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ARRY > SEC Filings for ARRY > Form 10-Q on 30-Oct-2012All Recent SEC Filings

Show all filings for ARRAY BIOPHARMA INC

Form 10-Q for ARRAY BIOPHARMA INC


30-Oct-2012

Quarterly Report


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Management's 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 the Annual Report on Form 10-K for the fiscal year ended June 30, 2012 we filed with the Securities and Exchange Commission on August 16, 2012, under the heading "Risk Factors" in Item 1A under Part II of this Quarterly Report, and in other reports we file with the Securities and Exchange Commission. 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. We are building late-stage development capabilities, with two wholly-owned programs, ARRY-614 and ARRY-520, and three partnered programs, Selumetinib partnered with AstraZeneca, MEK162 partnered with Novartis, and Danoprevir, an NS3 protease inhibitor, partnered with InterMune / Roche, having the potential to advance into registration trials by the end of 2013.

Our most advanced wholly-owned clinical stage drugs include:

Wholly Owned Drug   Indication                                      Clinical Status
1. ARRY-520         Kinesin spindle protein, or KSP, inhibitor      Phase 2
                    for multiple myeloma
2. ARRY-614         p38/Tie2 dual inhibitor for myelodysplastic     Phase 1
                    syndromes, or MDS
3. ARRY-797         p38 inhibitor for pain                          Phase 2
4. ARRY-502         CRTh2 antagonist for asthma                     Phase 2

In 2012, we made the strategic decision to focus internally on hematology/oncology moving forward. With our progress on ARRY-614 for myelodysplastic syndromes and ARRY-520 for multiple myeloma, we believe hematology/oncology is the area of greatest opportunity for Array and where we intend to concentrate our resources and build on our capabilities in fiscal 2013 and beyond.


In addition, we have 10 partner funded clinical programs:

Drug Candidate       Indication                Partner                    Clinical
                                                                          Status
1. Selumetinib       MEK inhibitor for         AstraZeneca, PLC           Phase 2
                     cancer
2. MEK162            MEK inhibitor for         Novartis International     Phase 2
                     cancer                    Pharmaceutical Ltd.
3. Danoprevir        Hepatitis C virus         InterMune (now owned by    Phase 2
                     protease inhibitor        Roche Holding AG)
4. AMG 151           Glucokinase activator     Amgen Inc.                 Phase 2
                     for Type 2 diabetes
5.                   HER2/EGFR inhibitor for   ASLAN Pharmaceuticals      Phase 2
ARRY-543/ASLAN001    gastric cancer            Pte Ltd.
6. GDC-0068          AKT inhibitor for         Genentech Inc.             Phase 2
                     cancer
7. LY2603618         Chk-1 inhibitor for       Eli Lilly and Company      Phase 2
                     cancer
8. GDC-0575 and      Chk-1 inhibitors for      Genentech Inc.             Phase 1b
GDC-0425             cancer
9. ARRY-382          cFMS inhibitor for        Celgene Corporation        Phase 1
                     cancer
10. VTX-2337         Toll-like receptor for    VentiRx                    Phase 1b
                     cancer                    Pharmaceuticals, Inc.

We also have a portfolio of proprietary and partnered drug discovery programs generated by our internal discovery efforts. Our internal drug discovery programs include inhibitors that target Trk receptors for the treatment of pain and G-protein coupled receptor 119 for the treatment of diabetes. We may choose to out-license select promising candidates through research partnerships.

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 is publicly disclosed.

Our significant collaborators include:

Amgen - We entered into a worldwide strategic collaboration with Amgen in December 2009 to develop and commercialize our glucokinase activator, AMG 151, which is currently in Phase 2 development for Type 2 diabetes, and to discover potential back-up compounds for AMG 151.

ASLAN Pharmaceuticals - We entered into a collaboration and license agreement with ASLAN Pharmaceuticals in July 2011 to develop Array's HER2 / EGFR inhibitor, ARRY-543, or ASLAN001, which is currently in a Phase 2 clinical trial in patients with gastric cancer.

AstraZeneca - In December 2003, we entered into a collaboration and license agreement with AstraZeneca under which AstraZeneca received a license to three of our MEK inhibitors for cancer, including selumetinib, which is currently in multiple Phase 2 clinical trials.

Celgene - We entered into a worldwide strategic collaboration agreement with Celgene in September 2007 focused on the discovery, development and commercialization of novel therapeutics in cancer and inflammation. The most advanced drug is ARRY-382, a cFMS inhibitor for cancer, which is currently in a Phase 1 clinical trial.

Genentech - We entered into a worldwide strategic collaboration agreement with Genentech in January 2003, which was expanded in 2005, 2008, and 2009, and is focused on the discovery, development and commercialization of novel therapeutics. The most advanced drug is GDC-0068, an AKT inhibitor for cancer, which is currently in a Phase 2 trial.

In August 2011, we entered into an oncology partnership with Genentech for the development of each company's small molecule Checkpoint kinase 1 (Chk-1) program. The programs include Genentech's compound GDC-0425 (RG7602) and Array's compound, GDC-0575, both of which are in Phase 1 clinical trials in patients with cancer.

