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| NBIX > SEC Filings for NBIX > Form 10-Q on 6-May-2009 | All Recent SEC Filings |
6-May-2009
Quarterly Report
research agreements and grants, clinical trial accruals (research and
development expense), debt, share-based compensation, investments, and fixed
assets. Estimates are based on historical experience, information received from
third parties and on various other assumptions that are believed to be
reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying values of assets and liabilities that are
not readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions. The items in our financial
statements requiring significant estimates and judgments are as follows:
Revenues under collaborative research and development agreements are
recognized as costs are incurred over the period specified in the related
agreement or as the services are performed. These agreements are on a
best-efforts basis, do not require scientific achievement as a performance
obligation, and provide for payment to be made when costs are incurred or the
services are performed. All fees are nonrefundable to the collaborators.
Upfront, nonrefundable payments for license fees, grants, and advance payments
for sponsored research revenues received in excess of amounts earned are
classified as deferred revenue and recognized as income over the contract or
development period. Estimating the duration of the development period includes
continual assessment of development stages and regulatory requirements.
Milestone payments are recognized as revenue upon achievement of pre-defined
scientific events, which requires substantive effort, and for which achievement
of the milestone was not readily assured at the inception of the agreement.
Research and development (R&D) expenses include related salaries, contractor
fees, facilities costs, administrative expenses and allocations of corporate
costs. All such costs are charged to R&D expense as incurred. These expenses
result from our independent R&D efforts as well as efforts associated with
collaborations, grants and in-licensing arrangements. In addition, we fund R&D
and clinical trials at other companies and research institutions under
agreements, which are generally cancelable. We review and accrue clinical trials
expense based on work performed, a method that relies on estimates of total
costs incurred based on patient enrollment, completion of studies and other
events. We follow this method since reasonably dependable estimates of the costs
applicable to various stages of a research agreement or clinical trial can be
made. Accrued clinical costs are subject to revisions as trials progress to
completion. Revisions are charged to expense in the period in which the facts
that give rise to the revision become known. Historically, revisions have not
resulted in material changes to R&D costs; however a modification in the
protocol of a clinical trial or cancellation of a trial could result in a charge
to our results of operations.
In accordance with Statement of Financial Accounting Standards (SFAS) No. 144
(SFAS 144), "Accounting for the Impairment or Disposal of Long-Lived Assets," if
indicators of impairment exist, we assess the recoverability of the affected
long-lived assets by determining whether the carrying value of such assets can
be recovered through undiscounted future operating cash flows. If impairment is
indicated, we measure the amount of such impairment by comparing the carrying
value of the asset to the estimated fair value of the asset, which is generally
determined based on the present value of the expected future cash flows. We have
determined that no impairment exists on our long-lived assets.
We grant stock options to purchase our common stock to our employees and
directors under the 2003 Incentive Stock Plan, as amended (the 2003 Plan) and
grant stock options to certain employees pursuant to Employment Commencement
Nonstatutory Stock Option Agreements. We also grant certain employees stock
bonuses and RSUs under the 2003 Plan. Additionally, we have outstanding options
that were granted under option plans from which we no longer make grants. The
benefits provided under all of these plans are subject to the provisions of
revised SFAS No. 123, "Share-Based Payment (SFAS 123R)." Share-based
compensation expense recognized under SFAS 123R for the three months ended
March 31, 2009 and 2008 was $1.9 million and $2.2 million, respectively.
Stock option awards and RSUs generally vest over a three to four year period
and expense is ratably recognized over those same time periods. However, due to
certain retirement provisions in our stock plans, share-based compensation
expense may be recognized over a shorter period of time, and in some cases the
entire share-based compensation expense may be recognized upon grant of the
share-based compensation award. Employees who are age 55 or older and have five
or more years of service with us are entitled to accelerated vesting of certain
unvested share-based compensation awards upon retirement. This retirement
provision leads to variability in the quarterly expense amounts recognized under
SFAS 123R, and therefore individual share-based compensation awards may impact
earnings disproportionately in any individual fiscal quarter.
