(979
|
)
|
|
|
(670
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income (expense), net
|
|
|
(13,580
|
)
|
|
|
(25,650
|
)
|
|
|
2,206
|
|
|
|
3,631
|
|
|
|
2,059
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before income taxes
|
|
|
(77,631
|
)
|
|
|
(128,103
|
)
|
|
|
(96,288
|
)
|
|
|
(55,443
|
)
|
|
|
(39,614
|
)
|
Income tax benefit
|
|
|
-
|
|
|
|
288
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(77,631
|
)
|
|
$
|
(127,815
|
)
|
|
$
|
(96,288
|
)
|
|
$
|
(55,443
|
)
|
|
$
|
(39,614
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding
basic and diluted
|
|
|
50,216
|
|
|
|
47,839
|
|
|
|
47,309
|
|
|
|
40,717
|
|
|
|
38,759
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per share basic and diluted
|
|
$
|
(1.55
|
)
|
|
$
|
(2.67
|
)
|
|
$
|
(2.04
|
)
|
|
$
|
(1.36
|
)
|
|
$
|
(1.02
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Cash and cash equivalents, marketable securities and restricted
cash
|
|
$
|
128,869
|
|
|
$
|
57,488
|
|
|
$
|
125,531
|
|
|
$
|
141,331
|
|
|
$
|
70,100
|
|
Working capital (deficit)
|
|
$
|
39,367
|
|
|
$
|
(5,378
|
)
|
|
$
|
66,346
|
|
|
$
|
120,827
|
|
|
$
|
56,008
|
|
Total assets
|
|
$
|
159,179
|
|
|
$
|
95,055
|
|
|
$
|
163,077
|
|
|
$
|
174,974
|
|
|
$
|
102,173
|
|
Long-term debt, net of discount
|
|
$
|
112,825
|
|
|
$
|
68,170
|
|
|
$
|
35,355
|
|
|
$
|
15,000
|
|
|
$
|
14,150
|
|
Total stockholders equity (deficit)
|
|
$
|
(116,678
|
)
|
|
$
|
(73,701
|
)
|
|
$
|
38,027
|
|
|
$
|
107,701
|
|
|
$
|
68,640
|
|
45
ITEM 7.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Managements Discussion and Analysis of Financial Condition
and Results of Operations contains forward-looking statements
within the meaning of the Private Securities Litigation Reform
Act of 1995, including statements about our expectations related
to the progress and success of drug discovery activities
conducted by Array and by our collaborators, our ability to
obtain additional capital to fund our operations
and/or
reduce our research and development spending, realizing new
revenue streams and obtaining future out-licensing collaboration
agreements that include up-front milestone
and/or
royalty payments, our ability to realize up-front milestone and
royalty payments under our existing or any future agreements,
future research and development spending and projections
relating to the level of cash we expect to use in operations,
our working capital requirements and our future headcount
requirements. In some cases, forward-looking statements can be
identified by the use of terms such as may,
will, expects, intends,
plans, anticipates,
estimates, potential, or
continue, or the negative thereof or other
comparable terms. These statements are based on current
expectations, projections and assumptions made by management and
are not guarantees of future performance. Although we believe
that the expectations reflected in the forward-looking
statements contained herein are reasonable, these expectations
or any of the forward-looking statements could prove to be
incorrect and actual results could differ materially from those
projected or assumed in the forward-looking statements. Our
future financial condition, as well as any forward-looking
statements are subject to significant risks and uncertainties,
including but not limited to the factors set forth under the
heading Risk Factors in Item 1A of this Annual
Report on
Form 10-K
for the fiscal year ended June 30, 2010. All forward
looking statements are made as of the date hereof and, unless
required by law, we undertake no obligation to update any
forward-looking statements.
The following discussion of our financial condition and results
of operations should be read in conjunction with the financial
statements and notes to those statements included elsewhere in
this quarterly report. The terms we, us,
our and similar terms refer to Array BioPharma Inc.
Overview
We are a biopharmaceutical company focused on the discovery,
development and commercialization of targeted small molecule
drugs to treat patients afflicted with cancer and inflammatory
diseases. Our proprietary drug development pipeline includes
clinical candidates that are designed to regulate
therapeutically important target pathways. In addition, leading
pharmaceutical and biotechnology companies partner with us to
discover and develop drug candidates across a broad range of
therapeutic areas.
The six most advanced programs that we are developing alone or
with a partner are as follows:
|
|
|
|
|
|
|
Program
|
|
Indication
|
|
Partner
|
|
Clinical Status
|
|
1. AMG 151/ARRY-403
|
|
Glucokinase activator for Type 2 diabetes
|
|
Amgen Inc.
|
|
Phase 1
|
2. MEK162/ARRY-162
|
|
MEK inhibitor for cancer
|
|
Novartis International Pharmaceutical Ltd.
|
|
Phase 1
|
3. ARRY-380
|
|
HER2 inhibitor for breast cancer
|
|
None; Array owned
|
|
Phase 1
|
4. ARRY-520
|
|
Kinesin spindle protein, or KSP, inhibitor for multiple myeloma,
or MM
|
|
None; Array owned
|
|
Phase 1/2
|
5. ARRY-543
|
|
HER2/EGFR inhibitor for solid tumors
|
|
None; Array owned
|
|
Phase 2
|
6. ARRY-614
|
|
p38/Tie2 dual inhibitor for myelodysplastic syndrome, or MDS
|
|
None; Array owned
|
|
Phase 1
|
46
In addition to these development programs, the seven most
advanced partnered drugs in clinical development are as follows:
|
|
|
|
|
|
|
|
|
Program
|
|
Indication
|
|
Partner
|
|
Clinical Status
|
|
1.
|
|
AZD6244/ARRY-886
|
|
MEK inhibitor for cancer
|
|
AstraZeneca, PLC
|
|
Phase 2
|
2.
|
|
AZD8330
|
|
MEK inhibitor for cancer
|
|
AstraZeneca, PLC
|
|
Phase 1
|
3.
|
|
Danoprevir/
RG7227/ITMN-191
|
|
Hepatitis C virus (HCV) protease inhibitor
|
|
InterMune, Inc. (in partnership with Roche Holding AG)
|
|
Phase 2
|
4.
|
|
GDC-0068
|
|
AKT kinase inhibitor for cancer
|
|
Genentech Inc.
|
|
Phase 1
|
5.
|
|
LY2603618/IC83
|
|
Checkpoint kinase, or Chk-1, inhibitor for cancer
|
|
Eli Lilly and Company
|
|
Phase 2
|
6.
|
|
VTX-2337
|
|
Toll-like receptor for cancer
|
|
VentiRx Pharmaceuticals, Inc.
|
|
Phase 1
|
7.
|
|
VTX-1463
|
|
Toll-like receptor for allergy
|
|
VentiRx Pharmaceuticals, Inc.
|
|
Phase 1
|
Any information we report about the development plans or the
progress or results of clinical trials or other development
activities of our partners is based on information that has been
reported to us or is otherwise publicly disclosed by our
partners.
We also have a portfolio of proprietary and partnered drug
discovery programs that we believe will generate an average of
one to two Investigational New Drug, or IND, applications per
year. We have active, partnered drug discovery programs with
Amgen, Celgene and Genentech in which we may earn milestone
payments and royalties. Our internal discovery efforts have also
generated additional early-stage drug candidates and we may
choose to out-license select promising candidates through
research partnerships prior to filing an IND application. Our
internal drug discovery programs include an inhibitor that
targets the kinase Chk-1 for the treatment of cancer and a
program directed to discovering inhibitors of a family of
tyrosine kinase, or Trk, receptors for the treatment of pain.
Our Chk-1 inhibitor is a
first-in-class,
selective, oral drug candidate and in preclinical studies has
shown prolonged inhibition of the Chk-1 target.
We have built our clinical and discovery programs through
spending $400.6 million from our inception through
June 30, 2010. In fiscal 2010, we spent $72.5 million
in research and development for proprietary drug discovery
expenses, compared to $89.6 million and $90.3 million
for fiscal years 2009 and 2008, respectively. During fiscal
2010, we signed strategic collaborations with Novartis and
Amgen. Together these collaborations provided Array with
$105 million in initial payments, over $1 billion in
potential milestone payments if all clinical and
commercialization milestones under the agreements are achieved,
double digit royalties and commercial co-detailing rights. We
have received a total of $478.1 million in research funding
and in up-front and milestone payments from our collaboration
partners since inception through June 30, 2010. Under our
existing collaboration agreements, we have the potential to earn
over $2.7 billion in additional milestone payments if we or
our collaborators achieve all the drug discovery, development
and commercialization objectives detailed in those agreements,
as well as the potential to earn royalties on any resulting
product sales from 17 drug development programs.
Our significant collaborators include:
|
|
|
|
|
Amgen, which entered into a worldwide strategic collaboration
with us to develop and commercialize our glucokinase activator,
AMG 151.
|
|
|
AstraZeneca, which licensed three of our MEK inhibitors for
cancer, including AZD6244, which is currently in multiple Phase
2 clinical trials.
|
|
|
Celgene Corporation, which entered into a worldwide strategic
collaboration agreement with us focused on the discovery,
development and commercialization of novel therapeutics in
cancer and inflammation.
|
|
|
Genentech, which entered into a worldwide strategic
collaboration agreement with us focused on the discovery,
development and commercialization of novel therapeutics. One
drug, GDC-0068, an
|
47
|
|
|
|
|
AKT inhibitor for cancer, entered a Phase 1 trial during the
first half of 2010. The other programs are in preclinical
development.
|
|
|
|
|
|
InterMune, which collaborated with us on the discovery of
danoprevir/RG7227/ITMN-191, a novel small molecule inhibitor of
the Hepatitis C Virus NS3/4 protease, which is currently in
Phase 2b clinical trials and which InterMune is developing in
partnership with Roche Holding AG.
|
|
|
Novartis, which entered into a worldwide strategic collaboration
with us to develop and commercialize our MEK inhibitor, MEK162
and other MEK inhibitors identified in the agreement.
|
Our fiscal year ends on June 30. When we refer to a fiscal
year or quarter, we are referring to the year in which the
fiscal year ends and the quarters during that fiscal year.
Therefore, fiscal 2010 refers to the fiscal year ended
June 30, 2010.
Business
Development and Collaborator Concentrations
We currently license or partner certain of our compounds
and/or
programs and enter into collaborations directly with
pharmaceutical and biotechnology companies through opportunities
identified by our business development group, senior management,
scientists and customer referrals. In addition, we may license
our compounds and enter into collaborations in Japan through an
agent.
The following collaborators contributed greater than 10% of our
total revenue for the periods presented:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended June 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Genentech
|
|
|
38.6
|
%
|
|
|
67.0
|
%
|
|
|
54.1
|
%
|
Amgen
|
|
|
28.2
|
%
|
|
|
-
|
|
|
|
-
|
|
Celgene
|
|
|
26.1
|
%
|
|
|
23.2
|
%
|
|
|
14.9
|
%
|
VentiRx
|
|
|
0.2
|
%
|
|
|
7.2
|
%
|
|
|
13.7
|
%
|
Ono
|
|
|
-
|
|
|
|
-
|
|
|
|
14.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
93.1
|
%
|
|
|
97.4
|
%
|
|
|
96.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In general, certain of our collaborators may terminate their
collaboration agreements with 90 to 180 days prior
notice. Our agreement with Genentech can be terminated with
120 days notice. Celgene may terminate its agreement
with us with six months notice. Amgen may terminate its
agreement with us at any time upon notice of 60 or 90 days
depending on the development activities going on at the time of
such notice.
The following table details revenue from our collaborators by
region based on the country in which collaborators are located
or the ship-to destination for compounds (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended June 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
North America
|
|
$
|
53,641
|
|
|
$
|
24,575
|
|
|
$
|
24,454
|
|
Europe
|
|
|
187
|
|
|
|
366
|
|
|
|
230
|
|
Asia Pacific
|
|
|
52
|
|
|
|
41
|
|
|
|
4,124
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
53,880
|
|
|
$
|
24,982
|
|
|
$
|
28,808
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
All of our collaboration agreements are denominated in
U.S. dollars.
Critical
Accounting Policies and Estimates
Managements discussion and analysis of financial condition
and results of operations are based upon our accompanying
Financial Statements, which have been prepared in accordance
with accounting principles generally accepted in the
U.S. The preparation of these financial statements requires
us to make estimates and assumptions that affect the reported
amounts of assets, liabilities, revenue and expenses as well as
the disclosure of contingent assets and liabilities. We
regularly review our estimates and assumptions.
48
These estimates and assumptions, which are based upon historical
experience and on various other factors believed to be
reasonable under the circumstances, form the basis for making
judgments about the carrying values of assets and liabilities
that are not readily apparent from other sources. Reported
amounts and disclosures may have been different had management
used different estimates and assumptions or if different
conditions had occurred in the periods presented.
Below is a discussion of the policies and estimates that we
believe involve a high degree of judgment and complexity.
Revenue
Recognition
Most of our revenue is from our collaborators for research
funding, up-front or license fees and milestone payments derived
from discovering and developing drug candidates. Our agreements
with collaboration partners include fees based on contracted
annual rates for full-time-equivalent employees working on a
program and may also include non-refundable license and up-front
fees, non-refundable milestone payments that are triggered upon
achievement of specific research or development goals and future
royalties on sales of products that result from the
collaboration. A small portion of our revenue comes from the
sale of compounds on a per-compound basis. We report revenue for
discovery, the sale of chemical compounds and the co-development
of proprietary drug candidates we out-license, as Collaboration
Revenue. License and Milestone Revenue is combined and consists
of up-front fees and ongoing milestone payments from
collaborators that are recognized during the applicable period.
We recognize revenue in accordance with Staff Accounting
Bulletin No. 104, Revenue Recognition
(SAB 104). SAB 104 establishes four
criteria, each of which must be met, in order to recognize
revenue for the performance of services or the shipment of
products. Revenue is recognized when (a) persuasive
evidence of an arrangement exists, (b) products are
delivered or services are rendered, (c) the sales price is
fixed or determinable and (d) collectability is reasonably
assured.
Collaboration agreements that include a combination of discovery
research funding, up-front or license fees, milestone payments
and/or
royalties are evaluated to determine whether each deliverable
under the agreement has value to the customer on a stand-alone
basis and whether reliable evidence of fair value for the
deliverable exists. Deliverables in an arrangement that do not
meet the separation criteria are treated as a single unit of
accounting, generally applying applicable revenue recognition
guidance for the final deliverable to the combined unit of
accounting in accordance with SAB 104.