InterMune (program acquired by Roche) - We entered into a collaboration with InterMune in 2002, which resulted in the joint discovery of danoprevir, a novel small molecule inhibitor of the Hepatitis C Virus


NS3/4A protease. Roche Holding AG acquired danoprevir from InterMune in 2010. Danoprevir is currently in Phase 2b clinical trials.

Novartis - We entered into a worldwide strategic collaboration with Novartis in April 2010 to develop and commercialize our MEK inhibitor, MEK162, and other MEK inhibitors identified in the agreement. MEK162 is currently in numerous Phase 1b and Phase 2 clinical trials in patients with cancer.

We have built our clinical development and drug discovery programs through spending $534.3 million from our inception in 1998 through September 30, 2012. During the first quarter of fiscal 2013, we spent $13.5 million in research and development expenses for proprietary drug discovery. In fiscal 2012, we spent $56.7 million in research and development expenses for proprietary drug discovery, compared to $63.5 million and $72.5 million for fiscal years 2011 and 2010, respectively.

We have received a total of $581.8 million in research funding and in up-front and milestone payments from our collaboration partners from inception through September 30, 2012, including $174.3 million in initial payments from our strategic collaborations with Amgen, Genentech and Novartis we entered into over the past three years. These three collaborations entitle Array to receive up to over $2.2 billion in additional potential milestone payments if all clinical and commercialization milestones under the agreements are achieved, double digit royalties and/or commercial co-detailing rights. With our other existing partnered programs, Array is entitled to receive a total of over $3.6 billion in additional potential milestone payments if we or our collaborators achieve the drug discovery, development and commercialization objectives detailed in those agreements. We also have the potential to earn royalties on any resulting product sales or share in the proceeds from development or commercialization arrangements resulting from 11 drug research and development programs.

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 general, 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 in progress at the time of such 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.

Additional information related to the concentration of revenue among our collaborators is reported in Note 2 - Segments, Geographic Information and Significant Collaborations to the financial statements included elsewhere in this Quarterly Report.

All of our collaboration agreements are denominated in U.S. dollars.

Critical Accounting Policies and Estimates

Management's discussion and analysis of financial condition and results of operations are based upon our accompanying financial statements, which have been prepared in accordance with GAAP. 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. 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.


Revenue Recognition

We recognize revenue based on 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 as services are rendered, (c) the sales price is fixed or determinable and (d) collectability is reasonably assured.

We follow ASC 605-25 "Revenue Recognition - Multiple-Element Arrangements" to determine the recognition of revenue under collaboration agreements that include multiple elements, including research and development services, achievement of development and commercialization milestones and drug product manufacturing. This standard provides guidance on the accounting for arrangements involving the delivery of multiple elements when the delivery of separate units of accounting occurs in different reporting periods. This standard addresses the determination of the units of accounting for multiple-element arrangements and how the arrangement's consideration should be allocated to each unit of accounting. We adopted this accounting standard on a prospective basis for all multiple-element arrangements entered into on or after July 1, 2010 and for any multiple-element arrangements that were entered into prior to July 1, 2010 but materially modified on or after July 1, 2010. The adoption of this standard may result in revenue recognition patterns for future agreements that are materially different from those recognized for our past collaboration arrangements.

For our multiple element transactions entered into on or after July 1, 2010, we evaluate the deliverables to determine if they meet the separation criteria under the standard and have stand-alone value and we allocate revenue to the elements based on their relative selling prices. We treat deliverables in an arrangement that do not meet the separation criteria in this standard as a single unit of accounting, generally applying applicable revenue recognition guidance for the final deliverable to the combined unit of accounting. Since the adoption of this standard, we have entered into one agreement with multiple elements. We have had no material modifications to arrangements that were entered into prior to July 1, 2010.

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. 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 or development term, the existence, or likelihood of achievement of development commitments and any other significant commitments. For agreements entered into prior to July 1, 2010, the performance period is generally the estimated research or development term. For agreements entered into after this date, the performance period for up-front license fees may be shorter because the performance period, measured as the time between the execution date and the completion of the inseparable technology transfer, is typically a shorter period, generally up to six months.

We defer the up-front payments and record them as Deferred Revenue upon receipt, pending recognition. The deferred portions of payments are classified as a short-term or long-term liability in the accompanying Condensed Balance Sheets, depending on the period over which revenue is expected to be recognized.

Most of our agreements provide for milestone payments. In certain cases, we recognize all or a portion of each milestone payment as revenue when the specific milestone is achieved based on the applicable percentage earned of the estimated research or development effort, or other performance obligation that has elapsed, to the total estimated research and/or development effort. In other cases, when the milestone payment is attributed to our future development obligations, we recognize the revenue on a straight-line basis over the estimated remaining development effort.

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. We adjust the amortization periods when appropriate to reflect changes in assumptions relating to the duration of expected performance periods. We could accelerate revenue recognition for non-refundable license fees, up-front payments and milestone payments in the event of early termination of programs. Alternatively, we could decelerate such revenue recognition if programs are extended. While changes to 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 are expected to be performed and, therefore, over which revenue is recognized.

