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| ALXN > SEC Filings for ALXN > Form 10-Q on 30-Oct-2008 | All Recent SEC Filings |
30-Oct-2008
Quarterly Report
Note Regarding Forward-Looking Statements
This quarterly report on Form 10-Q contains forward-looking statements that have been made pursuant to the provisions of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements are based on current expectations, estimates and projections about our industry, management's beliefs and certain assumptions made by our management, and may include, but are not limited to, statements regarding the potential benefits and commercial potential of Soliris, timing and effect of sales of Soliris in foreign markets, status and levels of reimbursement, price approval and funding processes outside the United States, interest and sense of urgency about Soliris in the patient, physician and payor communities, the safety and efficacy of Soliris and our product candidates, estimates of the potential markets and estimated commercialization dates for Soliris around the world, sales and marketing plans, any changes in the current or anticipated market demand or medical need for Soliris, status of our ongoing clinical trials, commencement dates for clinical trials and studies, clinical trial results, evaluation of our clinical trial results by regulatory agencies in other countries, prospects for regulatory approval in other countries, plans for and status of clinical programs for Soliris in non-PNH indications, the need for additional research and testing, the uncertainties involved in the drug development process and manufacturing, our future research and development activities, assessment of competitors and potential competitors, estimates of the capacity of manufacturing and other facilities to support Soliris and our product candidates, timing for seeking regulatory approval of our manufacturing facility in Rhode Island, potential costs resulting from product liability or other third party claims, including pending litigation, the sufficiency of our existing capital resources and projected cash needs, recording of valuation allowances on deferred tax assets, estimates on future cash outflows, results of pending litigation, assessment of impact of recent accounting pronouncements as well as assumptions relating to the foregoing. Words such as "anticipates," "expects," "intends," "plans," "believes," "seeks," "estimates," variations of such words and similar expressions are intended to identify such forward-looking statements, although not all forward-looking statements contain these identifying words. These statements are not guarantees of future performance and are subject to certain risks, uncertainties, and assumptions that are difficult to predict; therefore, actual results may differ materially from those expressed or forecasted in any such forward-looking statements. Such risks and uncertainties include, but are not limited to, those discussed later in this report under the section entitled "Risk Factors." Unless required by law, we undertake no obligation to update publicly any forward-looking statements, whether because of new information, future events or otherwise. However, readers should carefully review the risk factors set forth in other reports or documents we file from time to time with the Securities and Exchange Commission.
Business
Overview
We are a biopharmaceutical company engaged in the discovery, development and delivery of biologic therapeutic products aimed at treating patients with severe and life-threatening disease states, including hematologic and neurologic diseases, transplant rejection, cancer and autoimmune disorders. Our marketed product Solirisฎ (eculizumab) is the first therapy approved for the treatment of patients with paroxysmal nocturnal hemoglobinuria, or PNH.
Soliris is designed to inhibit a specific aspect of the complement component of the immune system, and thereby treat inflammation related to chronic hematologic and neurological disorders, transplant rejection, and autoimmune disorders. Soliris is a humanized antibody that blocks complement activity for one to two weeks after a single dose at the doses currently prescribed. The initial indication for which we received approval for Soliris is PNH. PNH is a rare, debilitating and life-threatening, acquired genetic deficiency blood disorder defined by the destruction of red blood cells, or hemolysis. The chronic hemolysis in patients with PNH may be associated with life-threatening thromboses, recurrent pain, kidney disease, disabling fatigue, impaired quality of life, severe anemia, pulmonary hypertension, shortness of breath and intermittent episodes of dark-colored urine (hemoglobinuria).
In March 2007, the U.S. Food and Drug Administration, or FDA, granted approval for Soliris, for the treatment of patients with PNH. We began commercial sale of Soliris in the United States during April 2007.
In June 2007, the European Commission, or E.C., approved the use of Soliris for patients with PNH in the European Union, which also serves as the basis for approval in Iceland and Norway. Subsequently, we engaged with appropriate authorities on the operational, reimbursement, price approval and funding processes that are separately required in each country and have initiated commercialization in those countries where this process has been completed. In several countries outside the United States, we continue meaningful sales to individual patients through approved named-patient programs. In September 2008, the British government notified the Company that they will begin reimbursement of Soliris on a national level beginning in the second quarter of 2009.