The determination of fair value of stock-based payment awards on the date of
grant using the Black-Scholes model is affected by our stock price, as well as
the input of other subjective assumptions. These assumptions include, but are
not limited to, the expected
term of stock options and our expected stock price volatility over the term of
the awards. Our stock options have characteristics significantly different from
those of traded options, and changes in the assumptions can materially affect
the fair value estimates.
SFAS 123R requires forfeitures to be estimated at the time of grant and
revised, if necessary, in subsequent periods if actual forfeitures differ from
those estimates. If actual forfeitures vary from our estimates, we will
recognize the difference in compensation expense in the period the actual
forfeitures occur or when options vest.
THREE MONTHS ENDED MARCH 31, 2009 AND 2008
Revenues were $0.7 million for the first quarter of 2009 compared with
$1.8 million for the respective period last year. The decrease in revenues for
the three months ended March 31, 2009, compared with the respective period in
2008, is primarily from revenues recognized in 2008 under our collaboration
agreement with GlaxoSmithKline (GSK). During the first quarter of 2008, we
recognized $1.0 million in milestone revenue from GSK. Additionally, during the
first quarters of both of 2009 and 2008, we recognized $0.7 million in revenue
under our collaboration agreement with Dainippon Sumitomo Pharma Co. Ltd
(DSP) from amortization of up-front licensing fees.
Research and development expenses decreased to $10.8 million for the first
quarter of 2009 compared with $14.2 million for the respective period in 2008.
Laboratory costs decreased by $0.3 million in the first quarter of 2009 compared
to the same period in 2008 and external development costs decreased by
$2.1 million compared to last year. External development spending in our
elagolix program decreased from $3.7 million in the first quarter of 2008 to
$1.9 million in the first quarter of 2009. In addition, depreciation expense
decreased by $0.8 million in the first quarter of 2009 compared with the same
period last year as a result of the termination of our right to repurchase any
portion of our facility or real property in the fourth quarter of 2008.
General and administrative expenses were $4.2 million for the first quarter
of 2009 compared with $8.3 million during the same period last year. This
decrease in general and administrative expenses is primarily due to severance
costs and additional stock option compensation expense for accelerated vesting
of certain stock grants of $2.4 million incurred in the first quarter of 2008.
During the first quarter of 2009, we recognized additional cease-use expense
under SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal
Activities" (SFAS 146) of $4.8 million due to an estimated increase in
construction costs, and a change in assumptions on the timing of tenant
occupancy and rental rates for the Front Building. See Note 11, "Real Estate" to
the accompanying Financial Statements.
Other expense increased from $0.3 million during the first quarter of 2008 to
$0.5 million for the first quarter of 2009. The increase resulted primarily from
rental payments made during the first quarter of 2008 under our sale-leaseback
agreement which were previously recorded as interest expense under
sale-leaseback accounting rules. These rental payments are components of
operating expenses during 2009. Additionally, investment income for the first
quarter of 2009 decreased by $1.4 million from the prior year period, primarily
due to lower cash balances coupled with lower overall interest rates, as well as
a $1.5 million recognized loss on an other-than-temporary impairment of our
auction rate securities and a $0.3 million realized loss on deferred
compensation investments.
Net loss for the first quarter of 2009 was $19.7 million, or $0.51 per share,
compared to $21.1 million, or $0.55 per share, for the same period in 2008. This
decrease in net loss was primarily due to severance costs incurred in the first
quarter of 2008 and expense management efforts during the first quarter of 2009.
