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ARIA > SEC Filings for ARIA > Form 10-Q on 9-Nov-2012All Recent SEC Filings

Show all filings for ARIAD PHARMACEUTICALS INC

Form 10-Q for ARIAD PHARMACEUTICALS INC


9-Nov-2012

Quarterly Report


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

The information set forth below should be read in conjunction with our unaudited condensed consolidated financial statements and the notes thereto included herein, as well as our audited consolidated financial statements and the notes thereto contained in our Annual Report on Form 10-K for the year ended December 31, 2011. Unless stated otherwise, references in this Quarterly Report on Form 10-Q to "we," "us," or "our" refer to ARIAD Pharmaceuticals, Inc., a Delaware corporation, and our subsidiaries unless the context requires otherwise.

Overview

Our vision is to transform the lives of cancer patients with breakthrough medicines. Our mission is to discover, develop and commercialize small-molecule drugs to treat cancer in patients with the greatest and most urgent unmet medical need - aggressive cancers where current therapies are inadequate. Our goal is to build a fully integrated oncology company focused on novel, molecularly targeted therapies to treat solid tumors and hematologic cancers.

Regulatory Process and Commercialization

In July 2012, we filed for regulatory approval in the United States of our lead product candidate, ponatinib, to treat patients with resistant or intolerant chronic myeloid leukemia, or CML, and Philadelphia - chromosome positive acute lymphoblastic leukemia, or Ph+ALL. We completed our rolling submission in September 2012. The U.S. Food and Drug Administration, or FDA, has granted priority review of this application and has established an action date of March 27, 2013 under the Prescription Drug User Fee Act, or PDUFA. We expect potential regulatory approval in the first quarter of 2013. In addition, in August 2012, we filed for marketing approval for ponatinib with the European Medicines Agency, or EMA, and expect potential approval in mid-2013. Subject to obtaining regulatory approval of ponatinib, we intend to commercialize ponatinib on our own in the United States, Europe and other selected territories worldwide. The FDA and the EMA are currently reviewing our applications, which reviews include, among other things, a detailed review of the data and information included in the applications, meetings and frequent communications between us and the regulatory authorities, and inspections, including potential inspections of clinical trial sites and third-party facilities used to manufacture ponatinib. If applicable regulatory criteria are not met, the regulatory authorities could refuse to approve or delay the approval of ponatinib.

If we are successful in obtaining approval of ponatinib in the United States in the anticipated time frames, we expect to begin marketing ponatinib shortly thereafter. Successful commercialization of ponatinib if it is approved will require effective marketing, distribution and pricing strategies; infrastructure to support commercial sales; sustained levels of drug product inventory of ponatinib; and company-wide processes and systems to support compliance with applicable laws and regulations and post-marketing safety evaluations. Our commercial leadership team has been preparing for anticipated commercial launch of ponatinib, including the hiring of a sales force and other professional staff necessary for an effective launch, the implementations of systems and processes to support launch, the development of tools and materials to be utilized during the commercialization of ponatinib and other activities.

We have also initiated operations in Europe, with headquarters in Switzerland, in preparation for potential EMA approval of ponatinib in mid-2013. We are hiring management and other personnel in key functions in Switzerland who are building our business infrastructure and capabilities in Europe. We plan to hire country-level personnel in key markets throughout Europe to focus on local market approvals, preparing for the launch of ponatinib upon approval and then managing marketing, sales and distribution operations.


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As a result, our operating expenses have increased throughout 2012, as we prepare for anticipated regulatory approvals of ponatinib, and we expect that such expenses will continue to increase to support an effective launch of this product in various territories. In addition, we expect that our operating expenses will also continue to increase as we continue to expand our research and development activities for ponatinib and other product candidates discussed below.

Product Development and Discovery

Our product pipeline currently consists of three product candidates - ponatinib, AP26113 and ridaforolimus.