We have submitted an application for marketing authorization in Australia for Soliris for the treatment of patients with PNH. The application was accepted for priority review. Soliris has received Orphan Drug Designation in Australia, which provides certain regulatory and filing fee advantages, including market exclusivity for several years once approved.
We have also submitted applications for marketing authorization in Canada and Switzerland for Soliris for the treatment of patients with PNH.
Clinical
We completed enrollment of Japanese patients in our AEGIS study in March 2008. This study is a single registration study to evaluate the safety, efficacy, and pharmacology of Soliris as a treatment for Japanese patients with PNH. The open label study was authorized by Japan's Pharmaceutical and Medical Devices Agency.
We are also focusing our research efforts on the use of eculizumab in other rare and severe complement-mediated conditions, including in chronic hemolytic and thrombotic disorders, transplant rejection and in chronic and debilitating neurological disorders. The FDA has authorized our Investigational New Drug Application, or IND, for studying the safety and effectiveness of eculizumab in treating myasthenia gravis, a rare autoimmune syndrome characterized by the failure of neuromuscular transmission, and we are expecting to begin clinical development in 2008. We are also aware that independent investigators have commenced a study to evaluate eculizumab in organ transplantation. We are currently developing clinical programs to investigate the use of Soliris as a treatment for patients with other complement-mediated disorders, including three severe, life-threatening, and rare hematologic disorders: atypical hemolytic uremic syndrome, a disease in which the lack of naturally occurring complement inhibitors can cause life-threatening kidney damage; catastrophic anti-phospholipid syndrome, a disorder in which uncontrollable blood clotting often leads to multiple organ failure; and cold hemagglutinin disease, an auto-immune hemolytic anemia.
The FDA has also authorized our IND to study the safety and efficacy of an antibody to the immune regulator CD200 in chronic lymphocytic leukemia, or CLL, an incurable chronic cancer that results from expansion of B-lymphocytes, and other myeloid tumors such as multiple myeloma. We commenced dosing of initial CLL patients with anti-CD200 in the second quarter of 2008.
Manufacturing
We currently rely on a single third-party contract manufacturer for commercial quantities of Soliris. We obtain drug product to meet our requirements for clinical studies using both internal and third-party contract manufacturing capabilities. For both clinical and commercial requirements, we have contracted and expect to continue contracting for product finishing, vial filling, and packaging through third parties.
In July 2006, we acquired a manufacturing plant in Smithfield, Rhode Island for the future commercial production of Soliris, manufacturing development and manufacturing of future products. We have begun validation production of Soliris in 2008 and expect to file for regulatory approval by mid-2009. We transferred our pilot manufacturing capabilities from New Haven, Connecticut to Smithfield, Rhode Island during 2007, and are using
this facility for the production and purification of certain of our product candidates for clinical studies. The pilot plant was placed in service in the fourth quarter 2007, and we expect to place the manufacturing plant in service once regulatory approval is obtained
Our most significant agreement with a third party manufacturer is the Large-Scale Product Supply Agreement with Lonza Sales AG, or Lonza, dated December 18, 2002, which has been amended from time to time. This agreement, the Lonza Agreement, relates to the manufacture of eculizumab. We have agreed to purchase certain minimum quantities of product from Lonza under our existing arrangements. If we terminate the Lonza Agreement without cause, we will be required to pay for batches of product scheduled for manufacture under our arrangement.
We are required to prepay certain amounts to Lonza related to the production of Soliris, which are reflected as prepaid manufacturing costs. Once we take title to the inventory produced by Lonza, the amounts are reclassified into inventory. On an ongoing basis, we evaluate our plans to proceed with production of Soliris by Lonza, which depends upon our commercial requirements, the progress of our clinical development programs and the status of our Smithfield, Rhode Island manufacturing plant.