In May 2009, we announced staff reductions of approximately 60 employees as
part of our restructuring program to prioritize our clinical development
programs. As a result, during the second quarter of 2009 we communicated to
affected employees a plan of organizational restructuring through involuntary
terminations. Pursuant to SFAS 112, "Employers' Accounting for Post-employment
Benefits" and SFAS 146, we expect to incur a severance charge of approximately
$3.0 million in the second quarter of 2009. The majority of this amount is
expected to be paid out during the second quarter of 2009. Additionally, we
elected to suspend any matching contributions to the 401(k) program and to
terminate our deferred compensation plan during the second quarter of 2009. The
related assets of the deferred compensation plan, carried as other non-current
assets on our balance sheet will be distributed to participants in accordance
with the provisions of the plan. Additionally, the liabilities of the deferred
compensation plan, carried as other liabilities in our balance sheet will be
relieved as the assets are distributed.
To date, our revenues have been derived primarily from funded research and
development, achievements of milestones under corporate collaborations, and
licensing of product candidates. The nature and amount of these revenues from
period to period may lead to substantial fluctuations in our of quarterly
revenues and earnings. Accordingly, results and earnings for one period are not
predictive of future periods. Collaborations, including grant revenue, accounted
for 100% of our revenue for the three months ended March 31, 2009 and 2008.
We expect to incur operating losses for the foreseeable future because of the
expenses we expect to incur related to progressing programs through our
pipeline.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 2009, our cash, cash equivalents, and investments totaled
$86.0 million compared with $101.5 million at December 31, 2008. The decrease in
cash and investment balances at March 31, 2009 resulted primarily from our net
loss of $19.7 million, which includes various non-cash expenditures.
Our long-term investments at March 31, 2009 included (at par value)
$22.6 million of auction rate securities. With the liquidity issues experienced
in global credit and capital markets, these auction rate securities have
experienced multiple failed auctions as the amount of securities submitted for
sale has exceeded the amount of purchase orders, and as a result, these affected
securities are currently not liquid. All of our auction rate securities are
secured by student loans, which are backed by the full faith and credit of the
federal government (up to approximately 98% of the value of the student loan).
All of these securities continue to pay interest according to their stated terms
(generally 120 basis points over the ninety-one day United States Treasury bill
rate) with interest rates resetting every 7 to 28 days. While it is not our
intent to hold these securities until their stated ultimate maturity dates,
these investments are scheduled to ultimately mature between 2030 and 2047.
The valuation of our auction rate securities investment portfolio is subject
to uncertainties that are difficult to predict. The fair values of these
securities were estimated utilizing a discounted cash flow analysis as of
March 31, 2009. The significant assumptions of this valuation model were
discount margins ranging from 254 to 931 basis points which are based on
industry recognized student loan sector indices, an additional liquidity
discount of 150 basis points and an estimated term to liquidity of 6 to 8 years.
Other items this analysis considers are the collateralization underlying the
security investments, the creditworthiness of the counterparty, and the timing
of expected future cash flows. These securities were also compared, when
possible, to other observable market data with similar characteristics as the
securities held by us. Although the auction rate security investments continue
to pay interest according to their stated terms, based on valuation models of
the individual securities, we have recognized in the consolidated statement of
operations for the three months ended March 31, 2009 a loss of approximately
$1.5 million in other expense, net for auction rate securities that we have
concluded that an other-than-temporary impairment exists. The carrying value in
long-term investments for these auction rate securities at March 31, 2009 was
$17.5 million.
During the fourth quarter of 2008, UBS AG (UBS) extended an offer of Auction
Rate Securities Rights (ARS Rights) to holders of illiquid auction rate
securities that were maintained by UBS as of February 13, 2008. The ARS Rights
provide the holder with the ability to sell the auction rate securities, along
with the ARS Rights, to UBS at the par value of the auction rate securities,
during an applicable exercise period. The ARS Rights grant UBS the sole
discretion and right to sell or otherwise dispose of auction rate securities at
any time up until July 2, 2012, without any prior notification of the holder, so
long as the holder receives a payment of par upon any sale or disposition. The
ARS Rights are not transferable, not tradeable, and will not be quoted or listed
on any securities exchange or any other trading network. The offer period for
the ARS Rights closed on November 14, 2008 and ARS Rights were issued by UBS
during the fourth quarter of 2008.