We recognize revenue from non-refundable up-front payments and
license fees on a straight-line basis over the term of
performance under the agreement, which is generally the
estimated research term. These advance payments are deferred and
recorded as Deferred Revenue upon receipt, pending recognition
and are classified as a short-term or long-term liability in the
accompanying Balance Sheets. When the performance period is not
specifically identifiable from the agreement, we estimate the
performance period based upon provisions contained within the
agreement, such as the duration of the research term, the
specific number of full-time-equivalent scientists working a
defined number of hours per year at a stated price under the
agreement, the existence, or likelihood of achievement, of
development commitments and other significant commitments of
ours.
We also have agreements that provide for milestone payments. In
certain cases, a portion of each milestone payment is recognized
as revenue when the specific milestone is achieved based on the
applicable percentage of the estimated research or development
term that has elapsed to the total estimated research
and/or
development term. In other cases, when the milestone payment
finances the future development obligations of the Company, the
revenue is recognized on a straight-line basis over the
estimated remaining development period. Certain milestone
payments are related to activities for which there are no future
obligations and as a result, are recognized when earned in their
entirety.
We periodically review the expected performance periods under
each of our agreements that provide for non-refundable up-front
payments and license fees and milestone payments and adjusts the
amortization periods when appropriate to reflect changes in
assumptions relating to the duration of expected
49
performance periods. Revenue recognition related to
non-refundable license fees and up-front payments and milestone
payments could be accelerated in the event of early termination
of programs or alternatively, decelerated, if programs are
extended. As such, while such estimates have no impact on our
reported cash flows, our reported revenue is significantly
influenced by our estimates of the period over which our
obligations will be performed.
Cost of
Revenue and Research and Development Expenses for Proprietary
Drug Discovery
We incur costs in connection with performing research and
development activities which consist mainly of compensation,
associated fringe benefits, share-based compensation,
preclinical and clinical outsourcing costs and other
collaboration-related costs, including supplies, small tools,
facilities, depreciation, recruiting and relocation costs and
other direct and indirect chemical handling and laboratory
support costs. We allocate these costs between Cost of Revenue
and Research and Development Expenses for Proprietary Drug
Discovery based upon the respective time spent by our scientists
on development conducted for our collaborations and for our
internal proprietary programs, respectively. Cost of Revenue
represents the costs associated with research and development,
including preclinical and clinical trials, conducted by us for
our collaborators. Research and Development Expenses for
Proprietary Drug Discovery consist of direct and indirect costs
related to our specific proprietary programs. We do not bear any
risk of failure for performing these activities and the payments
are not contingent on the success or failure of the research
program. Accordingly, we expense these costs when incurred.
Where our collaboration agreements provide for us to conduct
research or development and for which our partner has an option
to obtain the right to conduct further development and to
commercialize a product, we attribute a portion of its research
and development costs to Cost of Revenue based on the percentage
of total programs under the agreement that we conclude is likely
to be selected by the partner. These costs may not be incurred
equally across all programs. In addition, we continually
evaluate the progress of development activities under these
agreements and if events or circumstances change in future
periods that we reasonably believe would make it unlikely that a
collaborator would exercise an option with respect to the same
percentage of programs, we will adjust the allocation
accordingly.
For example, we granted Celgene Corporation an option to select
up to two of four programs developed under our collaboration
agreement with Celgene and concluded that Celgene was likely to
exercise its option with respect to two of the four programs.
Accordingly, we reported costs associated with the Celgene
collaboration as follows: 50% to Cost of Revenue, with the
remaining 50% to Research and Development Expenses for
Proprietary Drug Discovery through September 30, 2009, when
Celgene waived its rights with respect to one of the programs
during the second quarter of fiscal 2010, at which time,
management determined that Celgene is likely to exercise its
option to license one of the remaining three programs. As a
result, beginning October 1, 2009, we began reporting costs
associated with the Celgene collaboration as follows: 33.3% to
Cost of Revenue, with the remaining 66.7% to Research and
Development Expenses for Proprietary Drug Discovery. See
Note 6 Deferred Revenue for further
information about the Companys collaboration with Celgene.
Accrued
Outsourcing Costs
Substantial portions of our preclinical studies and clinical
trials are performed by third-party laboratories, medical
centers, contract research organizations and other vendors
(collectively CROs). These CROs generally bill
monthly or quarterly for services performed or bill based upon
milestone achievement. For preclinical studies, we accrue
expenses based upon estimated percentage of work completed and
the contract milestones remaining. For clinical studies,
expenses are accrued based upon the number of patients enrolled
and the duration of the study. We monitor patient enrollment,
the progress of clinical studies and related activities to the
extent possible through internal reviews of data reported to us
by the CROs, correspondence with the CROs and clinical site
visits. Our estimates depend on the timeliness and accuracy of
the data provided by the CROs regarding the status of each
program and total program spending. We periodically evaluate our
estimates to determine if adjustments are necessary or
appropriate based on information we receive.
50
Marketable
Securities
We have designated our marketable securities as of each Balance
Sheet date as
available-for-sale
securities and account for them at their respective fair values.
Marketable securities are classified as short-term or long-term
based on the nature of these securities and the availability of
these securities to meet current operating requirements.
Marketable securities that are readily available for use in
current operations are classified as short-term
available-for-sale
securities and are reported as a component of current assets in
the accompanying Balance Sheets. Marketable securities that are
not considered available for use in current operations are
classified as long-term
available-for-sale
securities and are reported as a component of long-term assets
in the accompanying Balance Sheets.
Securities that are classified as
available-for-sale
are carried at fair value, including accrued interest, with
temporary unrealized gains and losses reported as a component of
Stockholders Deficit until their disposition. We review
all
available-for-sale
securities each period to determine if they remain
available-for-sale
based on our current intent and ability to sell the security if
we are required to do so. The amortized cost of debt securities
in this category is adjusted for amortization of premiums and
accretion of discounts to maturity. Such amortization is
included in Interest Income in the accompanying Statements of
Operations and Comprehensive Loss. Realized gains on ARS are
reported in Gains (Losses) on Auction Rate Securities in the
accompanying Statements of Operations and Comprehensive Loss as
incurred along with declines in value judged to be
other-than-temporary
when such declines are recognized. The cost of securities sold
is based on the specific identification method.
Under the fair value hierarchy, our ARS are measured using
Level III, or unobservable inputs, as there is no active
market for the securities. The most significant unobservable
inputs used in this method are estimates of the amount of time
until a liquidity event will occur and the discount rate, which
incorporates estimates of credit risk and a liquidity premium
(discount). Due to the inherent complexity in valuing these
securities, we engaged a third-party valuation firm to perform
an independent valuation of the ARS as part of our overall fair
value analysis beginning with the first quarter of fiscal 2009
and continuing through all quarters of the current fiscal year.
While we believe that the estimates used in the fair value
analysis are reasonable, a change in any of the assumptions
underlying these estimates would result in different fair value
estimates for the ARS and could result in additional adjustments
to the ARS, either increasing or further decreasing their value,
possibly by material amounts.
See Note 3 Marketable Securities for
additional information about our investments in ARS as well as
Other Income (Expense) in the Results of Operations
discussion in Managements Discussion and Analysis of
Financial Condition and Results of Operations included elsewhere
in this Annual Report on
Form 10-K.
Fair Value
Measurements
Our financial instruments are recognized and measured at fair
value in our financial statements and mainly consist of cash and
cash equivalents, marketable securities, long-term investments,
trade receivables and payables, long-term debt, embedded
derivatives associated with the long-term debt and warrants. We
use different valuation techniques to measure the fair value of
assets and liabilities, as discussed in more detail below. Fair
value is defined as the price that would be received to sell the
financial instruments in an orderly transaction between market
participants at the measurement date. We use a framework for
measuring fair value based on a hierarchy that distinguishes
sources of available information used in fair value measurements
and categorizes them into three levels:
|
|
|
|
|
Level I: Quoted prices in active markets
for identical assets and liabilities.
|
|
|
Level II: Observable inputs other than
quoted prices in active markets for identical assets and
liabilities.
|
|
|
Level III: Unobservable inputs.
|
We disclose assets and liabilities measured at fair value based
on their level in the hierarchy. Considerable judgment is
required in interpreting market data to develop estimates of
fair value for assets or liabilities for
51
which there are no quoted prices in active markets, which
include our ARS, warrants issued by us or embedded derivatives
associated with our long-term debt. The use of different
assumptions
and/or
estimation methodologies may have a material effect on their
estimated fair value. Accordingly, the fair value estimates
disclosed by us may not be indicative of the amount that we or
holders of the instruments could realize in a current market
exchange.
We periodically review the realizability of each investment when
impairment indicators exist with respect to the investment. If
an
other-than-temporary
impairment of the value of an investment is deemed to exist, the
cost basis of the investment is written down to its then
estimated fair value.
Long-term Debt
and Embedded Derivatives
The terms of our long-term debt are discussed in detail in
Note 5 Long-term Debt included elsewhere
in this Annual Report on Form
10-K. The
accounting for these arrangements is complex and is based upon
significant estimates by management. We review all debt
agreements to determine the appropriate accounting treatment
when the agreement is entered into and review all amendments to
determine if the changes require accounting for the amendment as
a modification, or extinguishment and new debt. We also review
each long-term debt arrangement to determine if any feature of
the debt requires bifurcation
and/or
separate valuation. These features include hybrid instruments,
which are comprised of at least two components ((1) a debt host
instrument and (2) one or more conversion features),
warrants and other embedded derivatives, such as puts and other
rights of the debt holder.
We currently have two embedded derivatives related to our
long-term debt with Deerfield. The first is a variable interest
rate structure that constitutes a liquidity-linked variable
spread feature. The second derivative is a significant
transaction contingent put option relating to the ability of
Deerfield to accelerate repayment of the debt in the event of
certain changes in control of our company. Collectively, they
are referred to as the Embedded Derivatives. Under
the fair value hierarchy, our Embedded Derivatives are measured
using Level III, or unobservable inputs, as there is no
active market for them. The fair value of the variable interest
rate structure is based on our estimate of the probable
effective interest rate over the term of the Deerfield credit
facilities. The fair value of the put option is based on our
estimate of the probability that a change in control that
triggers Deerfields right to accelerate the debt will
occur. With those inputs, the fair value of each Embedded
Derivative is calculated as the difference between the fair
value of the Deerfield credit facilities if the Embedded
Derivatives are included and the fair value of the Deerfield
credit facilities if the Embedded Derivatives are excluded. Due
to the inherent complexity in valuing the Deerfield credit
facilities and the Embedded Derivatives, we engaged a
third-party valuation firm to perform the valuation as part of
our overall fair value analysis as of July 31, 2009, the
date funds were disbursed under the credit facility entered into
in May 2009 and for each subsequent quarter end through
June 30, 2010. The estimated fair value of the Embedded
Derivatives was determined based on managements judgment
and assumptions and the use of different assumptions could
result in significantly different estimated fair values.
The fair value of the Embedded Derivatives was initially
recorded as Derivative Liabilities and as Debt Discount in our
Balance Sheets. Any change in the value of the Embedded
Derivatives is adjusted quarterly as appropriate and recorded to
Derivative Liabilities in the Balance Sheets and Interest
Expense in the accompanying Statements of Operations and
Comprehensive Loss. The Debt Discount is being amortized from
the draw date of July 31, 2009 to the end of the term of
the Deerfield credit facilities using the effective interest
method and recorded as Interest Expense in the accompanying
Statements of Operations and Comprehensive Loss.
Warrants we issue in connection with our long-term debt
arrangements are reviewed to determine if they should be
classified as liabilities or as equity. All outstanding warrants
issued by us have been classified as equity. We value the
warrants at issuance based on a Black-Scholes option pricing
model and then allocate a portion of the proceeds under the debt
to the warrants based upon their relative fair values.
Any transaction fees paid in connection with our long-term debt
arrangements that quality for capitalization are recorded as
Other Long-Term Assets in the Balance Sheets and amortized to
Interest Expense in the
52
accompanying Statements of Operations and Comprehensive Loss
using the effective interest method over the term of the
underlying debt agreement.
Results of
Operations
Collaboration
Revenue
Collaboration Revenue consists of revenue for our performance of
drug discovery and development activities in collaboration with
partners, which include: co-development of proprietary drug
candidates we out-license as well as screening, lead generation
and lead optimization research, custom synthesis and process
research and to a small degree the development and sale of
chemical compounds.
A summary of our collaboration revenue follows (dollars in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended June 30,
|
|
|
Change 2010 vs. 2009
|
|
|
Change 2009 vs. 2008
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
$
|
|
|
%
|
|
|
$
|
|
|
%
|
|
|
Collaboration revenue
|
|
$
|
21,395
|
|
|
$
|
17,228
|
|
|
$
|
21,513
|
|
|
$
|
4,167
|
|
|
|
24.2
|
%
|
|
$
|
(4,285
|
)
|
|
|
(19.9
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2010 compared to Fiscal 2009 The
increase in Collaboration Revenue of $4.2 million, or
24.2%, for the year ended June 30, 2010 was from
$4.4 million of revenue from our new collaboration with
Amgen and $500 thousand of additional revenue under our
collaboration with Genentech, of which the $1 million
recorded in the first quarter of fiscal 2010 was for the
finalization of contract rates for services rendered in the
prior fiscal year. This increase was offset by fewer scientists
engaged on the Genentech program beginning in the third quarter
of fiscal 2010 and $800 thousand less revenue due to the
expiration of our research term with VentiRx.
Fiscal 2009 compared to Fiscal 2008
Collaboration Revenue decreased by $4.3 million or
19.9% in fiscal 2009 primarily due to lower revenue of
$4.1 million resulting from the expiration our
collaboration with Ono Pharmaceuticals and of $500 thousand due
to decreased activity under our collaboration with VentiRx.
These declines were partially offset by an increase of $263
thousand for the expansion of the Genentech collaboration in the
first quarter of fiscal 2009.
License and
Milestone Revenue
License and Milestone Revenue are combined and consist of
up-front license fees and ongoing milestone payments from
collaborators.