Long-term Debt and Embedded Derivatives

The terms of our long-term debt are discussed in detail in Note 5 - Long-term Debt to the financial statements in this Quarterly Report on Form 10-Q and in Note 8 - Long-Term Debt to the financial statements in our Annual Report on Form 10-K for the fiscal year ended June 30, 2012 as filed with the SEC on August 12, 2011. 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 of the debt, or as an extinguishment and issuance of new debt.

Recent Accounting Pronouncements

In June 2011, the FASB issued FASB ASU No. 2011-05, Comprehensive Income (Topic 220): Presentation of Comprehensive Income in U.S. GAAP and IFRS. This ASU provides companies the option to present the components of net income and other comprehensive income either as one continuous statement of comprehensive income or as two separate but consecutive statements. It eliminates the option to present components of other comprehensive income as part of the statement of changes in stockholders' equity. The provisions of this new guidance are effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. We adopted this disclosure standard in the first quarter of fiscal 2013 and it did not have a material impact on our results of operations.

Other recent accounting pronouncements issued by the FASB (including its Emerging Issues Task Force) and the Securities Exchange Commission did not or are not believed by management to have a material impact on our present or future financial statements.

Results of Operations

Fiscal Periods

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 2013 refers to the fiscal year ending June 30, 2013 and the first or current quarter refers to the quarter ended September 30, 2012.


License and Milestone Revenue

License and Milestone Revenue is combined and consists of up-front license fees and ongoing milestone payments from collaborators.

Below is a summary of our License and Milestone Revenue (dollars in thousands):

Three Months Ended

                        September 30,          Change 2012 vs. 2011
                       2012         2011           $              %

License Revenue      $    9,333   $ 14,081          (4,748)       -34%
Milestone Revenue         3,143      4,381          (1,238)       -28%
Total revenue        $   12,476   $ 18,462    $     (5,986)       -32%

License Revenue decreased $4.7 million, or 34%, for the current quarter compared to the same period last year. The decrease was from our Chk-1 license agreement with Genentech under which the majority of the revenue was earned during fiscal 2012.

Milestone Revenue decreased $1.2 million, or 28%, during the current quarter compared to the same period last year primarily due to the recognition of a $2.5 million milestone payment from Genentech in fiscal 2012 that did not recur in fiscal 2013. The decrease was partially offset by approximately $700 thousand in revenue earned during the current quarter from the $8.5 million milestone payment we received from Amgen during June 2012 for enrollment of patients in a Phase 2 study of AMG 151 / ARRY-403, as well as $314 thousand in additional Milestone Revenue recognized under our collaboration with Celgene.

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.

Below is a summary of our Collaboration Revenue (dollars in thousands):

Three Months Ended September 30, Change 2012 vs. 2011 2012 2011 $ %

Collaboration Revenue $ 3,357 $ 3,669 $ (312 ) -9%

Collaboration Revenue decreased during the current quarter compared to the same period in the prior year due to having fewer scientists engaged on the Genentech program and completion of the funded discovery research under our collaboration with Amgen. These decreases were largely offset by revenue earned under our new collaborations with DNA BioPharma and Clovis Oncology, as well as additional funded research under our collaboration with Celgene.

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.

Below is a summary of our Cost of Revenue (dollars in thousands):

                                        Three Months Ended
                                          September 30,            Change 2012 vs. 2011
                                        2012          2011           $                %

Cost of Revenue                       $   6,539     $   6,444      $      95             1%
Cost of Revenue as a percentage of
total revenue                               41%           29%

Cost of Revenue remained relatively constant during the first quarter of fiscal 2013 compared to the same period during the prior year. We had fewer scientists working on our collaboration with Genentech during the current quarter. Those reduced costs were offset by costs associated with work performed under our new collaborations with DNA BioPharma and Clovis Oncology.

Cost of Revenue as a percentage of total revenue for the three months ended September 30, 2012 increased primarily because of decreased License and Milestone Revenue recognized during the period.

Research and Development Expenses for Proprietary Programs

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 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.

Below is a summary of our Research and Development Expenses by categories of costs for the periods presented (dollars in thousands):

                                           Three Months Ended
                                              September 30,              Change 2012 vs. 2011
                                          2012            2011            $                  %

Salaries, benefits and share-based
compensation                             $   5,480       $   5,163     $     317                6%
Outsourced services and consulting           4,144           3,515           629               18%
Laboratory supplies                          1,687           1,563           124                8%
Facilities and depreciation                  1,837           1,997          (160 )             -8%
Other                                          386             360            26                7%
Total Research and Development
Expense for Proprietary Programs         $  13,534       $  12,598     $     936                7%

Research and Development Expenses for Proprietary Programs increased $936 thousand, or 7%, during the current quarter compared to the same period during prior year. The increased costs primarily resulted from advancing our wholly-owned programs through more advanced stages of clinical trials. Partially offsetting the increases for clinical trials were decreased costs for earlier stage discovery research.


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.

Below is a summary of our General and Administrative Expenses (dollars in thousands):

Three Months Ended September 30, Change 2012 vs. 2011 2012 2011 $ %

General and Administrative $ 4,780 $ 3,720 $ 1,060 28%

. . .

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