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OPTR > SEC Filings for OPTR > Form 10-Q on 3-Aug-2012All Recent SEC Filings

Show all filings for OPTIMER PHARMACEUTICALS INC

Form 10-Q for OPTIMER PHARMACEUTICALS INC


3-Aug-2012

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis should be read in conjunction with our consolidated financial statements and accompanying notes appearing elsewhere in this report, as well as the audited financial statements and accompanying notes included in our annual report on Form 10-K for the fiscal year ended December 31, 2011, as filed with the Securities and Exchange Commission, or SEC. This discussion and other parts of this report may contain forward-looking statements based upon current expectations that involve risks and uncertainties. Our actual results and the timing of selected events could differ materially from those anticipated in these forward-looking statements as a result of several factors, including those set forth under "Risk Factors" and elsewhere in this report.

Overview

We are a global biopharmaceutical company currently focused on commercializing our antibiotic product DIFICIDŽ(fidaxomicin) in the United States and Canada, and further developing other fidaxomicin products in the United States and worldwide, both by ourselves and with our partners and licensees. DIFICID is a macrolide antibacterial drug indicated in adults 18 years of age and older for the treatment of Clostridium difficile-associated diarrhea, or CDAD. CDAD is the most common symptom of Clostridium difficile infection, or CDI. We market DIFICID in the United States through our own sales force and through our co-promotion agreement with Cubist Pharmaceuticals, Inc., or Cubist.

In December 2011, the European Medicines Agency, or EMA, approved the Marketing Authorization Application, or MAA, for DIFICLIR (fidaxomicin) tablets for the treatment of adults suffering with CDI in Europe. In June 2012, our collaboration partner, Astellas Pharma Europe Ltd., or APEL, achieved the first sales of DIFICLIR tablets in its European territories. In addition, in June 2012, our subsidiary, Optimer Pharmaceuticals Canada, Inc., began marketing DIFICID in Canada where we recently received marketing approval from Health Canada. We have entered into agreements with Astellas Pharma Inc., or Astellas Japan, and with Specialised Therapeutics Australia Pty. Ltd, or STA, for the development and commercialization of fidaxomicin in Japan and in Australia and New Zealand, respectively. We are pursuing regulatory approval and commercialization of fidaxomicin in other geographies outside the United States through various collaboration partners.


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We were incorporated in November 1998. We have incurred significant net losses since our inception. As of June 30, 2012, we had an accumulated deficit of $226.2 million. These losses have resulted principally from costs incurred in connection with research and development activities, including the costs of clinical trial activities, license fees and general and administrative expenses, and more recently expenses incurred in connection with our commercial efforts with respect to DIFICID in the United States and Canada. We expect to incur operating losses for at least the next two years as we commercialize DIFICID, and pursue further development of DIFICID, including conducting post-marketing studies for label expansion and continuing further development, regulatory approval and commercialization of fidaxomicin worldwide. We may acquire or in-license additional products or product candidates, technologies or businesses that are complementary.

Critical Accounting Policies

Our Management's Discussion and Analysis of Financial Condition and Results of Operations is based on our consolidated financial statements, which have been prepared in conformity with generally accepted accounting principles in the United States. The preparation of these consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, expenses and related disclosures. Actual results could differ from those estimates. While our significant accounting policies are described in more detail in Note 2 of the Notes to Consolidated Financial Statements appearing elsewhere in this report, we believe the following accounting policies to be critical to the judgments and estimates used in the preparation of our consolidated financial statements.

Net Product Sales

DIFICID is available in the United States only through the three major wholesalers - AmerisourceBergen Corporation, Cardinal Health, Inc. and McKesson Corporation - and regional wholesalers that provide DIFICID to hospital and retail pharmacies, and long-term care facilities. We recognize revenue from product sales when there is persuasive evidence of an arrangement, delivery has occurred, title has passed to the customer, the price is fixed and determinable, the buyer is obligated to pay us, the obligation to pay is not contingent on resale of the product, the buyer has economic substance apart from us, we have no obligation to bring about the sale of the product, and the amount of returns can be reasonably estimated and collectability is reasonably assured. We recognize revenue from product sales of DIFICID upon delivery of product to the wholesalers.