A summary of our license and milestone revenue follows (dollars
in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended June 30,
|
|
|
Change 2010 vs. 2009
|
|
|
Change 2009 vs. 2008
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
$
|
|
|
%
|
|
|
$
|
|
|
%
|
|
|
License revenue
|
|
$
|
27,489
|
|
|
$
|
6,475
|
|
|
$
|
6,846
|
|
|
$
|
21,014
|
|
|
|
324.5
|
%
|
|
$
|
(371
|
)
|
|
|
(5.4
|
)%
|
Milestone revenue
|
|
|
4,996
|
|
|
|
1,279
|
|
|
|
449
|
|
|
|
3,717
|
|
|
|
290.6
|
%
|
|
|
830
|
|
|
|
184.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total license and milestone revenue
|
|
$
|
32,485
|
|
|
$
|
7,754
|
|
|
$
|
7,295
|
|
|
$
|
24,731
|
|
|
|
318.9
|
%
|
|
$
|
459
|
|
|
|
6.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2010 compared to Fiscal 2009 During
fiscal 2010, we received $100 million in upfront payments
from new collaborations with Amgen and Novartis and
$9.8 million in milestones. License revenue increased
$21 million in fiscal 2010 compared to fiscal 2009 as a
result of $10.8 million in revenue for our new
collaboration with Amgen, $2.2 million in revenue for our
new collaboration with Novartis and $7.4 million in
additional revenue recognized under the Celgene collaboration
due to our conclusion that the remaining estimated performance
period decreased from five to two years effective
September 30, 2009 (see Note 6 Deferred
Revenue to the accompanying Financial Statements).
53
Milestone revenue increased in fiscal 2010 by $3.7 million
over the prior year. The increase includes $3.8 million in
milestones recognized for the advancement of certain research
programs under our collaboration with Genentech, compared with
$280 thousand of milestone revenue under our Genentech
collaboration recognized in fiscal 2009. Additionally, we
recognized $1 million in milestone revenue from InterMune
during fiscal 2010 and similarly, recognized $1 million in
milestone revenue from VentiRx during fiscal 2009.
Fiscal 2009 compared to Fiscal 2008 License
and Milestone Revenue for fiscal 2009 remained relatively
consistent with fiscal 2008 in total. During fiscal 2009,
License and Milestone Revenue included an increase of
$920 thousand from additional license revenue following
expansion of our collaboration with Genentech and from
additional milestone revenue received from Genentech that was
recognized in fiscal 2009; and an increase in license revenue of
$1.5 million under our Celgene collaboration, which did not
begin until the second quarter of fiscal 2008; and a decrease in
license revenue of $1.7 million that was fully recognized
in 2008 under our program with VentiRx.
Cost of
Revenue
Cost of Revenue represents costs attributable to discovery and
development including preclinical and clinical trials we may
conduct for our collaborators and the cost of chemical compounds
sold from our inventory. These costs consist mainly of
compensation, associated fringe benefits, share-based
compensation, preclinical and clinical outsourcing costs and
other collaboration-related costs, including supplies, small
tools, travel and meals, facilities, depreciation, recruiting
and relocation costs and other direct and indirect chemical
handling and laboratory support costs.
A summary of our Cost of Revenue follows (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended June 30,
|
|
|
Change 2010 vs. 2009
|
|
|
Change 2009 vs. 2008
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
$
|
|
|
%
|
|
|
$
|
|
|
%
|
|
|
Cost of revenue
|
|
$
|
28,322
|
|
|
$
|
19,855
|
|
|
$
|
21,364
|
|
|
$
|
8,467
|
|
|
|
42.6
|
%
|
|
$
|
(1,509
|
)
|
|
|
(7.1
|
)%
|
Cost of revenue as a percentage of total revenue
|
|
|
52.6
|
%
|
|
|
79.5
|
%
|
|
|
74.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2010 compared to Fiscal 2009 Cost of
Revenue increased in absolute dollars and decreased as a
percentage of total revenue for fiscal 2010 compared to the
prior year. The increase in absolute dollars was for discovery,
preclinical and clinical costs for the advancement of certain
collaboration programs, including Celgene and our new programs
with Amgen and Novartis. These increases were offset by the
change in the estimate for the Celgene cost allocation from 50%
to Cost of Revenue and 50% to Research and Development Expenses
for Proprietary Drug Discovery to 33.3% and 67.7%, respectively,
as discussed further in Note 6 Deferred
Revenue to the accompanying Financial Statements. In
addition, there were fewer scientists engaged on our
collaboration with Genentech and our research term with VentiRx,
which expired in September 2009. The decrease as a percentage of
total revenue was because of greater License and Milestone
Revenue recognized during the year.
Fiscal 2009 compared to Fiscal 2008 Cost of
Revenue decreased in absolute dollars but increased as a
percentage of total revenue in fiscal 2009 compared with fiscal
2008. The increases in Cost of Revenue as a percentage of
revenue were primarily due to the decrease in license revenue
from VentiRx, which had no associated costs and increased costs
associated with advancement of our partnered programs, including
our collaboration with Celgene, as well as $269 thousand in
restructuring charges as discussed in Note 9
Restructuring Charges in the accompanying Financial
Statements.
Research and
Development Expenses for Proprietary Drug
Discovery
Our research and development expenses for proprietary drug
discovery include costs associated with our proprietary drug
programs for scientific and clinical personnel, supplies,
inventory, equipment, small tools, travel and meals,
depreciation, consultants, sponsored research, allocated
facility costs, costs related to
54
preclinical and clinical trials and share-based compensation. We
manage our proprietary programs based on scientific data and
achievement of research plan goals. Our scientists record their
time to specific projects when possible; however, many
activities simultaneously benefit multiple projects and cannot
be readily attributed to a specific project. Accordingly, the
accurate assignment of time and costs to a specific project is
difficult and may not give a true indication of the actual costs
of a particular project. As a result, we do not report costs on
a program basis.
The following table shows our research and development expenses
by categories of costs for the periods presented (dollars in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change 2010
|
|
|
Change 2009
|
|
|
|
Years Ended June 30,
|
|
|
vs. 2009
|
|
|
vs. 2008
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
$
|
|
|
%
|
|
|
$
|
|
|
%
|
|
|
Salaries, benefits and share-based compensation
|
|
$
|
31,358
|
|
|
$
|
37,887
|
|
|
$
|
33,304
|
|
|
$
|
(6,529
|
)
|
|
|
(17.2
|
)%
|
|
$
|
4,583
|
|
|
|
13.8
|
%
|
Outsourced services and consulting
|
|
|
19,131
|
|
|
|
28,761
|
|
|
|
34,570
|
|
|
|
(9,630
|
)
|
|
|
(33.5
|
)%
|
|
|
(5,809
|
)
|
|
|
(16.8
|
)%
|
Laboratory supplies
|
|
|
10,734
|
|
|
|
10,256
|
|
|
|
10,521
|
|
|
|
478
|
|
|
|
4.7
|
%
|
|
|
(265
|
)
|
|
|
(2.5
|
)%
|
Facilities and depreciation
|
|
|
9,697
|
|
|
|
10,649
|
|
|
|
10,148
|
|
|
|
(952
|
)
|
|
|
(8.9
|
)%
|
|
|
501
|
|
|
|
4.9
|
%
|
Other
|
|
|
1,568
|
|
|
|
2,007
|
|
|
|
1,804
|
|
|
|
(439
|
)
|
|
|
(21.9
|
)%
|
|
|
203
|
|
|
|
11.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total research and development for proprietary drug discovery
|
|
$
|
72,488
|
|
|
$
|
89,560
|
|
|
$
|
90,347
|
|
|
$
|
(17,072
|
)
|
|
|
(19.1
|
)%
|
|
$
|
(787
|
)
|
|
|
(0.9
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2010 compared to Fiscal 2009 Research
and Development Expenses for Proprietary Drug Discovery for
fiscal 2010 decreased from the prior year because our
development costs for AMG 151 and MEK162 shifted out of Research
and Development Expenses for our Proprietary Drug Discovery to
Cost of Revenue as a result of partnering these programs under
our collaboration agreements with Amgen and Novartis.
Additionally, we reduced overall spending as we focused on the
development efforts for our most advanced programs and reduced
resources devoted to early discovery research, which occurred
after the second quarter of fiscal 2009.
We expect our spending on research and development expenses for
our proprietary programs will remain relatively constant with
the fourth quarter of fiscal 2010 levels during fiscal 2011.
Fiscal 2009 compared to Fiscal 2008 Research
and Development Expenses for Proprietary Drug Discovery for
fiscal 2009 remained consistent with the prior year due to
shifting our development efforts towards our most advanced
programs and reduced resources devoted to early discovery
research, which occurred in the middle of fiscal 2009. These
efforts resulted in the progression of our most advanced
programs. Included in salaries, benefits and share-based
compensation for the year ended June 30, 2009 is
$1.1 million of restructuring charges as discussed in
Note 9 Restructuring Charges in the
accompanying Financial Statements.
General and
Administrative Expenses
General and Administrative Expenses consist mainly of
compensation and associated fringe benefits not included in Cost
of Revenue or Research and Development Expenses for Proprietary
Drug Discovery and include other management, business
development, accounting, information technology and
administration costs, including patent filing and prosecution,
recruiting and relocation, consulting and professional services,
travel and meals, sales commissions, facilities, depreciation
and other office expenses.
55
A summary of our General and Administrative Expenses follows
(dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended June 30,
|
|
|
Change 2010 vs. 2009
|
|
|
Change 2009 vs. 2008
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
$
|
|
|
%
|
|
|
$
|
|
|
%
|
|
|
General and administrative
|
|
$
|
17,121
|
|
|
$
|
18,020
|
|
|
$
|
15,591
|
|
|
$
|
(899
|
)
|
|
|
(5.0
|
)%
|
|
$
|
2,429
|
|
|
|
15.6
|
%
|
Fiscal 2010 compared to Fiscal 2009 General
and Administrative Expenses decreased $899 thousand, or 5%, in
fiscal 2010 compared to fiscal 2009 primarily as a result of
lower patent costs.
Fiscal 2009 compared to Fiscal 2008 General
and Administrative Expenses increased by $2.4 million
during the 2009 fiscal year over the prior fiscal year primarily
due to $1.5 million of additional patent costs related to
filing and supporting our patent applications and patents. In
addition audit, legal and other consulting expenses increased
$825 thousand related to general corporate matters, including
costs associated with the valuation of our ARS and closing our
additional credit facility with Deerfield.
Other Income
(Expense)
A summary of our Other Income (Expense) follows (dollars in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change 2010
|
|
|
Change 2009
|
|
|
|
Years Ended June 30,
|
|
|
vs. 2009
|
|
|
vs. 2008
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
$
|
|
|
%
|
|
|
$
|
|
|
%
|
|
|
Gains (losses) on auction rate securities
|
|
$
|
1,305
|
|
|
$
|
(17,742
|
)
|
|
$
|
(1,872
|
)
|
|
$
|
19,047
|
|
|
|
(107.4
|
)%
|
|
$
|
(15,870
|
)
|
|
|
847.8
|
%
|
Interest income
|
|
|
864
|
|
|
|
2,116
|
|
|
|
6,064
|
|
|
|
(1,252
|
)
|
|
|
(59.2
|
)%
|
|
|
(3,948
|
)
|
|
|
(65.1
|
)%
|
Interest expense
|
|
|
(15,749
|
)
|
|
|
(10,024
|
)
|
|
|
(1,986
|
)
|
|
|
(5,725
|
)
|
|
|
57.1
|
%
|
|
|
(8,038
|
)
|
|
|
404.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income (expense), net
|
|
$
|
(13,580
|
)
|
|
$
|
(25,650
|
)
|
|
$
|
2,206
|
|
|
$
|
12,070
|
|
|
|
(47.1
|
)%
|
|
$
|
(27,856
|
)
|
|
|
(1,262.7
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
A summary of the gains and losses recorded related to our ARS
follows (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended June 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Unrealized gains
|
|
$
|
3,214
|
|
|
$
|
3,232
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized losses
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
(1,939
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Realized gains
|
|
$
|
1,522
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Losses attributable to the change in unrealized losses
|
|
$
|
-
|
|
|
$
|
(1,939
|
)
|
|
$
|
-
|
|
Other current period losses
|
|
|
(217
|
)
|
|
|
(15,803
|
)
|
|
|
(1,872
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total impairment of marketable securities
|
|
$
|
(217
|
)
|
|
$
|
(17,742
|
)
|
|
$
|
(1,872
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The impairment of marketable securities shown in the table above
was from the other than temporary decline in the estimated fair
value of our ARS. The realized gains detailed in the table above
are the result of the realized gains recorded on the sale of two
of our ARS, which were sold in December 2009 and February 2010.
The determination of the estimated fair values of the warrants
issued in connection with the Deerfield credit facilities, the
Embedded Derivatives and the ARS requires significant management
judgment with regard to expectations of future cash balances,
general and specific economic conditions, forecasts of interest
rate behaviors, evaluation of potential acquirers and similar
other factors. While we believe that the estimates used in the
fair value analysis of the ARS, warrants and the Embedded
Derivatives are reasonable, a change in any of the assumptions
underlying these estimates would result in different fair value
estimates and could result in material changes in their fair
value. Future changes to the estimated
56
fair values of the Embedded Derivatives will be reflected in our
earnings. See Note 3 Marketable
Securities and Note 7 Long-term Debt
to the accompanying Financial Statements for additional
information about the ARS and these Embedded Derivatives.
Interest Income decreased during the year ended June 30,
2010 compared to fiscal 2009 primarily due to the sale of two of
our ARS as well as lower effective interest rates and lower
average cash and cash equivalent balances during fiscal 2010.
Interest Expense increased in fiscal 2010 compared to fiscal
2009 due to increased borrowings under the Deerfield credit
facilities, partially offset by a lower interest rate on the
debt.
The following table presents the components of Interest Expense
for the three years ended June 30, 2010 (dollars in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended June 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Deerfield Credit Facility:
|
|
|
|
|
|
|
|
|
|
|
|
|
2.0% simple interest
|
|
$
|
124
|
|
|
$
|
1,600
|
|
|
$
|
276
|
|
6.5% compounding interest
|
|
|
476
|
|
|
|
5,388
|
|
|
|
898
|
|
7.5% simple interest
|
|
|
8,250
|
|
|
|
-
|
|
|
|
-
|
|
Amortization of the transaction fees
|
|
|
549
|
|
|
|
268
|
|
|
|
5
|
|
Amortization of the debt discounts
|
|
|
5,948
|
|
|
|
2,427
|
|
|
|
46
|
|
Change in value of the Embedded Derivatives
|
|
|
(237
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest expense on Deerfield Credit Facility
|
|
|
15,110
|
|
|
|
9,683
|
|
|
|
1,225
|
|
Comerica Loan:
|
|
|
|
|
|
|
|
|
|
|
|
|
Variable interest
|
|
|
639
|
|
|
|
341
|
|
|
|
761
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest expense on Comerica Loan
|
|
|
639
|
|
|
|
341
|
|
|
|
761
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest expense
|
|
$
|
15,749
|
|
|
$
|
10,024
|
|
|
$
|
1,986
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
Taxes
A summary of our Income Tax Benefit follows (dollars in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change 2010
|
|
|
Change 2009
|
|
|
|
Years Ended June 30,
|
|
|
vs. 2009
|
|
|
vs. 2008
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
$
|
|
|
%
|
|
|
$
|
|
|
%
|
|
|
Income tax benefit
|
|
$
|
-
|
|
|
$
|
288
|
|
|
$
|
-
|
|
|
$
|
(288
|
)
|
|
|
100.0
|
%
|
|
$
|
288
|
|
|
|
-
|
|
During fiscal 2009, we recorded an income tax receivable and
benefit related to a research and experimentation federal income
tax credit. The $288 thousand credit relates to research
expenditures we made during fiscal 2008 and 2009.