Ponatinib

Ponatinib is an investigational pan BCR-ABL inhibitor that we believe has potential applications in various hematological cancers and solid tumors. In the third quarter of 2011, we completed patient enrollment in a pivotal Phase 2 clinical trial of ponatinib, which we refer to as the PACE trial, in approximately 450 patients with resistant or intolerant chronic myeloid leukemia, or CML, or Philadelphia positive acute lymphoblastic leukemia, or Ph+ ALL, who are resistant or intolerant to dasatinib or nilotinib or who have the T315I mutation. In June 2012, we announced updated clinical data from the PACE trial that showed that 54% of chronic-phase CML patients in the trial, including 70% of patients who have a T315I mutation, achieved a major cytogenetic response. The most common adverse events considered related to ponatinib included thrombocytopenia, rash, dry skin, abdominal pain, and headache.

In July 2012, we initiated a randomized Phase 3 clinical trial of ponatinib, referred to as the EPIC trial, in adult patients with newly diagnosed CML in the chronic phase. The trial is designed to provide definitive clinical data to support regulatory approval of ponatinib in treatment-nave CML. This trial is a randomized, two-arm, multi-center trial that compares the efficacy of ponatinib with that of imatinib. Approximately 500 patients will be enrolled and randomized 1:1 to treatment with ponatinib or imatinib. The primary endpoint of the trial is major molecular response (MMR) rate at 12 months of treatment.

In August 2012, we initiated a multicenter Phase 1/2 clinical trial in Japan of ponatinib in Japanese patients with CML who have failed treatment with dasatinib or nilotinib or who have Ph+ALL and have failed prior treatment with tyrosine kinase inhibitors. This trial is designed to establish the recommended dose for ponatinib and confirm its anti-leukemic activity in Japanese patients. We expect that this trial should provide the incremental data needed for initial regulatory approval of ponatinib in Japan. The phase 1 portion of the trial is designed to determine the recommended dose for Japanese patients and is expected to enroll at least 12 patients. The phase 2 portion of the trial is expected to enroll 25 patients. The primary endpoint for chronic phase CML patients is major cytogenetic response. The primary endpoint for accelerated and blast phase CML patients and for Ph+ALL patients is major hematologic response.

We plan to initiate additional clinical trials of ponatinib as we continue development of this product candidate.

AP26113

AP26113 is an investigational dual inhibitor of anaplastic lymphoma kinase, or ALK, and epidermal growth factor receptor, or EGFR - two clinically validated targets in non-small cell lung cancer, or NSCLC. We initiated patient enrollment in a Phase 1/2 clinical trial of AP26113 in the third quarter of 2011. We expect to enroll approximately 30 to 50 patients in the phase 1 portion of the trial and approximately 80 patients in the phase 2 portion of the trial.


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In September 2012, we announced initial clinical results from the Phase 1/2 trial of AP26113. The primary objectives of the phase 1 portion of the trial are to determine the maximum tolerated dose and the recommended dose for further study of AP26113 and to characterize its safety and preliminary anti-tumor activity. At the time of the announcement, 34 patients had been enrolled in the study and 19 remained on study. Safety data to date showed AP26113 to be generally well tolerated. The most common adverse events were nausea and fatigue. Of the 11 ALK-positive patients evaluable for response, eight patients demonstrated a partial response, or PR, using RECIST criteria. Of the six patients with EGFR mutant NSCLC, all of whom had failed other treatments, one patient achieved a partial response and two patients had stable disease. Based on these initial clinical results, we have initiated planning for a pivotal trial of AP26113 in ALK-positive NSCLC patients to begin in 2013.