During the six months ended June 30, 2012, the $29.6 million in net product revenue reflected a total of 12,289 DIFICID treatments shipped to wholesalers. Wholesalers shipped 11,675 DIFICID treatments to hospitals, retail pharmacies and long-term care facilities. As of June 30, 2012, approximately 1,800 hospitals had ordered DIFICID and the number of target hospitals including DIFICID on their formularies was approaching 900.

Our net revenues represent total revenues less allowances for customer credits, including estimated rebates, chargebacks, discounts and returns. These allowances are established by management as its best estimate, based on available information and are adjusted to reflect known changes in the factors that impact such allowances. Allowances for rebates, chargebacks, discounts and returns are established based on the contractual terms with customers, communications with customers as well as expectations about the market for the product and anticipated introduction of competitive products. Product shipping and handling costs are included in cost of sales.

Product Sales Allowances. We establish reserves for prompt-payment discounts, government rebates, product returns and other applicable allowances.

Allowances primarily relate to prompt-payment discounts and fee-for-service arrangements with our contracted wholesalers and are recorded at the time of sale, resulting in a reduction in product sales revenue. Accruals related to government rebates, product returns and other applicable allowances are recognized at the time of sale, resulting in a reduction in product sales revenue and an increase in accrued expenses.

Prompt-payment Discounts. We offer a prompt-payment discount to our contracted wholesalers. Since we expect our customers will take advantage of this discount, we accrue 100% of the prompt-payment discount that is based on the gross amount of each invoice, at the time of sale. The accrual is adjusted quarterly to reflect actual earned discounts.

Government Rebates and Chargebacks. We estimate government-mandated rebates and discounts relating to federal and state programs such as Medicaid, Veterans' Administration, or VA, and Department of Defense programs, the Medicare Part D Coverage Discount Program and certain other qualifying federal and state government programs. We estimate the amount of these reductions based on historical trends for similar competitive products, until such time as DIFICID patient data, actual sales data and market research data related to payor mix has reached an established steady state. These allowances are adjusted each period based on actual experience.


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Medicaid rebate reserves relate to our estimated obligations to states under statutory "best price" obligations which also may include supplemental rebate agreements with certain states. Rebate accruals are recorded during the same period in which the related product sales are recognized. Actual rebate amounts are determined at the time of claim by the state, and we will generally make cash payments for such amounts after receiving billings from the state.

VA rebates or chargeback reserves represent our estimated obligations resulting from contractual commitments to sell DIFICID to qualified healthcare providers at a price lower than the list price charged to our distributors. The distributor will charge us for the difference between what the distributor pays for the product and the ultimate selling price to the qualified healthcare provider. Rebate accruals are established during the same period in which the related product sales are recognized. Actual chargeback amounts for Public Health Service are determined at the time of resale to the qualified healthcare provider from the distributor, and we generally will issue credits for such amounts after receiving notification from the distributor.

Although allowances and accruals are recorded at the time of product sale, certain rebates generally will be paid out, on average, up to six months or longer after the sale. Reserve estimates are evaluated quarterly and, if necessary, adjusted to reflect actual results. Any such adjustments will be reflected in our operating results in the period of the adjustment.

Product Returns. Our policy is to accept returns of DIFICID for six months prior to, and twelve months after, the product expiration date. We also permit returns if the product is damaged or defective when received by its customers. We will provide a credit for such returns to customers with whom we have a direct relationship. Once product is dispensed it cannot be returned, but we allow partial returns in states where such returns are mandated. We do not exchange product from inventory for the returned product.

Allowances for product returns are recorded during the period in which the related product sales are recognized, resulting in a reduction to product revenue. We estimate product returns based upon sales of DIFICID, management experience with similar products, historical trends in the pharmaceutical industry and trends for similar products sold by others.

Contract Revenue

In order to determine the revenue recognition for contingent milestones, we evaluate the contingent milestones using the criteria as provided by the Financial Accounting Standards Board, or FASB, guidance on the milestone method of revenue recognition at the inception of a collaboration agreement.