Liquidity and
Capital Resources
We have incurred operating losses and an accumulated deficit as
a result of ongoing research and development spending. As of
June 30, 2010, we had an accumulated deficit of
$490.8 million. We had net losses of $77.6 million,
$127.8 million and $96.3 million for the fiscal years
ended June 30, 2010, 2009 and 2008, respectively.
We have historically funded our operations through payments
received under our collaborations and out-licensing
transactions, the issuance of equity securities and through debt
provided by our credit facilities. Until we can generate
sufficient levels of cash from our operations, which we do not
expect to achieve in the foreseeable future, we will continue to
utilize our existing cash, cash equivalents and marketable
securities that were generated primarily from these sources. We
believe that our cash, cash equivalents and marketable
securities and excluding the value of the ARS we hold, will
enable us to continue to fund our
57
operations for at least the next 12 months. In December
2009, we received a $60 million up-front payment from Amgen
under a Collaboration and License Agreement. In April 2010, we
entered into a License Agreement with Novartis under which we
received $45 million in an upfront and milestone payment in
the fourth quarter of fiscal 2010. The recognition of revenue
under these agreements is discussed further in
Note 6 Deferred Revenue to the
accompanying Financial Statements. There can be no assurance
that we will be successful in entering into future
collaborations, however, or that other funds will be available
to us when needed.
If we are unable to obtain additional funding from these or
other sources to the extent or when needed, it may be necessary
to significantly reduce our current rate of spending through
further reductions in staff and delaying, scaling back or
stopping certain research and development programs. Insufficient
funds may also require us to relinquish greater rights to
product candidates at an earlier stage of development or on less
favorable terms to us or our stockholders than we would
otherwise choose in order to obtain up-front license fees needed
to fund our operations.
Our ability to realize milestone or royalty payments under
existing collaboration agreements and to enter into new
partnering arrangements that generate additional revenue through
up-front fees and milestone or royalty payments, is subject to a
number of risks, many of which are beyond our control and
include the following: the drug development process is risky and
highly uncertain and we may not be successful in generating
proof-of-concept
data to create partnering opportunities and even if we are, we
or our collaborators may not be successful in commercializing
drug candidates we create; our collaborators have substantial
control and discretion over the timing and continued development
and marketing of drug candidates we create and, therefore, we
may not receive milestone, royalty or other payments when
anticipated or at all; the drug candidates we develop may not
obtain regulatory approval; and, if regulatory approval is
received, drugs we develop will remain subject to regulation or
may not gain market acceptance, which could delay or prevent us
from generating milestone, royalty revenue or product revenue
from the commercialization of these drugs.
Our assessment of our future need for funding is a
forward-looking statement that is based on assumptions that may
prove to be wrong and that involve substantial risks and
uncertainties. Our actual future capital requirements could vary
as a result of a number of factors, including:
|
|
|
|
|
Our ability to enter into agreements to out-license, co-develop
or commercialize our proprietary drug candidates and the timing
of payments under those agreements throughout each
candidates development stage;
|
|
|
The number and scope of our research and development programs;
|
|
|
The progress and success of our preclinical and clinical
development activities;
|
|
|
The progress of the development efforts of our collaborators;
|
|
|
Our ability to maintain current collaboration agreements;
|
|
|
The costs involved in enforcing patent claims and other
intellectual property rights;
|
|
|
The costs and timing of regulatory approvals; and/or
|
|
|
The expenses associated with unforeseen litigation, regulatory
changes, competition and technological developments, general
economic and market conditions and the extent to which we
acquire or invest in other businesses, products and technologies.
|
Cash, Cash
Equivalents and Marketable Securities
Cash equivalents are short-term, highly liquid financial
instruments that are readily convertible to cash and have
maturities of 90 days or less from the date of purchase.
Marketable securities classified as short-term consist primarily
of various financial instruments such as commercial paper,
U.S. government agency obligations and corporate notes and
bonds with high credit quality with maturities of greater than
90 days when purchased. Marketable securities classified as
long-term consist primarily of our investments in ARS. See
Note 3 Marketable Securities in the
accompanying Financial Statements for more information regarding
our ARS. Our ability to sell the ARS is substantially limited
due to auctions that continue to be suspended for these
securities in the
58
related markets. In the event we need to access these funds and
liquidate the ARS prior to the time auctions of these
investments are successful or the date on which the original
issuers retire these securities, we may be required to sell them
in a distressed sale in a secondary market, most likely for a
lower value than their current fair value.
Following is a summary of our cash, cash equivalents and
marketable securities (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change 2010
|
|
|
Change 2009
|
|
|
|
Years Ended June 30,
|
|
|
vs. 2009
|
|
|
vs. 2008
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
$
|
|
|
%
|
|
|
$
|
|
|
%
|
|
|
Cash and cash equivalents
|
|
$
|
32,846
|
|
|
$
|
33,202
|
|
|
$
|
56,448
|
|
|
$
|
(356
|
)
|
|
|
(1.1
|
)%
|
|
$
|
(23,246
|
)
|
|
|
(41.2
|
)%
|
Marketable securities
short-term
|
|
|
78,664
|
|
|
|
7,296
|
|
|
|
39,243
|
|
|
|
71,368
|
|
|
|
978.2
|
%
|
|
|
(31,947
|
)
|
|
|
(81.4
|
)%
|
Marketable securities
long-term
|
|
|
17,359
|
|
|
|
16,990
|
|
|
|
29,840
|
|
|
|
369
|
|
|
|
2.2
|
%
|
|
|
(12,850
|
)
|
|
|
(43.1
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
128,869
|
|
|
$
|
57,488
|
|
|
$
|
125,531
|
|
|
$
|
71,381
|
|
|
|
124.2
|
%
|
|
$
|
(68,043
|
)
|
|
|
(54.2
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flow
Activities
Following is a summary of our cash flows (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change 2010
|
|
|
Change 2009
|
|
|
|
Years Ended June 30,
|
|
|
vs. 2009
|
|
|
vs. 2008
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
$
|
|
|
%
|
|
|
$
|
|
|
%
|
|
|
Cash flows provided by (used in):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating activities
|
|
$
|
17,558
|
|
|
$
|
(92,939
|
)
|
|
$
|
(45,736
|
)
|
|
$
|
110,497
|
|
|
|
(118.9
|
)%
|
|
$
|
(47,203
|
)
|
|
|
103.2
|
%
|
Investing activities
|
|
|
(69,063
|
)
|
|
|
29,005
|
|
|
|
50,726
|
|
|
|
(98,068
|
)
|
|
|
(338.1
|
)%
|
|
|
(21,721
|
)
|
|
|
(42.8
|
)%
|
Financing activities
|
|
|
51,149
|
|
|
|
40,688
|
|
|
|
40,788
|
|
|
|
10,461
|
|
|
|
25.7
|
%
|
|
|
(100
|
)
|
|
|
(0.2
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
(356
|
)
|
|
$
|
(23,246
|
)
|
|
$
|
45,778
|
|
|
$
|
22,890
|
|
|
|
(98.5
|
)%
|
|
$
|
(69,024
|
)
|
|
|
(150.8
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2010 compared to Fiscal 2009 Net
cash provided by (used in) operating activities for fiscal 2010
was $17.6 million, compared to $(92.9) million for
fiscal 2009. The $100 million received in fiscal 2010 from
Amgen and Novartis in up-front and initial milestone payments
under our collaboration agreements with them was offset by
reduced spending on advancing our own proprietary programs,
which decreased our net loss. Net cash provided by (used in)
operating activities was also higher due to the issuance of
stock as payment of 2009 employee bonuses during fiscal
2010 compared to the cash bonus distribution during the prior
year.
Net cash (used in) provided by investing activities was
$(69.1) million and $29 million in fiscal 2010 and
2009, respectively. During the fiscal 2010, we invested
$1.6 million less in property and equipment than we did in
the prior year because of our plan to reduce overall spending.
During the first quarter of fiscal 2010, we liquidated our
non-ARS marketable securities as they matured. During the fourth
quarter of fiscal 2010, we began investing again in longer term
U.S. government backed securities.
Net cash provided by financing activities was $51.1 million
and $40.7 million for fiscal 2010 and 2009, respectively.
This increase was primarily due to receiving net proceeds of
$11 million from sales of shares of our common stock under
our Equity Distribution Agreement with Piper Jaffray &
Co. Both years include net proceeds of $39 million from the
Deerfield facilities.
Fiscal 2009 compared to Fiscal 2008 Net
cash used in operating activities for fiscal year 2009 was
$92.9 million, compared to $45.7 million for fiscal
2008. The most significant reason for this increase was a
$40 million license payment from Celgene received in fiscal
2008. During fiscal year 2009, our net loss of
$127.8 million was reduced by non-cash charges of
$6.6 million for depreciation and amortization
59
expense, $5.9 million for share-based compensation expense,
a $17.7 million other-than temporary impairment charge
related to our ARS and $8 million of amortization of debt
discount. Changes in operating assets and liabilities included
an increase of $3.6 million of deferred revenue, primarily
related to milestone payments received under our agreements with
Genentech and Celgene, a decrease of $6.5 million in
accrued outsourcing costs due to decreased obligations for
outsourced pharmacology, contract drug manufacturing and
clinical trial expenses, an increase in accounts payable due to
the timing of payments, a decrease to deferred rent of
$2.7 million related to non-cash charges and $898 thousand
of changes in other operating assets and liabilities.
Net cash provided by investing activities was $29 million
and $50.7 million in fiscal 2009 and 2008, respectively.
During fiscal 2009, we invested $2.9 million in property
and equipment, primarily in lab equipment and facilities for
research and development and various computer equipment hardware
and software. Purchases of marketable securities used
$19.1 million in cash and proceeds from sales and
maturities of marketable securities provided $51.1 million.
Net cash provided by financing activities was comparable at
$40.7 million and $40.8 million in fiscal 2009 and
2008, respectively; primarily due to $40 million in
proceeds we received in connection with our $80 million
debt facility in both December of 2008 and in June of 2008. We
also received proceeds of $1.7 million and
$1.8 million from exercises of employee stock options and
purchases of stock by employees under our ESPP during fiscal
2009 and fiscal 2008, respectively.
Obligations and
Commitments
The following table shows our contractual obligations and
commitments as of June 30, 2010 (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less Than
|
|
|
1 to 3
|
|
|
4 to 5
|
|
|
|
|
|
|
|
|
|
1 Year
|
|
|
Years
|
|
|
Years
|
|
|
Over 5 Years
|
|
|
Total
|
|
|
Debt obligations (1)
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
141,762
|
|
|
$
|
-
|
|
|
$
|
141,762
|
|
Interest on debt obligations (3)(4)
|
|
|
9,488
|
|
|
|
18,976
|
|
|
|
7,663
|
|
|
|
-
|
|
|
|
36,127
|
|
Operating lease commitments (2)
|
|
|
7,895
|
|
|
|
16,080
|
|
|
|
16,453
|
|
|
|
8,653
|
|
|
|
49,081
|
|
Purchase obligations (2)
|
|
|
17,105
|
|
|
|
1,497
|
|
|
|
-
|
|
|
|
-
|
|
|
|
18,602
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
34,488
|
|
|
$
|
36,553
|
|
|
$
|
165,878
|
|
|
$
|
8,653
|
|
|
$
|
245,572
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Reflected in the accompanying Balance Sheets, net of debt
discounts of $28.9 million. |
(2) |
|
These obligations are not reflected in the accompanying Balance
Sheets. |
(3) |
|
Interest on the variable debt obligations under the Loan and
Security Agreement with Comerica Bank is calculated at 3.25%,
the interest rate in effect as of June 30, 2010. |
(4) |
|
Interest on the variable debt obligation under the credit
facilities with Deerfield is calculated at 7.5%, the interest
rate in effect as of June 30, 2010. |
We are obligated under non-cancelable operating leases for all
of our facilities and under certain equipment leases. Original
lease terms for our facilities in effect as of June 30,
2010 were five to 10 years and generally require us to pay
the real estate taxes, insurance and other operating costs.
Equipment lease terms generally range from three to five years.
Purchase obligations totaling $10.4 million are for
outsourced services for clinical trials and other research and
development costs. Purchase obligations totaling
$4.2 million are for software related expenses. The
remaining $4 million is for all other purchase commitments.
ITEM 7A.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
Market risk represents the risk of loss that may impact our
financial position, results of operations or cash flows due to
adverse changes in financial and commodity market prices, the
liquidity of ARS we hold and fluctuations in interest rates. All
of our collaboration agreements and nearly all purchase orders
are denominated in U.S. dollars. As a result, historically
and as of June 30, 2010, we have had little or no exposure
to market risk from changes in foreign currency or exchange
rates.
60
Our investment portfolio, without regard to our ARS, is
comprised primarily of readily marketable, high-quality
securities diversified and structured to minimize market risks.
We target our average portfolio maturity at one year or less.
Our exposure to market risk for changes in interest rates
relates primarily to our investments in marketable securities.
Marketable securities held in our investment portfolio are
subject to changes in market value in response to changes in
interest rates and liquidity. As of June 30, 2010,
$16.6 million of our investment portfolio was invested in
ARS that are not marketable as discussed below. In addition, a
significant change in market interest rates could have a
material impact on interest income earned from our investment
portfolio. A theoretical 100 basis point change in interest
rates and security prices would impact our annual net loss
positively or negatively by $1.3 million based on the
current balance of $128.9 million of investments classified
as cash and cash equivalents and short-term and long-term
marketable securities available for sale.