Ridaforolimus

Ridaforolimus is an investigational mTOR inhibitor that we discovered internally and later licensed in 2010 to Merck & Co., Inc., or Merck. Under the license agreement, Merck is responsible for all activities and funds 100 percent of the costs related to the development, manufacturing and commercialization of ridaforolimus in oncology. In the third quarter of 2011, Merck filed in both Europe and the United States for regulatory approval of ridaforolimus as a maintenance therapy for patients with metastatic soft-tissue and bone sarcomas who had a favorable response to chemotherapy. In June 2012, the U.S. Food and Drug Administration, or FDA, issued a complete response letter regarding the New Drug Application, or NDA, filed by Merck, stating that the FDA cannot approve the application in its present form and that additional clinical trial(s) would need to be conducted to further assess safety and efficacy of ridaforolimus in this indication. Merck has announced that it is in ongoing discussions with health authorities in Europe and other countries as part of their application procedures for ridaforolimus for the treatment of metastatic soft-tissue or bone sarcomas in patients who had a favorable response to chemotherapy, and that Merck is studying ridaforolimus in combination with other mechanisms in several tumor types. Under the license agreement, Merck has agreed to pay us milestone payments based on successful development of ridaforolimus and achievement of specified sales thresholds, as well as tiered, double-digit royalties on global net sales of ridaforolimus.

In addition to our lead development programs, we have a focused drug discovery program centered on small-molecule therapies that are molecularly targeted to cell-signaling pathways implicated in cancer.

Critical Accounting Policies and Estimates

Our financial position and results of operations are affected by subjective and complex judgments, particularly in the areas of revenue recognition, the carrying value of intangible assets, accrued product development expenses, the fair value of warrants to purchase our common stock, and inventory valuation.

Revenue Recognition

We generate revenue from license and collaboration agreements with third parties related to use of our technology and/or development and commercialization of product candidates. Such agreements may provide for payment to us of up-front payments, periodic license payments, milestone payments and royalties. We also generate revenue from services provided under license agreements.

For the nine months ended September 30, 2012, we reported total licensing and service revenue of $484,000. Revenue is recognized when there is persuasive evidence that an arrangement exists, delivery has occurred, the price is fixed and determinable and collection is reasonably assured. Revenue arrangements with multiple elements are divided into separate units of accounting if certain criteria are met, including whether the delivered element has stand-alone value to the customer. When deliverables are separable, consideration received is allocated to the separate units of accounting based on the relative selling price of the elements and the appropriate revenue recognition principles are applied to each unit.


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The assessment of multiple element arrangements requires judgment in order to determine the appropriate units of accounting and the points in time that, or periods over which, revenue should be recognized. Regarding our license agreement with Merck entered into in May 2010, the transition services are recognized in the period in which they are received or the services are rendered. Milestone payments under the license agreement are recognized when earned.

Intangible Assets

At September 30, 2012, we reported $1.0 million of intangible assets, consisting of capitalized costs related primarily to purchase and issued patents, patent applications and licenses, net of accumulated amortization. The carrying value of these intangible assets is evaluated for possible impairment, and losses are recorded when the evaluation indicates that the carrying value is not recoverable. This evaluation involves estimates of future net cash flows expected to be generated by the asset. Such estimates require judgment regarding future events and expected cash flows. Changes in these estimates, including decisions to discontinue using the technologies, could result in material changes to our balance sheet and charges to our statements of operations. If we were to abandon the ongoing development of the underlying product candidates or technologies or terminate our efforts to pursue collaborations or license agreements, or if our estimates of future net cash flows expected to be generated by the asset change, we may be required to write down or write off a portion of the carrying value of our intangible assets. In the nine month period ended September 30, 2012, we recorded charges of $4.8 million in our statement of operations to reflect impairment of the intangible assets associated with ridaforolimus following the decision by the FDA not to approve the NDA filed by Merck for ridaforolimus for the treatment of patients with soft-tissue and bone sarcomas.

Accrued Product Development Expenses

We accrue expenses for our product development activities based on our estimates of services performed or progress achieved pursuant to contracts and agreements with multiple vendors including research laboratories, contract manufacturers, contract research organizations and clinical sites. These estimates are recorded in research and development expenses in our statement of operations and are reflected in accrued product development expenses on our balance sheet. At September 30, 2012, we reported accrued product development expenses of $13.3 million on our balance sheet.

Our estimates of services performed or progress achieved are based on all available information we have from reports, correspondence and discussions with our vendors. Our estimates of accrued expenses based on such information require judgment. Actual costs may vary from such estimates. When such variances become known, we adjust our expenses accordingly.