Accounting Standard Codification ("ASC") Topic 605-28, Revenue Recognition - Milestone Method ("ASC 605-28"), established the milestone method as an acceptable method of revenue recognition for certain contingent event-based payments under research and development arrangements. Under the milestone method, a payment that is contingent upon the achievement of a substantive milestone is recognized in its entirety in the period in which the milestone is achieved. A milestone is an event (i) that can be achieved based in whole or in part on either our performance or on the occurrence of a specific outcome resulting from our performance, (ii) for which there is substantive uncertainty at the date the arrangement is entered into that the event will be achieved and
(iii) that would result in additional payments being due to us. The determination that a milestone is substantive is judgmental and is made at the inception of the arrangement. Milestones are considered substantive when the consideration earned from the achievement of the milestone is (i) commensurate with either our performance to achieve the milestone or the enhancement of value of the item delivered as a result of a specific outcome resulting from our performance to achieve the milestone, (ii) relates solely to past performance and (iii) is reasonable relative to all deliverables and payment terms in the arrangement.

Other contingent, event-based payments received for which payment is either contingent solely upon the passage of time or the results of a collaborative partner's performance are not considered milestones under ASC 605-28. In accordance with ASC Topic 605-25, Revenue Recognition - Multiple-Element Arrangements ("ASC 605-25"), such payments will be recognized as revenue when all of the following criteria are met: persuasive evidence of an arrangement exists; delivery has occurred or services have been rendered; price is fixed or determinable; and collectability is reasonably assured.

Revenues recognized for royalty payments, if any, are recognized as earned in accordance with the terms of various research and collaboration agreements.

For collaboration agreements with multiple deliverables, we recognize collaboration revenues and expenses by analyzing each element of the agreement to determine if it is to be accounted for as a separate element or single unit of accounting. If an element is to be treated separately for revenue recognition purposes, the revenue recognition principles most appropriate for that element are applied to determine when revenue is to be recognized. If an element is not to be treated separately for revenue recognition purposes, the revenue recognition principles most appropriate for the bundled group of elements are applied to determine when revenue is to be recognized.


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Cash received in advance of services being performed is recorded as deferred revenue and recognized as revenue as services are performed over the applicable term of the agreement. In connection with certain research collaboration agreements, revenues are recognized from non-refundable up-front fees, that we do not believe are specifically tied to a separate earnings process, ratably over the term of the agreement. Research fees are recognized as revenue as the related research activities are performed.

With respect to revenues derived from reimbursement of direct out-of-pocket expenses for research costs associated with grants, where we act as a principal, with discretion to choose suppliers, bear credit risk and perform part of the services required in the transaction, we record revenue for the gross amount of the reimbursement. The costs associated with these reimbursements are reflected as a component of research and development expense in the consolidated statements of operations.

Inventory

Inventory is stated at the lower of cost or market. Cost is determined in a manner which approximates the first-in, first-out (FIFO) method. We capitalize inventory produced in preparation for product launches upon FDA approval when costs are expected to be recoverable through the commercialization of the product. We reserve for potentially excess, dated or obsolete inventories based on an analysis of inventory on hand compared to forecasts of future sales. As of June 30, 2012, inventories consisted of $6.6 million in raw materials, $0.6 million in work in process and $1.3 million in finished goods. During the second quarter, we reserved $0.5 million of our inventory cost.

Research and Development

Research and development costs are expensed as incurred and consist primarily of costs associated with clinical trials, medical affairs, compensation, including stock-based compensation, and other expenses related to research and development, including personnel costs, facilities costs and depreciation.

When non-refundable payments for goods or services to be received in the future for use in research and development activities are made, we defer and capitalize these types of payments. The capitalized amounts are expensed when the related goods are delivered or the services are performed.

Stock-based Compensation

The FASB authoritative guidance requires that share-based payment transactions with employees be recognized in the financial statements based on their fair value and recognized as compensation expense over the vesting period.

Total consolidated stock-based compensation expense of $4.0 million and $2.5 million was recognized in the three months ended June 30, 2012 and 2011, respectively. Total consolidated stock-based compensation expense of $7.0 million and $4.7 million was recognized in the six months ended June 30, 2012 and 2011, respectively. The stock-based compensation expense recognized included expense from performance-based stock options and restricted stock units.

Stock-based compensation expense is estimated as of the grant date based on the fair value of the award and is recognized as expense over the requisite service period, which generally represents the vesting period. We estimate the fair value of our stock options using the Black-Scholes option-pricing model and the fair value of our stock awards based on the quoted market price of our common stock.