Our long-term marketable securities investment portfolio
includes ARS. During the fiscal year ended June 30, 2008
and subsequent thereto, auctions for all of our ARS were
unsuccessful. As of June 30, 2010, we held five securities
with a par value of $26.3 million and an estimated fair
value of $16.6 million. As of June 30, 2009, we held
seven securities with a par value of $32.9 million and an
estimated fair value of $16.5 million. We sold one of the
ARS in the second quarter of fiscal 2010 with a par value of
$4 million and an estimated fair value of $2.1 million
for $2.8 million and realized a gain of $1.2 million,
with $391 thousand reclassified from Accumulated Other
Comprehensive Income. We sold another ARS in the third quarter
of fiscal 2010 with a par value of $2.6 million and an
estimated fair value of $0.9 million for $715 thousand and
realized a gain of $357 thousand, with $524 thousand
reclassified to earnings from Accumulated Other Comprehensive
Income.
Due to unsuccessful auctions and continuing uncertainty and
volatility in the credit markets, the estimated fair value of
our ARS has fluctuated and we have therefore recorded fair value
adjustments to our ARS as follows (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended June 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Unrealized gains
|
|
$
|
3,214
|
|
|
$
|
3,232
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized losses
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
(1,939
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Realized gains
|
|
$
|
1,522
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Losses attributable to the change in unrealized losses
|
|
$
|
-
|
|
|
$
|
(1,939
|
)
|
|
$
|
-
|
|
Other current period losses
|
|
|
(217
|
)
|
|
|
(15,803
|
)
|
|
|
(1,872
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total impairment of marketable securities
|
|
$
|
(217
|
)
|
|
$
|
(17,742
|
)
|
|
$
|
(1,872
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We have recorded cumulative net loss adjustments of
$9.7 million to the ARS we hold as of June 30, 2010.
Due to the volatility of the underlying credit markets, the fair
value of the ARS may continue to fluctuate and we may experience
additional impairments. In the event we need to access the funds
invested in any of our ARS prior to the time auctions of these
investments are successful or the original issuers retire these
securities, we will be required to sell them in a distressed
sale in a secondary market, most likely for a significantly
lower amount than their current fair value.
As of June 30, 2010, we had $141.8 million of debt
outstanding, exclusive of the debt discount of
$28.9 million. The term loan under our senior secured
credit facility with Comerica Bank of $15 million is
variable rate debt. Assuming constant debt levels, a theoretical
change of 100 basis points on our current interest rate of
3.25% on the Comerica debt as of June 30, 2010 would result
in a change in our annual interest expense of $150 thousand. The
interest rate on our long-term debt under the credit facilities
with Deerfield is variable based on our total cash, cash
equivalents and marketable securities balances. However, as long
as our total cash, cash equivalents and marketable securities
balances remain above $60 million, our interest rate is
fixed at 7.5%. Assuming constant debt levels, a theoretical
change of 100 basis points on our current rate of interest
of 7.5% on the Deerfield credit facilities as of June 30,
2010 would result in a change in our annual interest expense of
$1.2 million.
61
Historically and as of June 30, 2010, we have not used
foreign currency derivative instruments or engaged in hedging
activities.
ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements required by this item are located in
Item 15 beginning on
page F-1
of this Annual Report on
Form 10-K
and are incorporated herein by reference.
ITEM 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
None.
ITEM 9A.
CONTROLS AND PROCEDURES
Evaluation of
Disclosure Controls and Procedures
As of the end of the period covered by this Annual Report on
Form 10-K,
under the supervision of our Chief Executive Officer and our
Chief Financial Officer, we evaluated the effectiveness of our
disclosure controls and procedures, as such term is defined in
Rule 13a-15(e)
and
Rule 15d-15(e)
under the Securities Exchange Act of 1934. Based on this
evaluation, our Chief Executive Officer and our Chief Financial
Officer have concluded that our disclosure controls and
procedures are effective as of June 30, 2010 to ensure that
information we are required to disclose in reports that we file
or furnish under the Securities Exchange Act of 1934:
(1) is recorded, processed and summarized effectively and
reported within the time periods specified in Securities and
Exchange Commission rules and forms and (2) is accumulated
and communicated to our management, including our Chief
Executive Officer and our Chief Financial Officer, as
appropriate to allow timely decisions regarding required
disclosure. Our disclosure controls and procedures include
components of our internal control over financial reporting.
Managements assessment of the effectiveness of our
internal control over financial reporting set forth below is
expressed at the level of reasonable assurance because a control
system, no matter how well designed and operated, can provide
only reasonable, but not absolute, assurance that the control
systems objectives will be met.
Evaluation of
Internal Control over Financial Reporting
Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002,
we have included a report on managements assessment of the
design and effectiveness of our internal control over financial
reporting as part of this Annual Report on
Form 10-K
for the fiscal year ended June 30, 2010. Our independent
registered public accounting firm also audited and reported on
the effectiveness of our internal control over financial
reporting. Managements report and the independent
registered public accounting firms attestation report are
included under the captions entitled Managements
Report on Internal Control Over Financial Reporting and
Report of Independent Registered Public Accounting
Firm in Item 15 of this Annual Report on
Form 10-K
and are incorporated herein by reference.
Changes in
Internal Control over Financial Reporting
There has been no change in our internal control over financial
reporting during the fourth quarter of our fiscal year ended
June 30, 2010 that has materially affected, or is
reasonably likely to materially affect, our internal control
over financial reporting.
ITEM 9B.
OTHER INFORMATION
None.
62
PART III
The information required by this item is incorporated by
reference from the information under the captions
Proposal 1 Election of Directors,
Executive Officers and Section 16(a)
Beneficial Ownership Reporting Compliance contained in the
Proxy Statement of Array BioPharma Inc. relating to the annual
meeting of stockholders to be held on November 4, 2010.
Code of
Ethics
We have adopted a Code of Conduct that applies to all of our
directors, officers and employees, including our principal
executive officer, principal financial officer and principal
accounting officer. The Code of Conduct is posted under the
Investor Relations portion of our website at
www.arraybiopharma.com.
We intend to satisfy the disclosure requirement of
Form 8-K
regarding amendments to or waivers from a provision of our Code
of Conduct by posting such information on our website at
www.arraybiopharma.com and, to the extent required by the NASDAQ
Stock Market, by filing a current report on
Form 8-K
with the SEC, disclosing such information.
The information required by this item is incorporated by
reference from the information under the caption Executive
Compensation contained in the Proxy Statement of Array
BioPharma Inc. relating to the annual meeting of stockholders to
be held on November 4, 2010.
ITEM 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
AND RELATED STOCKHOLDER MATTERS
The information required by this item is incorporated by
reference from the information under the captions
Principal Stockholders and
Proposal 2 Approval of Amendment to
Employee Stock Purchase Plan contained in the Proxy
Statement of Array BioPharma Inc. relating to the annual meeting
of stockholders to be held on November 4, 2010.
ITEM 13.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR
INDEPENDENCE
The information required by this item is incorporated by
reference from the information under the captions Certain
Relationships and Transactions and
Proposal 1 Election of
Directors Meetings of the Board of Directors and
Committees of the Board of Directors contained in the
Proxy Statement of Array BioPharma Inc. relating to the
annual meeting of stockholders to be held on November 4,
2010.
ITEM 14.
PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information required by this item is incorporated by
reference from the information under the caption Fees
Billed by the Principal Accountant contained in the Proxy
Statement of Array BioPharma Inc. relating to the annual meeting
of stockholders to be held on November 4, 2010.
63
PART IV
ITEM 15.
EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
The following documents are filed as part of this Annual Report
on
Form 10-K:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1.
|
|
|
Financial Statements
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reference is made to the Index to the Financial Statements as
set forth on
page F-1
of this Annual Report on
Form 10-K.
|
|
|
|
|
|
|
|
|
|
|
2.
|
|
|
Financial Statement Schedules
|
|
|
|
|
|
|
|
|
|
|
|
|
|
All schedules have been omitted as the required information is
either not required, not applicable, or otherwise included in
the Financial Statements and notes thereto.
|
|
|
|
|
|
|
|
|
|
|
3.
|
|
|
Exhibits
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reference is made to the Exhibit Index that is set forth
after the Financial Statements referenced above in this Annual
Report on
Form 10-K.
|
64
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, as amended, the Registrant has
duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Boulder,
State of Colorado, on August 12, 2010.
ARRAY BIOPHARMA INC.
Robert E. Conway
Chief Executive Officer
KNOW ALL PERSONS BY THESE PRESENTS, that each person
whose signature appears below constitutes and appoints Robert E.
Conway, R. Michael Carruthers and John R. Moore, and each or any
one of them, his true and lawful attorney-in-fact and agent,
with full power of substitution and resubstitution, for him and
in his name, place and stead, in any and all capacities, to sign
any and all amendments (including post-effective amendments) to
this report on
Form 10-K,
and to file the same, with all exhibits thereto, and other
documents in connection therewith, with the Securities and
Exchange Commission, granting unto said attorneys-in-fact and
agents, and each of them, full power and authority to do and
perform each and every act and thing requisite and necessary to
be done in connection therewith, as fully to all intents and
purposes as he might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents, or any of
them, or their or his substitutes or substitute, may lawfully do
or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons
on behalf of the registrant and in the capacities and on the
dates indicated.
|
|
|
|
|
|
|
|
|
|
SIGNATURE
|
|
TITLE
|
|
|
|
|
|
|
|
|
/s/ ROBERT
E. CONWAY
Robert
E. Conway
|
|
Chief Executive Officer and Director (Principal Executive
Officer)
|
|
August 12, 2010
|
|
|
|
|
|
/s/ KYLE
A. LEFKOFF
Kyle
A. Lefkoff
|
|
Chairman of the Board of Directors
|
|
August 12, 2010
|
|
|
|
|
|
/s/ R.
MICHAEL CARRUTHERS
R.
Michael Carruthers
|
|
Chief Financial Officer
(Principal Financial And
Accounting Officer)
|
|
August 12, 2010
|
|
|
|
|
|
/s/ FRANCIS
J. BULLOCK
Francis
J. Bullock, Ph.D.
|
|
Director
|
|
August 12, 2010
|
|
|
|
|
|
/s/ MARVIN
H. CARUTHERS
Marvin
H. Caruthers, Ph.D.
|
|
Director
|
|
August 12, 2010
|
|
|
|
|
|
/s/ KEVIN
KOCH
Kevin
Koch, Ph.D.
|
|
Director
|
|
August 12, 2010
|
|
|
|
|
|
/s/ DAVID
L. SNITMAN
David
L. Snitman, Ph.D.
|
|
Director
|
|
August 12, 2010
|
65
|
|
|
|
|
|
|
|
|
|
SIGNATURE
|
|
TITLE
|
|
|
|
|
|
|
|
|
/s/ GIL
J. VAN LUNSEN
Gil
J. Van Lunsen
|
|
Director
|
|
August 12, 2010
|
|
|
|
|
|
/s/ DOUGLAS
E. WILLIAMS
Douglas
E. Williams, Ph.D.
|
|
Director
|
|
August 12, 2010
|
|
|
|
|
|
/s/ JOHN
L. ZABRISKIE
John
L. Zabriskie, Ph.D.
|
|
Director
|
|
August 12, 2010
|
66
INDEX TO THE
FINANCIAL STATEMENTS
|
|
|
|
|
Description
|
|
Page No.
|
|
|
|
|
|
|
|
|
|
F-2
|
|
|
|
|
|
|
|
|
|
F-3
|
|
|
|
|
|
|
|
|
|
F-4
|
|
|
|
|
|
|
|
|
|
F-5
|
|
|
|
|
|
|
|
|
|
F-6
|
|
|
|
|
|
|
|
|
|
F-7
|
|
|
|
|
|
|
|
|
|
F-8
|
|
|
|
|
|
|
|
|
|
F-9
|
|
F-1
MANAGEMENTS
REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Our management is responsible for establishing and maintaining
adequate internal control over financial reporting, as such term
is defined in Exchange Act
Rules 13a-15(f)
and
15d-15(f).
Our internal control over financial reporting is a process
designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles.
All internal control systems, no matter how well designed, have
inherent limitations. Therefore even those systems determined to
be effective can provide only reasonable assurance with respect
to financial statement preparation and presentation. Because of
its inherent limitations, internal control over financial
reporting may not prevent or detect misstatements. Projections
of any evaluation of effectiveness to future periods are subject
to the risk that controls may become inadequate because of
changes in conditions, or that the degree of compliance with the
policies or procedures may deteriorate.
Under the supervision and with the participation of our
management, including our Chief Executive Officer and Chief
Financial Officer, we conducted an evaluation of the
effectiveness of our internal control over financial reporting
as of June 30, 2010 based on the framework set forth in
Internal Control Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission
(COSO). Based on that evaluation, our management concluded that,
as of June 30, 2010, our internal control over financial
reporting was effective.
KPMG LLP, our independent registered public accounting firm, has
issued an attestation report on the effectiveness of our
internal control over financial reporting as of June 30,
2010, as stated in their report, which is included elsewhere
herein.
Robert E. Conway
Chief Executive Officer
August 12, 2010
/s/ R.
MICHAEL CARRUTHERS
R. Michael Carruthers
Chief Financial Officer
August 12, 2010
F-2
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders
Array BioPharma Inc.:
We have audited Array BioPharma Inc.s internal control
over financial reporting as of June 30, 2010, based on
criteria established in Internal Control
Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). Array BioPharma
Inc.s management is responsible for maintaining effective
internal control over financial reporting and for its assessment
of the effectiveness of internal control over financial
reporting, included in the accompanying Managements
Report on Internal Control over Financial Reporting. Our
responsibility is to express an opinion on the Companys
internal control over financial reporting based on our audit.
We conducted our audit 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 effective internal control
over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of
internal control over financial reporting, assessing the risk
that a material weakness exists, and testing and evaluating the
design and operating effectiveness of internal control based on
the assessed risk. Our audit also included performing such other
procedures as we considered necessary in the circumstances. We
believe that our audit provides a reasonable basis for our
opinion.
A companys internal control over financial reporting is a
process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles. A companys
internal control over financial reporting includes those
policies and procedures that (1) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions
are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of
management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the
companys assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
In our opinion, Array BioPharma Inc. maintained, in all material
respects, effective internal control over financial reporting as
of June 30, 2010, based on criteria established in
Internal Control Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway
Commission.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
balance sheets of Array BioPharma Inc. as of June 30, 2010
and 2009, and the related statements of operations and
comprehensive loss, stockholders equity (deficit) and cash
flows for each of the years in the three-year period ended
June 30, 2010, and our report dated August 12, 2010
expressed an unqualified opinion on those financial statements.
Boulder, Colorado
August 12, 2010
F-3
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders
Array BioPharma Inc.:
We have audited the accompanying balance sheets of Array
BioPharma Inc. as of June 30, 2010 and 2009, and the
related statements of operations and comprehensive loss,
stockholders equity (deficit) and cash flows for each of
the years in the three-year period ended June 30, 2010.