We have elected to participate in the ARS Rights program for all of our
outstanding auction rate securities maintained by UBS. We have $14.6 million (at
par value) of auction rate securities that are maintained by UBS. Under the
terms of the ARS Rights offer, our applicable exercise period begins on June 30,
2010 and ends July 2, 2012. Additionally, we are eligible for a loan of up to
75% of the market value of the auction rate securities, should a loan be needed.
It is our intention to sell the auction rate securities and ARS Rights to UBS on
June 30, 2010.
We elected to measure the ARS Rights under the fair value option of SFAS 159,
"The Fair Value Option for Financial Assets and Financial Liabilities -
including an amendment of FASB Statement No. 115" (SFAS 159), to mitigate
volatility in reported earnings due to their linkage to the auction rate
securities. Simultaneously, due to the ARS Rights granted by UBS, we made a
one-time election to transfer the related auction rate security holdings from
available-for-sale securities to trading securities. We anticipate that any
changes in the fair value of the ARS Rights will be offset by the changes in the
fair value of the related auction rate securities with no material net impact to
the consolidated statement of operations. The ARS Rights will continue to be
measured at fair value under SFAS 159 until the earlier of their maturity or
exercise. At March 31, 2009, we valued these ARS Rights at $2.1 million.
Our remaining auction rate securities that are not maintained by UBS continue
to be treated as available-for-sale investments. These auction rate securities
have a par value of $8.0 million. During the first quarter of 2009, certain
ratings agencies downgraded these auction rate securities and we recognized an
other-than-temporary impairment of $1.5 million in the consolidated statement of
operations for the three months ended March 31, 2009. At March 31, 2009, we
valued these investments at $5.3 million.
Changes to estimates and assumptions used in estimating the fair value of the
auction rate securities and related ARS Rights may provide materially different
values. In addition, actual market exchanges, if any, may occur at materially
different amounts. For example, a reduction of the expected term to redemption
assumption by approximately two years for the auction rate securities and
related ARS Rights would yield a net increase in the valuation of these
investments of $0.5 million. Other factors that may impact the valuation of our
auction rate securities and related ARS Rights include changes to credit ratings
of the securities as well as to the underlying assets supporting those
securities, rates of default of the underlying assets, underlying collateral
value, discount rates, counterparty risk and ongoing strength and quality of
market credit and liquidity.
At present, in the event we need to access the funds that are in an illiquid
state, we may not be able to do so without the possible loss of principal, until
a future auction for these investments is successful, another secondary market
evolves for these securities, they are redeemed by the issuer or they mature. If
we are unable to sell these securities in the market or they are not redeemed,
we could be required to hold them to maturity. We do not currently anticipate a
need to access these funds for operational purposes in 2009, nor the outstanding
auction rate securities with UBS prior to June 30, 2010, the beginning of the
ARS Rights exercise period. We will continue to monitor and evaluate these
investments on an ongoing basis for impairment.
Net cash used in operating activities during the first three months of 2009
was $14.4 million compared with $28.2 million during the same period last year.
Net loss for the first three months of 2009 was $19.7 million compared to
$21.1 million for the same period in 2008. This decrease in net loss was
primarily due to severance costs incurred in the first quarter of 2008 and
expense management efforts during the first quarter of 2009.
Net cash used in investing activities during the first three months of 2009
was $2.4 million compared to net cash provided by investing activities of
$36.6 million for the first three months of 2008. The fluctuation in net cash
provided by investing activities resulted primarily from the timing differences
in investment purchases, sales and maturities, and the fluctuation of our
portfolio mix between cash equivalents and short-term investment holdings.
No cash was utilized in financing activities during the first three months of
2009 compared to $0.5 million used in 2008 related to cash payments made on
outstanding debt obligations.
The terms of our facility lease agreement require that we maintain
$50.0 million in cash and investments at all times, or increase our security
deposit by $5.0 million.