Other Events
In July 2008, the Company's Board of Directors approved a two-for-one stock split to be effected in the form of a 100 percent stock dividend. The additional shares were distributed on August 22, 2008 to stockholders of record as of the close of trading on August 12, 2008.
In October 2008, certain holders of our convertible notes exercised conversion rights with respect to an aggregate principal amount of $52,778 of the notes resulting in the issuance of 3,355,770 shares of common stock. The shares will be issued in November 2008.
Critical Accounting Policies and the Use of Estimates
The significant accounting policies and basis of preparation of our consolidated financial statements are described in Note 1, "Business Overview and Summary of Significant Accounting Policies" of our financial statements included in our Form 10-K for the year ended December 31, 2007. Under accounting principles generally accepted in the United States, we are required to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, expenses and disclosure of contingent assets and liabilities in our financial statements. We base our assumptions, judgments and estimates on historical experience and various other factors that we believe to be reasonable under the circumstances. Actual results could differ from those estimates.
We believe the judgments, estimates and assumptions associated with the following critical accounting policies have the greatest potential impact on our consolidated financial statements, so we consider these to be our critical accounting policies:
Revenue recognition
Royalties
Inventories
Prepaid manufacturing
Research and development expenses
Stock-based compensation
Long-lived assets
Income taxes
For a complete discussion of these critical accounting policies, refer to "Critical Accounting Policies and Use of Estimates" within "Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations" included within our Form 10-K for the year ended December 31, 2007. We have reviewed our critical accounting policies as disclosed in our Form 10-K, and, we have not noted any material changes.
Results of Operations
Revenues
Net product sales
The following table summarizes product revenue for the three and nine months ended September 30, 2008 and 2007:
Three months ended Nine months ended September 30 Increase /(Decrease) September 30 Increase/(Decrease) 2008 2007 $ Change 2008 2007 $ Change Net product sales $ 76,500 $ 21,973 $ 54,527 $ 181,605 $ 32,524 $ 149,081
In March 2007, the FDA granted approval for Soliris for the treatment of PNH. In June 2007, the E.C. also approved Soliris for the treatment of PNH. Our product sales have been solely attributable to sales of Soliris and have been generated from three sources: commercial sales in the United States (beginning in the second quarter of 2007), "named-patient" sales prior to full-scale commercialization in certain countries outside the United States (beginning in the first quarter of 2007) and commercial sales in countries outside the United States (beginning in the fourth quarter of 2007). The increases in revenue for the three and nine months ended September 30, 2008 were due to an increased number of patients treated with Soliris as a result of our product launches in the United States and Europe. During the three months ended September 30, 2008, certain government payors agreed to reimburse for Soliris shipments which were delivered in prior periods. Accordingly, we recognized $5,300 of net product sales in the third quarter associated with these prior shipments.
Contract research revenue
We recorded no contract research revenue for the three months and recorded $95 and $5,660 for the nine months ended September 30, 2008 and 2007, respectively. The decrease in contract research revenues relates primarily to the termination of our collaborative agreement with Proctor & Gamble, effective March 30, 2007.
Cost of sales
Cost of sales was $8,948 and $2,154, for the three months and $21,554 and $3,305 for the nine months ended September 30, 2008 and 2007, respectively. For the three and nine months ended September 30, 2008, cost of sales includes manufacturing costs, as well as royalty expenses associated with sales of Soliris.
Product sold during the three and nine months ended September 30, 2007 was previously expensed prior to submission of our Biologics License Application, or BLA, and therefore is not included in the cost of sales during this period. During the fourth quarter of 2007, we fully exhausted the supply of previously expensed inventory. Beginning in 2008, our cost of sales includes the full manufacturing cost of the inventory. Accordingly, cost of sales for the three and nine months ended September 30, 2007 primarily includes royalty expenses associated with sales of Soliris and certain quality control costs.
On a periodic basis and based on events such as the outcome of litigation, we may reassess the estimates of royalties owed to certain third parties. Changes in these estimates could have a material impact on our cost of sales in future periods.