These financial statements are the responsibility of the
Companys management. Our responsibility is to express an
opinion on these financial statements 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 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 financial position
of Array BioPharma Inc. as of June 30, 2010 and 2009, and
the results of its operations and its cash flows for each of the
years in the three-year period ended June 30, 2010, in
conformity with U.S. generally accepted accounting
principles.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), Array
BioPharma Inc.s internal control over financial reporting
as of June 30, 2010, based on the criteria established in
Internal Control Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO), and our report dated August 12, 2010
expressed an unqualified opinion on the effectiveness of the
Companys internal control over financial reporting.
Boulder, Colorado
August 12, 2010
F-4
ARRAY BIOPHARMA
INC.
Balance Sheets
(Amounts in
Thousands, Except Share and Per Share Amounts)
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
ASSETS
|
Current assets
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
32,846
|
|
|
$
|
33,202
|
|
Marketable securities
|
|
|
78,664
|
|
|
|
7,296
|
|
Prepaid expenses and other current assets
|
|
|
5,788
|
|
|
|
4,419
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
117,298
|
|
|
|
44,917
|
|
Long-term assets
|
|
|
|
|
|
|
|
|
Marketable securities
|
|
|
17,359
|
|
|
|
16,990
|
|
Property and equipment, net
|
|
|
21,413
|
|
|
|
26,498
|
|
Other long-term assets
|
|
|
3,109
|
|
|
|
6,650
|
|
|
|
|
|
|
|
|
|
|
Total long-term assets
|
|
|
41,881
|
|
|
|
50,138
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
159,179
|
|
|
$
|
95,055
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS DEFICIT
|
Current liabilities
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
5,634
|
|
|
$
|
6,746
|
|
Accrued outsourcing costs
|
|
|
4,907
|
|
|
|
4,759
|
|
Accrued compensation and benefits
|
|
|
10,013
|
|
|
|
7,848
|
|
Other accrued expenses
|
|
|
1,723
|
|
|
|
1,675
|
|
Deferred rent
|
|
|
3,180
|
|
|
|
3,034
|
|
Deferred revenue
|
|
|
52,474
|
|
|
|
11,233
|
|
Current portion of long-term debt
|
|
|
-
|
|
|
|
15,000
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
77,931
|
|
|
|
50,295
|
|
Long-term liabilities
|
|
|
|
|
|
|
|
|
Deferred rent
|
|
|
18,301
|
|
|
|
21,481
|
|
Deferred revenue
|
|
|
65,177
|
|
|
|
28,340
|
|
Long-term debt, net
|
|
|
112,825
|
|
|
|
68,170
|
|
Derivative liabilities
|
|
|
825
|
|
|
|
-
|
|
Other long-term liability
|
|
|
798
|
|
|
|
470
|
|
|
|
|
|
|
|
|
|
|
Total long-term liabilities
|
|
|
197,926
|
|
|
|
118,461
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
275,857
|
|
|
|
168,756
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
Stockholders deficit
|
|
|
|
|
|
|
|
|
Preferred stock, $0.001 par value; 10,000,000 shares
authorized, no shares issued or outstanding
|
|
|
-
|
|
|
|
-
|
|
Common stock, $0.001 par value; 120,000,000 shares
authorized; 53,224,248 and 48,125,776 shares issued
and outstanding, as of June 30, 2010 and 2009, respectively
|
|
|
53
|
|
|
|
48
|
|
Additional paid-in capital
|
|
|
332,277
|
|
|
|
312,349
|
|
Warrants
|
|
|
36,296
|
|
|
|
23,869
|
|
Accumulated other comprehesive gain
|
|
|
5,528
|
|
|
|
3,234
|
|
Accumulated deficit
|
|
|
(490,832
|
)
|
|
|
(413,201
|
)
|
|
|
|
|
|
|
|
|
|
Total stockholders deficit
|
|
|
(116,678
|
)
|
|
|
(73,701
|
)
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders deficit
|
|
$
|
159,179
|
|
|
$
|
95,055
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
financial statements.
F-5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended June 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
Collaboration revenue
|
|
$
|
21,395
|
|
|
$
|
17,228
|
|
|
$
|
21,513
|
|
License and milestone revenue
|
|
|
32,485
|
|
|
|
7,754
|
|
|
|
7,295
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
|
53,880
|
|
|
|
24,982
|
|
|
|
28,808
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenue
|
|
|
28,322
|
|
|
|
19,855
|
|
|
|
21,364
|
|
Research and development for proprietary drug discovery
|
|
|
72,488
|
|
|
|
89,560
|
|
|
|
90,347
|
|
General and administrative
|
|
|
17,121
|
|
|
|
18,020
|
|
|
|
15,591
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
117,931
|
|
|
|
127,435
|
|
|
|
127,302
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(64,051
|
)
|
|
|
(102,453
|
)
|
|
|
(98,494
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense)
|
|
|
|
|
|
|
|
|
|
|
|
|
Gains (losses) on auction rate securities
|
|
|
1,305
|
|
|
|
(17,742
|
)
|
|
|
(1,872
|
)
|
Interest income
|
|
|
864
|
|
|
|
2,116
|
|
|
|
6,064
|
|
Interest expense
|
|
|
(15,749
|
)
|
|
|
(10,024
|
)
|
|
|
(1,986
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income (expense), net
|
|
|
(13,580
|
)
|
|
|
(25,650
|
)
|
|
|
2,206
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before income taxes
|
|
|
(77,631
|
)
|
|
|
(128,103
|
)
|
|
|
(96,288
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax benefit
|
|
|
-
|
|
|
|
288
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(77,631
|
)
|
|
$
|
(127,815
|
)
|
|
$
|
(96,288
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in unrealized gains (losses) on marketable securities
|
|
|
2,294
|
|
|
|
5,171
|
|
|
|
(1,922
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss
|
|
$
|
(75,337
|
)
|
|
$
|
(122,644
|
)
|
|
$
|
(98,210
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding basic and
diluted
|
|
|
50,216
|
|
|
|
47,839
|
|
|
|
47,309
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per share basic and diluted
|
|
$
|
(1.55
|
)
|
|
$
|
(2.67
|
)
|
|
$
|
(2.04
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
financial statements.
F-6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
Preferred Stock
|
|
|
Common Stock
|
|
|
Paid-in
|
|
|
|
|
|
Comprehensive
|
|
|
Accumulated
|
|
|
|
|
|
|
Shares
|
|
|
Amounts
|
|
|
Shares
|
|
|
Amounts
|
|
|
Capital
|
|
|
Warrants
|
|
|
Income (Loss)
|
|
|
Deficit
|
|
|
Total
|
|
|
Balance as of June 30, 2007
|
|
|
-
|
|
|
$
|
-
|
|
|
|
47,076
|
|
|
$
|
47
|
|
|
$
|
296,767
|
|
|
$
|
-
|
|
|
$
|
(15
|
)
|
|
$
|
(189,098
|
)
|
|
$
|
107,701
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock under stock option and employee stock
purchase plans
|
|
|
-
|
|
|
|
-
|
|
|
|
469
|
|
|
|
1
|
|
|
|
1,787
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,788
|
|
Share-based compensation expense
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
6,159
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
6,159
|
|
Issuance of common stock warrants
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
20,589
|
|
|
|
-
|
|
|
|
-
|
|
|
|
20,589
|
|
Change in unrealized gain (loss) on marketable securities
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(1,922
|
)
|
|
|
-
|
|
|
|
(1,922
|
)
|
Net loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(96,288
|
)
|
|
|
(96,288
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of June 30, 2008
|
|
|
-
|
|
|
|
-
|
|
|
|
47,545
|
|
|
|
48
|
|
|
|
304,713
|
|
|
|
20,589
|
|
|
|
(1,937
|
)
|
|
|
(285,386
|
)
|
|
|
38,027
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock under stock option and employee stock
purchase plans
|
|
|
-
|
|
|
|
-
|
|
|
|
580
|
|
|
|
-
|
|
|
|
1,688
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,688
|
|
Share-based compensation expense
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
5,948
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
5,948
|
|
Repricing of common stock warrants
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,280
|
|
|
|
|
|
|
|
|
|
|
|
3,280
|
|
Recognition of unrealized loss out of accumulated other
comprehensive income (loss) to earnings
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,939
|
|
|
|
-
|
|
|
|
1,939
|
|
Change in unrealized gain (loss) on marketable securities
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
3,232
|
|
|
|
-
|
|
|
|
3,232
|
|
Net loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(127,815
|
)
|
|
|
(127,815
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of June 30, 2009
|
|
|
-
|
|
|
|
-
|
|
|
|
48,125
|
|
|
|
48
|
|
|
|
312,349
|
|
|
|
23,869
|
|
|
|
3,234
|
|
|
|
(413,201
|
)
|
|
|
(73,701
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock under stock option and employee stock
purchase plans
|
|
|
-
|
|
|
|
-
|
|
|
|
797
|
|
|
|
1
|
|
|
|
1,175
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,176
|
|
Share-based compensation expense
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
5,372
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
5,372
|
|
Issuance of common stock for cash, net of offering costs
|
|
|
-
|
|
|
|
-
|
|
|
|
3,302
|
|
|
|
3
|
|
|
|
10,970
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
10,973
|
|
Issuance of common stock warrants
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
12,427
|
|
|
|
-
|
|
|
|
-
|
|
|
|
12,427
|
|
Payment of employee bonus with stock
|
|
|
-
|
|
|
|
-
|
|
|
|
1,000
|
|
|
|
1
|
|
|
|
2,411
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,412
|
|
Recognition of unrealized gain out of accumulated other
comprehensive income to earnings
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(915
|
)
|
|
|
-
|
|
|
|
(915
|
)
|
Change in unrealized gain on marketable securities
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
3,209
|
|
|
|
-
|
|
|
|
3,209
|
|
Net loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(77,631
|
)
|
|
|
(77,631
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of June 30, 2010
|
|
|
-
|
|
|
$
|
-
|
|
|
|
53,224
|
|
|
$
|
53
|
|
|
$
|
332,277
|
|
|
$
|
36,296
|
|
|
$
|
5,528
|
|
|
$
|
(490,832
|
)
|
|
$
|
(116,678
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
financial statements.
F-7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended June 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Cash flows from operating activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(77,631
|
)
|
|
$
|
(127,815
|
)
|
|
$
|
(96,288
|
)
|
Adjustments to reconcile net loss to net cash provided by (used
in) operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization expense
|
|
|
6,338
|
|
|
|
6,613
|
|
|
|
6,103
|
|
Non-cash interest expense for the Deerfield Credit
|
|
|
|
|
|
|
|
|
|
|
|
|
Facility
|
|
|
6,737
|
|
|
|
8,083
|
|
|
|
944
|
|
Share-based compensation expense
|
|
|
5,372
|
|
|
|
5,948
|
|
|
|
6,159
|
|
(Gains) losses on auction rate securities
|
|
|
(1,305
|
)
|
|
|
17,742
|
|
|
|
1,872
|
|
Changes in operating assets and liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
Prepaid expenses and other current assets
|
|
|
(658
|
)
|
|
|
818
|
|
|
|
(818
|
)
|
Accounts payable and other accrued expenses
|
|
|
(1,064
|
)
|
|
|
1,274
|
|
|
|
(2,281
|
)
|
Accrued outsourcing costs
|
|
|
148
|
|
|
|
(6,521
|
)
|
|
|
7,599
|
|
Accrued compensation and benefits
|
|
|
4,577
|
|
|
|
80
|
|
|
|
961
|
|
Deferred rent
|
|
|
(3,034
|
)
|
|
|
(2,740
|
)
|
|
|
(2,619
|
)
|
Deferred revenue
|
|
|
78,078
|
|
|
|
3,579
|
|
|
|
32,632
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) operating activities
|
|
|
17,558
|
|
|
|
(92,939
|
)
|
|
|
(45,736
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of property and equiment
|
|
|
(1,253
|
)
|
|
|
(2,940
|
)
|
|
|
(8,186
|
)
|
Purchases of marketable securities
|
|
|
(78,785
|
)
|
|
|
(19,139
|
)
|
|
|
(71,593
|
)
|
Proceeds from sales and maturities of marketable securities
|
|
|
10,975
|
|
|
|
51,084
|
|
|
|
130,505
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) investing activities
|
|
|
(69,063
|
)
|
|
|
29,005
|
|
|
|
50,726
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from exercise of stock options and shares issued under
the employee stock purchase plan
|
|
|
1,176
|
|
|
|
1,688
|
|
|
|
1,788
|
|
Proceeds from the issuance of common stock for cash
|
|
|
11,596
|
|
|
|
-
|
|
|
|
-
|
|
Payment of offering costs
|
|
|
(623
|
)
|
|
|
-
|
|
|
|
-
|
|
Proceeds from the issuance of long-term debt
|
|
|
40,000
|
|
|
|
40,000
|
|
|
|
40,000
|
|
Payment of transaction fees
|
|
|
(1,000
|
)
|
|
|
(1,000
|
)
|
|
|
(1,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities
|
|
|
51,149
|
|
|
|
40,688
|
|
|
|
40,788
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (decrease) increase in cash and cash equivalents
|
|
|
(356
|
)
|
|
|
(23,246
|
)
|
|
|
45,778
|
|
Cash and cash equivalents as of beginning of year
|
|
|
33,202
|
|
|
|
56,448
|
|
|
|
10,670
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents as of end of year
|
|
$
|
32,846
|
|
|
$
|
33,202
|
|
|
$
|
56,448
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow information
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for interest
|
|
$
|
8,540
|
|
|
$
|
1,937
|
|
|
$
|
1,806
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of non-cash information
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants included in Other Long-term Assets
|
|
$
|
-
|
|
|
$
|
3,280
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transaction fee included in Other Long-term Assets and Other
Accrued Expenses
|
|
$
|
-
|
|
|
$
|
500
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
financial statements.
F-8
NOTE 1 -
OVERVIEW AND BASIS OF PRESENTATION
Organization
Array BioPharma Inc. (the Company) is a
biopharmaceutical company focused on the discovery, development
and commercialization of targeted small molecule drugs to treat
patients afflicted with cancer and inflammatory diseases. The
Companys proprietary drug development pipeline includes
clinical candidates that are designed to regulate
therapeutically important target pathways. In addition, leading
pharmaceutical and biotechnology companies partner with the
Company to discover and develop drug candidates across a broad
range of therapeutic areas.