We believe that our existing capital resources, together with interest income
and future payments due under our strategic alliances, will be sufficient to
satisfy our current and projected funding requirements for at least the next
12 months. However, we cannot guarantee that these capital resources and
payments will be sufficient to conduct all of our research and development
programs as planned. The amount and timing of expenditures will vary depending
upon a number of factors, including progress of our research and development
programs.
We will require additional funding to continue our research and product
development programs, to conduct preclinical studies and clinical trials, for
operating expenses, to pursue regulatory approvals for our product candidates,
for the costs involved in filing and prosecuting patent applications and
enforcing or defending patent claims, if any, the cost of product in-licensing
and any possible acquisitions, and we may require additional funding to
establish manufacturing and marketing capabilities in the future. We intend to
seek additional funding through strategic alliances, and may seek additional
funding through public or private sales of our securities, including equity
securities. In addition, we have financed capital purchases and may continue to
pursue opportunities to obtain additional debt financing in the future. However,
additional equity or debt financing might not be available on reasonable terms,
if at all, and any additional equity financings will be dilutive to our
stockholders. Recently, the credit markets and the financial services industry
have been experiencing a period of unprecedented turmoil and upheaval
characterized by the bankruptcy, failure, collapse or sale of various financial
institutions and an unprecedented level of intervention from the United States
federal government. These events have generally made equity and debt financing
more difficult to obtain. If adequate funds are not available, we may be
required to curtail significantly one or more of our research or development
programs or obtain funds through arrangements with collaborators or others. This
may require us to relinquish rights to certain of our technologies or product
candidates. To the extent that we are unable to obtain third-party funding for
such expenses, we expect that increased expenses will result in increased losses
from operations.
We cannot assure you that we will be successful in the development of our
product candidates, or that, if successful, any products marketed will generate
sufficient revenues to enable us to earn a profit.
INTEREST RATE RISK
We are exposed to interest rate risk on our short and long term investments.
The primary objective of our investment activities is to preserve principal
while at the same time maximizing yields without significantly increasing risk.
To achieve this objective, we invest in highly liquid and high quality
government and other debt securities. To minimize our exposure due to adverse
shifts in interest rates, we invest in short-term securities and ensure that the
maximum initial average maturity of our investments does not exceed 36 months.
If a 10% change in interest rates had occurred on March 31, 2009, this change
would not have had a material effect on the fair value of our investment
portfolio as of that date. Due to the short holding period of our investments
and the nature of our investments, we have concluded that we do not have a
material financial market interest rate risk exposure.
NEW ACCOUNTING PRONONCEMENTS
In April 2009, the Financial Accounting Standards Board (FASB) issued several
pronouncements related to fair value measurement, recording and disclosure in
financial reporting.
FASB Staff Position No. 107-1 and Accounting Principles Board (APB) 28-1,
"Interim Disclosures about Fair Value of Financial Instruments," were issued to
outline the required financial statement disclosures relating to fair value of
financial instruments during interim reporting periods. FASB Staff Position
No. 157-4, "Determining Fair Value When the Volume and Level of Activity for the
Asset or Liability Have Significantly Decreased and Identifying Transactions
That Are Not Orderly," was issued to provide additional guidance in evaluating
the fair value of a financial instrument when the volume and level of activity
for the asset or liability has significantly decreased. FASB Staff Position
No. 115-2 and FASB Staff Position No. 124-2, "Recognition and Presentation of
Other-Than-Temporary Impairments," were issued to provide additional guidance on
presenting impairment losses on securities.
All of the above mentioned pronouncements will be effective for interim and
annual reporting periods ending after June 15, 2009, and early adoption is
permitted. We do not expect the adoption of these new pronouncements to have a
material effect on our consolidated results of operations or financial
condition.
In May 2008, the FASB issued SFAS 162, "The Hierarchy of Generally Accepted
Accounting Principles" (SFAS 162). SFAS 162 identifies the sources of accounting
principles and the framework for selecting the principles used in the
preparation of financial statement of nongovernmental entities that are
. . .
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