Research and Development
Our research and development expense includes personnel, facility and external costs associated with the research and development of our product candidates, as well as product development costs related to Soliris, including regulatory filings, post-marketing expenses and patient registries. These research and development costs primarily include preclinical and clinical studies, discovery research, quality control and quality assurance, non-inventoried manufacturing costs, pharmacovigilance, regulatory and other product development expenses.
Research and development expenses were $14,874 and $16,906, for the three months and $47,306 and $53,318 for the nine months ended September 30, 2008 and 2007, respectively.
For the three months ended September 30, 2008, the decrease in research and development expense of $2,032, as compared to the same period in the prior year, was primarily related to the following:
Decrease of $1,387 in research and development payroll and benefit expense related primarily to a reduction in stock-based compensation due to employee forfeitures and additional capitalization to inventory and property, plant and equipment.
Decrease of $733 in discovery research related primarily to a reduction in external research and consulting fees.
Decrease of $666 in operating and occupancy charges related primarily to the expiration of our lease at our New Haven, CT location.
Increase of $533 in non-labor clinical development due largely to an increase in spending of $1,849 related to our AEGIS clinical study in Japan, studies of eculizumab in non-PNH indications and costs of the PNH registry. These costs were offset by a decrease in spending on the EXTENSION and EXPLORE studies of approximately $1,317.
For the nine months ended September 30, 2008, the decrease in research and development expense of $6,012, as compared to the same period in the prior year, was primarily related to the following:
Decrease of $4,559 in research and development payroll and benefit expense related primarily to a reduction in stock-based compensation due to employee forfeitures and additional capitalization to inventory and property, plant and equipment.
Decrease of $1,388 in non-labor discovery research expense, due largely to a reduction in external research and consulting fees.
Decrease of $1,036 in operating and occupancy charges related primarily to the expiration of our lease at our New Haven, CT location.
Decrease of $642 in product development related primarily to additional capitalization of costs associated with the validation of our manufacturing facility in Smithfield, Rhode Island.
Increase of $1,001 in depreciation and amortization related primarily to the amortization of costs associated with our new pilot plant located at our manufacturing facility in Smithfield, RI, which was placed in service in the fourth quarter 2007.
Increase of $612 in non-labor clinical development due largely to an increase in spending of $5,062 related to our AEGIS clinical study in Japan, studies of eculizumab in non-PNH indications and costs of the PNH registry. These costs were offset by a decrease in spending on the EXTENSION, EXPLORE and EMBRACE studies and BLA costs of approximately $4,534.
Selling, General and Administrative Expenses
Our selling, general and administrative expense includes commercial and administrative personnel, corporate facility and external costs required to support the marketing and sales of our commercialized products. These selling, general and administrative costs include: corporate facility operating expenses and depreciation; marketing and sales operations in support of Soliris; human resources; finance, legal, information technology and support personnel expenses; and other corporate costs such as telecommunications, insurance, audit and legal expenses.
Selling, general and administrative expenses were $32,064 and $24,944, for the three months and $94,754 and $67,571 for the nine months ended September 30, 2008 and 2007, respectively.
For the three months ended September 30, 2008, the increase of $7,120 in selling, general and administrative expense, as compared to the same period in the prior year, was primarily related to the following:
Increase in non-labor commercial operations of $4,006 was due primarily to our foreign operations, which we expanded significantly throughout 2007.
Increase in salary, benefits and other labor expenses of $2,825 including increased share-based compensation cost of $1,592. The increases in these costs were a result of increased headcount related to commercial development activities, including increases in payroll and benefits costs related to our global commercial operations teams. This increase was also due to increases in payroll and benefits within other certain operational groups to support our growth as a commercial entity.
For the nine months ended September 30, 2008, the increase of $27,183 in selling, general and administrative expense, as compared to the same period in the prior year, was primarily related to the following:
Increase in salary, benefits and other labor expenses of $12,962 including increased share-based compensation cost of $4,699. The increases in these costs were a result of increased headcount related to commercial development activities, including increases in payroll and benefits costs related to our global commercial operations teams. This increase was also due to increases in payroll and benefits within certain operational groups to support our growth as a commercial entity.