Basis of
Presentation
The Company follows the accounting guidance outlined in the
Financial Accounting Standards Board Codification and these
audited financial statements have been prepared in conformity
with accounting principles generally accepted in the United
States (U.S.).
Use of
Estimates
The preparation of financial statements in conformity with
accounting principles generally accepted in the
U.S. 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. Although management bases
these estimates on historical data and other assumptions
believed to be reasonable under the circumstances, actual
results could differ significantly from these estimates.
The Company believes the accounting estimates having the most
significant impact on its financial statements relate to
(i) estimating the fair value of the Companys auction
rate securities (ARS); (ii) estimating accrued
outsourcing costs for clinical trials and preclinical testing;
(iii) estimating the fair value of the Companys
long-term debt that has associated warrants and embedded
derivatives and the separate valuation of those warrants and
embedded derivatives; and (iv) estimating the periods over
which up-front and milestone payments from collaboration
agreements are recognized.
Liquidity
The Company has incurred operating losses and has an accumulated
deficit as a result of ongoing research and development
spending. As of June 30, 2010, the Company had an
accumulated deficit of $490.8 million. The Company had net
losses of $77.6 million, $127.8 million and
$96.3 million for the fiscal years ended June 30,
2010, 2009 and 2008, respectively.
The Company has historically funded its operations through
payments under its collaborations and out-licensing
transactions, the issuance of equity securities and through debt
provided by its credit facilities. Until the Company can
generate sufficient levels of cash from its operations, which
the Company does not expect to achieve in the foreseeable
future, the Company will continue to utilize its existing cash,
cash equivalents and marketable securities that were generated
primarily from these sources. The Company believes that its
cash, cash equivalents and marketable securities, excluding the
value of the ARS it holds, will enable it to continue to fund
its operations for at least the next 12 months. In December
2009, the Company received a $60 million up-front payment
from Amgen Inc. under a Collaboration and License Agreement. In
April 2010, the Company entered into a License Agreement with
Novartis International Pharmaceutical Ltd. under which the
Company received $45 million in an upfront and milestone
payment in the fourth quarter of fiscal 2010. The recognition of
revenue under these agreements is discussed
F-9
ARRAY BIOPHARMA
INC.
Notes to the Financial Statements
For the Fiscal Years Ended June 30, 2010, 2009 and
2008
further in Note 6 Deferred Revenue.
There can be no assurance that the Company will be successful in
entering into future collaborations, however, or that other
funds will be available to us when needed.
If the Company is unable to obtain additional funding from these
or other sources to the extent or when needed, it may be
necessary to significantly reduce its current rate of spending
through further reductions in staff and delaying, scaling back
or stopping certain research and development programs.
Insufficient funds may also require the Company to relinquish
greater rights to product candidates at an earlier stage of
development or on less favorable terms to it or its stockholders
than the Company would otherwise choose in order to obtain
up-front license fees needed to fund its operations.
Fair Value
Measurements
The Companys financial instruments are recognized and
measured at fair value in the Companys financial
statements and mainly consist of cash and cash equivalents,
marketable securities, long-term investments, trade receivables
and payables, long-term debt, embedded derivatives associated
with the long-term debt and warrants. The Company uses different
valuation techniques to measure the fair value of assets and
liabilities, as discussed in more detail below. Fair value is
defined as the price that would be received to sell the
financial instruments in an orderly transaction between market
participants at the measurement date. The Company uses a
framework for measuring fair value based on a hierarchy that
distinguishes sources of available information used in fair
value measurements and categorizes them into three levels:
|
|
|
|
|
Level I: Quoted prices in active markets
for identical assets and liabilities.
|
|
|
Level II: Observable inputs other than
quoted prices in active markets for identical assets and
liabilities.
|
|
|
Level III: Unobservable inputs.
|
The Company discloses assets and liabilities measured at fair
value based on their level in the hierarchy. Considerable
judgment is required in interpreting market data to develop
estimates of fair value for assets or liabilities for which
there are no quoted prices in active markets, which include the
Companys ARS, warrants issued by the Company in connection
with its long-term debt and the embedded derivatives associated
with the long-term debt. The use of different assumptions
and/or
estimation methodologies may have a material effect on their
estimated fair value. Accordingly, the fair value estimates
disclosed by the Company may not be indicative of the amount
that the Company or holders of the instruments could realize in
a current market exchange.
The Company periodically reviews the realizability of each
investment when impairment indicators exist with respect to the
investment. If an
other-than-temporary
impairment of the value of an investment is deemed to exist, the
cost basis of the investment is written down to its then
estimated fair value.
Cash and Cash
Equivalents
Cash equivalents consist of short-term, highly liquid financial
instruments that are readily convertible to cash and have
maturities of 90 days or less from the date of purchase and
may consist of money market funds, taxable commercial paper,
U.S. government agency obligations and corporate notes and
bonds with high credit quality.
Marketable
Securities
The Company has designated its marketable securities as of each
Balance Sheet date as
available-for-sale
securities and accounts for them at their respective fair
values. Marketable securities are classified as short-term or
long-term based on the nature of these securities and the
availability of
F-10
ARRAY BIOPHARMA
INC.
Notes to the Financial Statements
For the Fiscal Years Ended June 30, 2010, 2009 and
2008
these securities to meet current operating requirements.
Marketable securities that are readily available for use in
current operations are classified as short-term
available-for-sale
securities and are reported as a component of current assets in
the accompanying Balance Sheets. Marketable securities that are
not considered available for use in current operations are
classified as long-term
available-for-sale
securities and are reported as a component of long-term assets
in the accompanying Balance Sheets.
Securities that are classified as
available-for-sale
are carried at fair value, including accrued interest, with
temporary unrealized gains and losses reported as a component of
Stockholders Deficit until their disposition. The Company
reviews all
available-for-sale
securities each period to determine if they remain
available-for-sale
based on the Companys then current intent and ability to
sell the security if it is required to do so. The amortized cost
of debt securities in this category is adjusted for amortization
of premiums and accretion of discounts to maturity. Such
amortization is included in Interest Income in the accompanying
Statements of Operations and Comprehensive Loss. Realized gains
on ARS are reported in Gains (Losses) on Sales of Auction Rate
Securities in the accompanying Statements of Operations and
Comprehensive Loss as incurred along with declines in value
judged to be
other-than-temporary
when such declines are recognized. The cost of securities sold
is based on the specific identification method.
Under the fair value hierarchy, the Companys ARS are
measured using Level III, or unobservable inputs, as there
is no active market for the securities. The most significant
unobservable inputs used in this method are estimates of the
amount of time until a liquidity event will occur and the
discount rate, which incorporates estimates of credit risk and a
liquidity premium (discount). Due to the inherent complexity in
valuing these securities, the Company engaged a third-party
valuation firm to perform an independent valuation of the ARS as
part of its overall fair value analysis beginning with the first
quarter of fiscal 2009 and continuing through all quarters of
the current fiscal year. While the Company believes that the
estimates used in the fair value analysis are reasonable, a
change in any of the assumptions underlying these estimates
would result in different fair value estimates for the ARS and
could result in additional adjustments to the ARS, either
increasing or further decreasing their value, possibly by
material amounts.
Property and
Equipment
Property and equipment are stated at historical cost less
accumulated depreciation and amortization. Additions and
improvements are capitalized. Certain costs to internally
develop software are also capitalized. Maintenance and repairs
are expensed as incurred.
Depreciation and amortization are computed on the straight-line
method based on the following estimated useful lives:
|
|
|
|
|
Furniture and fixtures
|
|
|
7 years
|
|
Equipment
|
|
|
5 years
|
|
Computer hardware and software
|
|
|
3 years
|
|
The Company depreciates leasehold improvements associated with
operating leases on a straight-line basis over the shorter of
the expected useful life of the improvements or the remaining
lease term.
The carrying value for property and equipment is reviewed for
impairment when events or changes in circumstances indicate that
the book value of the assets may not be recoverable. An
impairment loss would be recognized when estimated undiscounted
future cash flows from the use of the asset and its eventual
disposition is less than its carrying amount.
Equity
Investment
The Company has and may continue to enter into collaboration and
licensing agreements in which it receives an equity interest in
consideration for all or a portion of up-front, license or other
fees under the
F-11
ARRAY BIOPHARMA
INC.
Notes to the Financial Statements
For the Fiscal Years Ended June 30, 2010, 2009 and
2008
terms of the agreement. The Company reports the value of equity
securities received from non-publicly traded companies in which
it does not exercise a significant controlling interest at cost
as Other Long-term Assets in the accompanying Balance Sheets.
The Company monitors its investment for impairment at least
annually and makes appropriate reductions in the carrying value
if it is determined that an impairment has occurred, based
primarily on the financial condition and near term prospects of
the issuer.
Accrued
Outsourcing Costs
Substantial portions of the Companys preclinical studies
and clinical trials are performed by third-party laboratories,
medical centers, contract research organizations and other
vendors (collectively CROs). These CROs generally
bill monthly or quarterly for services performed or bill based
upon milestone achievement. For preclinical studies, the Company
accrues expenses based upon estimated percentage of work
completed and the contract milestones remaining. For clinical
studies, expenses are accrued based upon the number of patients
enrolled and the duration of the study. The Company monitors
patient enrollment, the progress of clinical studies and related
activities to the extent possible through internal reviews of
data reported to it by the CROs, correspondence with the CROs
and clinical site visits. The Companys estimates depend on
the timeliness and accuracy of the data provided by its CROs
regarding the status of each program and total program spending.
The Company periodically evaluates the estimates to determine if
adjustments are necessary or appropriate based on information it
receives.
Deferred
Revenue
The Company records amounts received but not earned under its
collaboration agreements as Deferred Revenue, which are then
classified as either current or long-term in the accompanying
Balance Sheets based on the period over which they are expected
to be recognized as revenue.
Long-term Debt
and Embedded Derivatives
The terms of the Companys long-term debt are discussed in
detail in Note 5 Long-term Debt. The
accounting for these arrangements is complex and is based upon
significant estimates by management. The Company reviews all
debt agreements to determine the appropriate accounting
treatment when the agreement is entered into and reviews all
amendments to determine if the changes require accounting for
the amendment as a modification, or extinguishment and new debt.
The Company also reviews each long-term debt arrangement to
determine if any feature of the debt requires bifurcation
and/or
separate valuation. These features include hybrid instruments,
which are comprised of at least two components ((1) a debt host
instrument and (2) one or more conversion features),
warrants and other embedded derivatives, such as puts and other
rights of the debt holder.
The Company currently has two embedded derivatives related to
its long-term debt with Deerfield Private Design Fund, L.P. and
Deerfield Private Design International Fund, L.P. (who we refer
to collectively as Deerfield). The first is a variable interest
rate structure that constitutes a liquidity-linked variable
spread feature. The second derivative is a significant
transaction contingent put option relating to the ability of
Deerfield to accelerate the repayment of the debt in the event
of certain changes in control of the Company. Collectively, they
are referred to as the Embedded Derivatives. Under
the fair value hierarchy, the Companys Embedded
Derivatives are measured using Level III, or unobservable
inputs as there is no active market for them. The fair value of
the variable interest rate structure is based on the
Companys estimate of the probable effective interest rate
over the term of the Deerfield credit facilities. The fair value
of the put option is based on the Companys estimate of the
probability that a change in control that triggers
Deerfields right to accelerate the debt will occur. With
those inputs, the fair value of each Embedded Derivative is
calculated as the difference between the fair value of the
Deerfield credit facilities if the Embedded Derivatives are
included and the fair value of the Deerfield credit facilities
if the Embedded
F-12
ARRAY BIOPHARMA
INC.
Notes to the Financial Statements
For the Fiscal Years Ended June 30, 2010, 2009 and
2008
Derivatives are excluded. Due to the inherent complexity in
valuing the Deerfield credit facilities and the Embedded
Derivatives, the Company engaged a third-party valuation firm to
perform the valuation as part of its overall fair value analysis
as of July 31, 2009, the date the funds were disbursed
under the credit facility entered into in May 2009 and for each
subsequent quarter end through June 30, 2010. The estimated
fair value of the Embedded Derivatives was determined based on
managements judgment and assumptions. The use of different
assumptions could result in significantly different estimated
fair values.
The fair value of the Embedded Derivatives was initially
recorded as Derivative Liabilities and as Debt Discount in the
Companys accompanying Balance Sheets. Any change in the
value of the Embedded Derivatives is adjusted quarterly as
appropriate and recorded to Derivative Liabilities in the
Balance Sheets and Interest Expense in the accompanying
Statements of Operations and Comprehensive Loss. The Debt
Discount is being amortized from the draw date of July 31,
2009 to the end of the term of the Deerfield credit facilities
using the effective interest method and recorded as Interest
Expense in the accompanying Statements of Operations and
Comprehensive Loss.
Warrants issued by the Company in connection with its long-term
debt arrangements are reviewed to determine if they should be
classified as liabilities or as equity. All outstanding warrants
issued by the Company have been classified as equity. The
Company values the warrants at issuance based on a Black-Scholes
option pricing model and then allocates a portion of the
proceeds under the debt to the warrants based upon their
relative fair values.
Any transaction fees relating to the Companys long-term
debt arrangements that qualify for capitalization are recorded
as Other Long-Term Assets in the Balance Sheets and amortized to
Interest Expense in the accompanying Statements of Operations
and Comprehensive Loss using the effective interest method over
the term of the underlying debt agreement.
Income
Taxes
The Company accounts for income taxes using the asset and
liability method. The Company recognizes the amount of income
taxes payable or refundable for the year as well as deferred tax
assets and liabilities. Deferred tax assets and liabilities are
determined based on the difference between the financial
statement carrying value and the tax basis of assets and
liabilities and, using enacted tax rates in effect for the year,
reflect the expected effect these differences would have on
taxable income. Valuation allowances are recorded to reduce the
amount of deferred tax assets when, based upon available
objective evidence, the expected reversal of temporary
differences and projections of future taxable income, management
cannot conclude it is more likely than not that some or all of
the deferred tax assets will be realized.
Operating
Leases
The Company has negotiated certain landlord/tenant incentives
and rent holidays and escalations in the base price of rent
payments under its operating leases. For purposes of determining
the period over which these amounts are recognized or amortized,
the initial term of an operating lease includes the
build-out period of leases, where no rent payments
are typically due under the terms of the lease and includes
additional terms pursuant to any options to extend the initial
term if it is more likely than not that the Company will
exercise such options. The Company recognizes rent holidays and
rent escalations on a straight-line basis over the initial lease
term. The landlord/tenant incentives are recorded as an increase
to Deferred Rent in the accompanying Balance Sheets and
amortized on a straight-line basis over the initial lease term.