Equity instruments issued to non-employees are recorded at their fair value and are periodically revalued as the equity instruments vest and are recognized as expense over the related service period.

Investment in OBI

We account for our investment in OBI under the equity method of accounting as we do not have the elements of control that would require consolidation. The investment is subsequently adjusted for equity in net income and cash contributions and distributions. In addition, we record adjustments to reflect the amortization of basis differences attributable to the fair values in excess of net book values of identified tangible and intangible assets. Any difference between the carrying amount of the investment on our balance sheet and the underlying equity in net assets is evaluated for impairment at each reporting period.

Income Taxes

We estimate income taxes based on the jurisdictions where we conduct business. Significant judgment is required in determining our worldwide income tax provision. We estimate our current tax liability and assess temporary differences that result from differing treatments of certain items for tax and accounting purposes. These differences result in net deferred tax assets and liabilities. We then


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assess the likelihood that deferred tax assets will be realized. A valuation allowance is recorded when it is more likely than not that some of the deferred tax assets will not be realized. We review the need for a valuation allowance each interim period to reflect uncertainties about whether we will be able to utilize deferred tax assets before they expire. The valuation allowance analysis is based on estimates of taxable income for the jurisdictions in which we operate and the periods over which our deferred tax assets may be realized. Changes in our valuation allowance could result in material increases or decreases in our income tax expense in the period such changes occur, which could have a material impact on our operating results.

We estimate that our federal and state taxable income, if any, for the current year will be fully offset by net operating losses and research and development credit carryovers. As such, no current tax provision has been recorded. We also have recorded a full valuation allowance for the remaining net deferred tax benefits. We have completed a Section 382/383 analysis regarding the limitation of the net operating losses and credit carryovers and have considered the annual limitation when determining the amount available for utilization in the current year.

We recognize and measure benefits for uncertain tax positions using a two-step approach. The first step is to evaluate the tax position taken and expected to be taken in a tax return by determining if the weight of available evidence indicates that it is more likely than not that the tax position will be sustained upon audit, including resolution of any related appeals or litigation processes. For tax positions that are more likely than not to be sustained upon audit, the second step is to measure the tax benefit as the largest amount that has more than a 50% chance of being realized upon settlement. Significant judgment is required to evaluate uncertain tax positions. We evaluate uncertain tax positions on a quarterly basis. The evaluations are based upon a number of factors, including changes in facts or circumstances, changes in tax law, correspondence with tax authorities during the course of audits and effective settlement of audit issues. Changes in recognition or measurement of uncertain tax positions could result in material increases or decreases in our income tax expense in the period such changes occur, which could have a material impact on our effective tax rate and operating results.

Results of Operations

Comparison of Three Months Ended June 30, 2012 and 2011

Revenues

Total revenues for the three months ended June 30, 2012 and 2011 were $49.8 million and $33,000, respectively, an increase of $49.8 million. In April 2012, pursuant to our collaboration and license agreement, we received a $20.0 million up-front payment from Astellas Japan. We assessed the deliverable for stand alone value under the contract and recognized $19.9 million as contract revenue during the second quarter of 2012 upon delivery of the license know-how. A portion of the up-front payment was deferred for undelivered items. We also recognized revenue on the 10.0 million Euros milestone payment from APEL in association with the first sales of fidaxomicin in an APEL territory. In addition, we recognized $15.2 million of net product revenue from sales of DIFICID. We launched DIFICID in the U.S. in July 2011 and in Canada in June 2012.

Costs and Expenses

Cost of product sales. Cost of product sales for the three months ended June 30, 2012 was $2.3 million and consisted inventory sold and royalties due to Par.

Cost of contract revenue. The $1.7 million incurred for the three months ended June 30, 2012 represented a royalty payment we paid to Par based on the revenue from the Astellas Japan up-front payment and the 10.0 million Euros milestone payment from APEL.

Research and development expense. Research and development expense for the three months ended June 30, 2012 and 2011 was $11.6 million and $10.3 million, respectively, an increase of $1.3 million. The increase was due primarily to higher health economics and outcomes research costs.