Increase in non-labor commercial operations of $8,138 was comprised primarily of expansion of our foreign operations, which we expanded significantly in the latter half of 2007.
Increase in non-labor general and administration of $5,421 primarily related to increases in legal costs associated with ongoing litigation and increases in infrastructure costs to support our growth as a commercial entity.
Other Income and Expense
We recognize investment income primarily from our portfolio of cash equivalents and short-term marketable securities. Investment income was $690 and $1,796, for the three months and $2,071 and $6,724 for the nine months ended September 30, 2008 and 2007, respectively. The decrease was due primarily to lower interest rates and cash, cash equivalents and marketable securities during the three and nine month periods ended September 30, 2008, versus the same periods in the prior year.
We incur interest on our convertible notes, mortgage debt, revolving credit facility, and other debt and capital lease obligations. Our interest expense is net of capitalized interest related to the construction of our Rhode Island manufacturing facility, which was $182 and $430 for the three and nine months ended September 30, 2008. Interest expense was $634 and $643, for the three months and $1,975 and $1,854 for the nine months ended September 30, 2008 and 2007, respectively.
Foreign currency transaction gains and losses relate to our foreign operations, which increased significantly beginning in 2007. The foreign currency transaction gains totaled $566 and $578, for the three months and $200 and $924 for the nine months ended September 30, 2008 and 2007, respectively. The gains were primarily a result of the fluctuation in exchange rates for the U.S. Dollar compared to the Euro and British Pound on the unhedged portion of our monetary assets and liabilities.
Income Taxes
We currently record a full valuation allowance against its US federal and state deferred tax assets, and against a substantial portion of its foreign deferred tax assets.
The tax provision (benefit) for the three and nine months ended September 30, 2008 includes a cash exchange of certain state research and development tax credits of $67 and $247, respectively. These benefits were offset by a current tax provision related to state and foreign taxes of $482 and $416, during the three and nine months ended September 30, 2008, respectively. Additionally, the tax provision for the nine months ended September 30, 2008 includes a benefit of $106 associated with the reversal of a valuation allowance against the deferred tax asset of a foreign subsidiary.
We will continue to monitor its valuation allowances on deferred tax assets to assess whether it is more likely than not that the related tax benefits would be realized and whether the related valuation allowance is necessary.
Net Income (Loss)
The Company recorded net income for the three and nine month periods ended September 30, 2008 of $19,689 and $17,813 or $0.23 and $0.22 per diluted share, respectively, versus a net loss of $20,085 and $79,958 or $0.27 and $1.11 per diluted share, respectively, for the corresponding periods in 2007.
Liquidity and Capital Resources
As of September 30, 2008, our consolidated cash, cash equivalents and marketable securities totaled $126,402. The $19,690 increase from December 31, 2007 is largely attributable to the collection of accounts receivable and management's focus on efficient use of our capital resources. Until required for use in the business, we invest our cash reserves in money market funds and high quality commercial, corporate and U.S. Government notes in accordance with our investment policy. We do not have any investments in auction rate securities.
Financial instruments that potentially expose the Company to concentrations of credit risk are limited to accounts receivable and our foreign exchange derivative contracts. At September 30, 2008, two individual customers accounted for 27.3% and 20.2% of the accounts receivable balance. For the three months ended September 30, 2008, one customer accounted for 18.5% of our product sales. For the nine months ended September 30, 2008, one customer accounted for 21.6% of our product sales.
At September 30, 2008, we have foreign currency forward contracts with notional amounts totaling $127,039. These outstanding foreign currency forward contracts had a fair value of $7,734, which is included in other current assets. The counterparty to these forward contracts is a multinational commercial bank, and we believe the risk of nonperformance is not material.
At September 30, 2008, our working capital was $209,033, compared to $167,645 at December 31, 2007. At September 30, 2008, our current ratio was 4.4, compared to 5.4 at December 31, 2007.
We anticipate that cash generated from operations and our existing available cash, as well as interest and investment income earned on available cash and . . .
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