The Company has also entered into two sale-lease back
transactions for its facilities in Boulder and Longmont,
Colorado, where the consideration received from the landlord is
recorded as increases to Deferred Rent in the accompanying
Balance Sheets and amortized on a straight-line basis over the
lease
F-13
ARRAY BIOPHARMA
INC.
Notes to the Financial Statements
For the Fiscal Years Ended June 30, 2010, 2009 and
2008
term. Deferred Rent balances are classified as short-term or
long-term in the accompanying Balance Sheets based upon when
reversal of the liability is expected to occur.
Share-Based
Compensation
The Company uses the fair value method of accounting for
share-based compensation arrangements which requires that
compensation expense be recognized based on the grant date fair
value of the arrangement. Share-based compensation arrangements
include stock options granted under the Companys Amended
and Restated Stock Option and Incentive Plan (the Option
Plan) and purchases of common stock by its employees at a
discount to the market price under the Companys Employee
Stock Purchase Plan (the ESPP).
The estimated fair value of stock options is based on a
Black-Scholes option pricing model and is expensed on a
straight-line basis over the vesting term. Compensation expense
for stock options is reduced for estimated forfeitures, which
are estimated at the time of grant and revised, if necessary, in
subsequent periods if actual forfeitures differ from those
estimates. Compensation expense for purchases under the ESPP is
recognized based on a Black-Scholes option pricing model that
incorporates the estimated fair value of the common stock during
each offering period and the percentage of the purchase discount.
Revenue
Recognition
Most of the Companys revenue is from the Companys
collaborators for research funding, up-front or license fees and
milestone payments derived from discovering and developing drug
candidates. The Companys agreements with collaboration
partners include fees based on contracted annual rates for
full-time-equivalent employees working on a program and may also
include non-refundable license and up-front fees, non-refundable
milestone payments that are triggered upon achievement of
specific research or development goals and future royalties on
sales of products that result from the collaboration. A small
portion of the Companys revenue comes from the sale of
compounds on a per-compound basis. The Company reports revenue
for discovery, the sale of chemical compounds and the
co-development of proprietary drug candidates that the Company
out-licenses, as Collaboration Revenue. License and Milestone
Revenue is combined and consists of up-front fees and ongoing
milestone payments from collaborators that are recognized during
the applicable period.
The Company recognizes revenue in accordance with Staff
Accounting Bulletin No. 104, Revenue Recognition
(SAB 104), which establishes four criteria,
each of which must be met, in order to recognize revenue for the
performance of services or the shipment of products. Revenue is
recognized when (a) persuasive evidence of an arrangement
exists, (b) products are delivered or services are
rendered, (c) the sales price is fixed or determinable and
(d) collectability is reasonably assured.
Collaboration agreements that include a combination of discovery
research funding, up-front or license fees, milestone payments
and/or
royalties are evaluated to determine whether each deliverable
under the agreement has value to the customer on a stand-alone
basis and whether reliable evidence of fair value for the
deliverable exists. Deliverables in an arrangement that do not
meet the separation criteria are treated as a single unit of
accounting, generally applying applicable revenue recognition
guidance for the final deliverable to the combined unit of
accounting in accordance with SAB 104.
The Company recognizes revenue from non-refundable up-front
payments and license fees on a straight-line basis over the term
of performance under the agreement, which is generally the
estimated research term. These advance payments are deferred and
recorded as Deferred Revenue upon receipt, pending recognition
and are classified as a short-term or long-term liability in the
accompanying Balance Sheets.
F-14
ARRAY BIOPHARMA
INC.
Notes to the Financial Statements
For the Fiscal Years Ended June 30, 2010, 2009 and
2008
When the performance period is not specifically identifiable
from the agreement, the Company estimates the performance period
based upon provisions contained within the agreement, such as
the duration of the research term, the specific number of
full-time-equivalent scientists working a defined number of
hours per year at a stated price under the agreement, the
existence, or likelihood of achievement, of development
commitments and other significant commitments of the Company.
The Company also has agreements that provide for milestone
payments. In certain cases, a portion of each milestone payment
is recognized as revenue when the specific milestone is achieved
based on the applicable percentage of the estimated research or
development term that has elapsed to the total estimated
research
and/or
development term. In other cases, when the milestone payment
finances future development obligations of the Company, the
revenue is recognized on a straight-line basis over the
estimated remaining development period. Certain milestone
payments are related to activities for which there are no future
obligations and as a result, are recognized when earned in their
entirety.
The Company periodically reviews the expected performance
periods under each of its agreements that provide for
non-refundable up-front payments and license fees and milestone
payments and adjusts the amortization periods when appropriate
to reflect changes in assumptions relating to the duration of
expected performance periods. Revenue recognition related to
non-refundable license fees and up-front payments and milestone
payments could be accelerated in the event of early termination
of programs or alternatively, decelerated, if programs are
extended. As such, while such estimates have no impact on its
reported cash flows, the Companys reported revenue is
significantly influenced by its estimates of the period over
which its obligations will be performed.
Cost of Revenue
and Research and Development Expenses for Proprietary Drug
Discovery
The Company incurs costs in connection with performing research
and development activities which consist mainly of compensation,
associated fringe benefits, share-based compensation,
preclinical and clinical outsourcing costs and other
collaboration-related costs, including supplies, small tools,
facilities, depreciation, recruiting and relocation costs and
other direct and indirect chemical handling and laboratory
support costs. The Company allocates these costs between Cost of
Revenue and Research and Development Expenses for Proprietary
Drug Discovery based upon the respective time spent by its
scientists on development conducted for its collaborators and
for its internal proprietary programs, respectively. Cost of
Revenue represents the costs associated with research and
development, including preclinical and clinical trials,
conducted by the Company for its collaborators. Research and
Development Expenses for Proprietary Drug Discovery consist of
direct and indirect costs related to our specific proprietary
programs. The Company does not bear any risk of failure for
performing these activities and the payments are not contingent
on the success or failure of the research program. Accordingly,
the Company expenses these costs when incurred.
Where the Companys collaboration agreements provide for it
to conduct research or development and for which the
Companys partner has an option to obtain the right to
conduct further development and to commercialize a product, the
Company attributes a portion of its research and development
costs to Cost of Revenue based on the percentage of total
programs under the agreement that the Company concludes is
likely to be selected by the partner. These costs may not be
incurred equally across all programs. In addition, the Company
continually evaluates the progress of development activities
under these agreements and if events or circumstances change in
future periods that the Company reasonably believes would make
it unlikely that a collaborator would exercise an option with
respect to the same percentage of programs, the Company will
adjust the allocation accordingly.
For example, the Company granted Celgene Corporation an option
to select up to two of four programs developed under its
collaboration agreement with Celgene and concluded that Celgene
was likely to
F-15
ARRAY BIOPHARMA
INC.
Notes to the Financial Statements
For the Fiscal Years Ended June 30, 2010, 2009 and
2008
exercise its option with respect to two of the four programs.
Accordingly, the Company reported costs associated with the
Celgene collaboration as follows: 50% to Cost of Revenue, with
the remaining 50% to Research and Development Expenses for
Proprietary Drug Discovery. Celgene waived its rights with
respect to one of the programs during the second quarter of
fiscal 2010, at which time management determined that Celgene is
likely to exercise its option to license one of the remaining
three programs. Accordingly, beginning October 1, 2009, the
Company began reporting costs associated with the Celgene
collaboration as follows: 33.3% to Cost of Revenue, with the
remaining 66.7% to Research and Development Expenses for
Proprietary Drug Discovery. See Note 6
Deferred Revenue, for further information about the
Companys collaboration with Celgene.
Net Loss per
Share
Basic net loss per share is computed by dividing net loss for
the period by the weighted averaged number of common shares
outstanding during the period. Diluted net loss per share
reflects the additional dilution from potential issuances of
common stock, such as stock issuable pursuant to the exercise of
stock options and warrants issued related to the Companys
long-term debt. The treasury stock method is used to calculate
the potential dilutive effect of these common stock equivalents.
Potentially dilutive shares are excluded from the computation of
diluted net loss per share when their effect is anti-dilutive.
As a result of the Companys net losses through the date of
these Financial Statements, all potentially dilutive securities
were anti-dilutive and therefore have been excluded from the
computation of diluted net loss per share.
Comprehensive
Income (Loss)
The Companys comprehensive income (loss) consists of the
Companys net losses and unrealized gains and losses on
investments in
available-for-sale
marketable securities. The Company had no other sources of
comprehensive income (loss) for the periods presented.
Recent Accounting
Pronouncements
Collaborative Arrangements In the first
quarter of fiscal 2010, new guidance relating to the accounting
practices and disclosures for collaborative arrangements became
effective. A collaborative arrangement is a contractual
arrangement that involves a joint operating activity. These
arrangements involve two (or more) parties who are both
(a) active participants in the activity and
(b) exposed to significant risks and rewards dependent on
the commercial success of the activity. The Company determined
that while certain agreements are collaborative arrangements,
none of the current activities being performed under those
arrangements would require a change to the accounting practices
or disclosures made by the Company in its Quarterly Reports on
Form 10-Q
and Annual Reports on
Form 10-K.
Convertible Debt In the first quarter of
fiscal 2010, guidance relating to the accounting for
convertible debt became effective. The Company
determined that none of its credit facilities are considered
convertible debt as defined under this accounting
guidance and therefore this pronouncement had no impact on its
financial statements and disclosures.
Fair Value Measurements In August 2009 and
January 2010, new literature was issued giving companies
additional guidance relating to the fair value measurements and
disclosures of liabilities. The guidance issued in August 2009
was effective for the Company for the first quarter of fiscal
2010 and was adopted at that time. The guidance issued in
January 2010 was effective for the Company for the third quarter
of fiscal 2010 and was adopted at that time. The effect of these
new literatures is reflected in the accompanying Financial
Statements and the related notes.
Revenue Recognition for Multiple Deliverable
Arrangements In October 2009, new guidance was
issued related to multiple-deliverable revenue arrangements that
are effective for the Company prospectively for
F-16
ARRAY BIOPHARMA
INC.
Notes to the Financial Statements
For the Fiscal Years Ended June 30, 2010, 2009 and
2008
revenue arrangements entered into or materially modified
subsequent to July 1, 2010. The objective of this change is
to address the accounting for multiple-deliverable arrangements
to enable companies to account more easily for products or
services (deliverables) separately rather than as a combined
unit. The Company does not believe that adoption of this
guidance will have a material impact on its financial statements.
Subsequent Events In February 2010, new
guidance was issued related to the recognition and disclosure of
subsequent events. The guidance was effective when issued and
has been considered in the preparation of the accompanying
Financial Statements and the related notes.
Milestone Revenue Recognition In March 2010,
new guidance was issued related to accounting for milestone
revenue recognition. The guidance is effective for the Company
for the first quarter of fiscal 2011 though early adoption is
permitted. The Company adopted the guidance during the third
quarter of fiscal 2010 and it is reflected in the accompanying
Financial Statements and the related notes. Its impact was not
considered material.
NOTE 2 -
SEGMENTS, GEOGRAPHIC INFORMATION AND SIGNIFICANT
COLLABORATORS
Segments
All operations of the Company are considered to be in one
operating segment and, accordingly, no segment disclosures have
been presented. The physical location of all of the
Companys equipment, leasehold improvements and other fixed
assets is within the U.S.
Geographic
Information
The following table details revenue from collaborators by
geographic area based on the country in which collaborators are
located or the ship-to destination for compounds (dollars in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended June 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
North America
|
|
$
|
53,641
|
|
|
$
|
24,575
|
|
|
$
|
24,454
|
|
Europe
|
|
|
187
|
|
|
|
366
|
|
|
|
230
|
|
Asia Pacific
|
|
|
52
|
|
|
|
41
|
|
|
|
4,124
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
53,880
|
|
|
$
|
24,982
|
|
|
$
|
28,808
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Significant
Collaborators
The following collaborators contributed greater than 10% of the
Companys total revenue for each of the periods presented
below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended
|
|
|
|
June 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Genentech, Inc.
|
|
|
38.6
|
%
|
|
|
67.0
|
%
|
|
|
54.1
|
%
|
Amgen, Inc.
|
|
|
28.2
|
%
|
|
|
-
|
|
|
|
-
|
|
Celgene Corporation
|
|
|
26.1
|
%
|
|
|
23.2
|
%
|
|
|
14.9
|
%
|
VentiRx Pharmaceuticals, Inc.
|
|
|
0.2
|
%
|
|
|
7.2
|
%
|
|
|
13.7
|
%
|
Ono Pharmaceutical Co., Ltd.
|
|
|
-
|
|
|
|
-
|
|
|
|
14.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
93.1
|
%
|
|
|
97.4
|
%
|
|
|
96.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-17
ARRAY BIOPHARMA
INC.
Notes to the Financial Statements
For the Fiscal Years Ended June 30, 2010, 2009 and
2008
The loss of one or more of its significant collaborators could
have a material adverse effect on the Companys business,
operating results and/or financial condition. The Company does
not require collateral, though most of the Companys
collaborators pay in advance. Although the Company is impacted
by economic conditions in the biotechnology and pharmaceutical
sectors, management does not believe that a significant credit
risk exists as of June 30, 2010.
NOTE 3 -
MARKETABLE SECURITIES
Marketable securities consisted of the following as of
June 30, 2010 (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
|
|
|
|
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Fair
|
|
|
|
|
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Value
|
|
|
|
|
|
Short-term
available-for-sale
securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government agency securities
|
|
$
|
78,652
|
|
|
$
|
-
|
|
|
$
|
(4
|
)
|
|
$
|
78,648
|
|
|
|
|
|
Mutual fund securities
|
|
|
16
|
|
|
|
-
|
|
|
|
-
|
|
|
|
16
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sub-total
|
|
|
78,668
|
|
|
|
-
|
|
|
|
(4
|
)
|
|
|
78,664
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term
available-for-sale
securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Auction rate securities
|
|
|
11,027
|
|
|
|
5,533
|
|
|
|
-
|
|
|
|
16,560
|
|
|
|
|
|
Mutual fund securities
|
|
|
799
|
|
|
|
-
|
|
|
|
-
|
|
|
|
799
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sub-total
|
|
|
11,826
|
|
|
|
5,533
|
|
|
|
-
|
|
|
|
17,359
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
90,494
|
|
|
$
|
5,533
|
|
|
$
|
(4
|
)
|
|
$
|
96,023
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketable securities consisted of the following as of
June 30, 2009 (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
|
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
|