Selling, general and administrative expense. Selling, general and administrative expense for the three months ended June 30, 2012 and 2011 was $28.9 million and $14.8 million, respectively, an increase of $14.1 million. The increase was due primarily to our commercialization efforts on DIFICID. We had higher headcount during the 2012 period and thus incurred higher salary expense. We also incurred higher advertising and promotion expenses as well as higher legal, consulting and other outside services.


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Co-promotion expenses with Cubist. The $5.0 million in the quarter ended June 30, 2012 represented certain expenses that may be due Cubist under our April 2011 DIFICID co-promotion agreement. We did not incur similar expenses in the three months ended June 30, 2011.

Equity in net loss of OBI. The $0.7 million represented the loss recognized in our investment in OBI using the equity method. We did not have a similar loss for the same period in the prior year.

Interest income and other, net. Net interest income and other of $44,000 for the three months ended June 30, 2012 was relatively consistent with the $96,000 for the three months ended June 30, 2011.

Net loss attributable to non-controlling interest. We did not incur a net loss attributable to non-controlling interest for the three months ended June 30, 2012 as OBI was not consolidated in our financial statements during the period. During 2011, such amount represented the non-controlling interest's proportionate share of OBI's net losses.

Comparison of Six Months Ended June 30, 2012 and 2011

Revenues

Total revenues for the six months ended June 30, 2012 and 2011 were $64.1 million and $69.3 million, respectively. In 2012, our revenues were made up of $29.6 million in DIFICID product sales and $34.5 million in contract revenue. The decrease of $5.2 million was primarily due to the $69.2 million up-front payment we received from APEL in the first quarter of the 2011, partially offset by the receipt in April 2012 of the $20.0 million up-front payment from Astellas Japan and the 10.0 million Euro milestone payment from APEL in association with the first commercial sale of DIFICLIR in an APEL territory. In addition, we recognized $29.6 million of net product sales of DIFICID in the six months ended June 2012. We launched DIFICID in the U.S. in July 2011 and in Canada in June 2012.

Costs and Expenses

Cost of product sales. Cost of product sales for the six months ended June 30, 2012 was $4.6 million and consisted of inventory sold and royalties due to Par on net sales of DIFICID.

Cost of contract revenue. Cost of contract revenue for the six months ended June 30, 2012 and 2011 was $1.7 million and $4.3 million, respectively, a decrease of $2.6 million. The decrease is due to lower collaboration revenue in the current period as compared to the same period in the prior year.

Research and development expense. Research and development expense for the six months ended June 30, 2012 and 2011 was $22.6 million and $18.7 million, respectively, an increase of $3.9 million. The increase was primarily due to higher health economics and outcomes research, medical affairs, medical education, pharmacovigilance and publication expenses.

Selling, general and administrative expense. Selling, general and administrative expense for the six months ended June 30, 2012 and 2011 was $54.4 million and $26.6 million, respectively, an increase of $27.8 million. The increase was primarily due to our commercialization efforts on DIFICID. We had higher headcount during the 2012 period and thus incurred higher salary expense. We also incurred higher advertising and promotion expenses as well as higher legal, consulting and other outside services.

Co-promotion expenses with Cubist. The $15.1 million represented certain expenses that may be due Cubist under our April 2011 DIFICID co-promotion agreement. Based on the level of sales to date and the estimated continued growth in revenues, Optimer achieved the first year sales target and has accrued $10.4 million, representing the quarterly service fee and a pro-rated portion of the $5.0 million bonus payment as well as pro-rated portion of gross profit. We did not incur similar expenses in the six months ended June 30, 2011.

Gain on de-consolidation of OBI. The $23.8 million represented the gain on the de-consolidation of OBI. We did not have a similar gain in the six months ended June 30, 2011.

Equity in net loss of OBI. The $1.2 million represented the loss recognized in our investment in OBI using the equity method. We did not have a similar loss in the six months ended June 30, 2011.


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Interest income and other, net. Net interest income and other of $121,000 for the six months ended June 30, 2012 was relatively consistent with the $119,000 for the six months ended June 30, 2011.

Net loss attributable to non-controlling interest. Net loss attributable to non-controlling interest for the six months ended June 30, 2012 and 2011 was approximately $0.3 million and $1.0 million, respectively, a decrease of $0.7 million. The $0.3 million represented approximately one month of non-controlling . . .

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