Fair Value of Warrants

Warrants outstanding at December 31, 2011 to purchase 5,805,843 shares of our common stock, issued on February 25, 2009 in connection with a registered direct offering of our common stock, were classified as a derivative liability. Accordingly, the fair value of the warrants was recorded on our balance sheet as a liability, and such fair value was adjusted in each financial reporting period with the adjustment to fair value reflected in our consolidated statement of operations. At December 31, 2011, we reported a warrant liability of $58.6 million on our balance sheet.

During the three-month period ended March 31, 2012, all 5,805,843 warrants that were outstanding at December 31, 2011 were exercised for proceeds to us of approximately $12.5 million. Upon the exercise of these remaining warrants, the balance of the warrant liability and the proceeds received upon exercise were credited to stockholders' equity and the liability was eliminated.


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The fair value of the warrants was determined using the Black-Scholes option valuation model. Fluctuations in the assumptions and factors used in the Black-Scholes model resulted in adjustments to the fair value of the warrants recorded on our balance sheet reflected through charges or credits in our statement of operations. The primary factor in the Black-Scholes model that impacted the fair value of the warrants was the market value of our common stock on the date of the valuation.

Inventory

We have incurred significant costs related to the manufacturing of drug product as part of our ongoing research and development activities and production of drug product that would be available to support commercialization activities. We will begin to capitalize costs of inventory produced in preparation for commercial sale of ponatinib when it is considered to have a high probability of regulatory approval and the costs to manufacture the drug product are expected to be recoverable through drug product sales.

We have expensed all costs related to the manufacture of ponatinib to date because of the inherent risks associated with the development of a drug candidate, the uncertainty about the regulatory approval process and the lack of history for our company of regulatory approval of drug candidates. We expect that the majority of the costs of the initial commercial supply of ponatinib that will be available for product sales if we obtain approval will have already been expensed. Accordingly, we expect the manufacturing costs for ponatinib included in our cost of sales to initially be insignificant, as most of these costs will have been recorded as research and development expenses in prior periods, and to increase as we begin to sell inventory that is produced after we begin capitalizing ponatinib commercial inventory.

Results of Operations

For the three months ended September 30, 2012 and 2011

Revenue

We recorded total revenue of $85,000 in the three-month period ended September 30, 2012, compared to $25.1 million in the corresponding period in 2011. Total revenue in 2012 consisted of license revenue pursuant to a license agreement related to our ARGENT technology in accordance with our revenue recognition policy. Total revenue in 2011 consisted primarily of a $25 million milestone payment received pursuant to our License Agreement with Merck. For the remainder of 2012, we expect to record limited licensing revenue and service revenue. We cannot predict the timing or amount of any future revenue under our license agreement with Merck.


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Operating Expenses

Research and Development Expenses

Research and development expenses increased by $19.1 million, or 97 percent, to $38.8 million in the three-month period ended September 30, 2012, compared to $19.7 million in the corresponding period in 2011, as described in further detail below. The research and development process necessary to develop a pharmaceutical product for commercialization is subject to extensive regulation by numerous governmental authorities in the United States and other countries. This process typically takes years to complete and requires the expenditure of substantial resources. Current requirements include:

preclinical toxicology, pharmacology and metabolism studies, as well as in vivo efficacy studies in relevant animal models of disease;

manufacturing of drug product for preclinical studies and clinical trials and ultimately for commercial supply;

submission of the results of preclinical studies and information regarding manufacturing and control and proposed clinical protocol to the U.S. Food and Drug Administration, or FDA, in an investigational new drug application or IND (or similar filings with regulatory agencies outside the United States);

conduct of clinical trials designed to provide data and information regarding the safety and efficacy of the product candidate in humans; and

submission of all the results of testing to the FDA in a new drug application, or NDA (or similar filings with regulatory agencies outside the United States).

Upon approval by the appropriate regulatory authorities, including in some countries approval of product pricing, we may commence commercial marketing and distribution of the product.

We group our research and development, or R&D, expenses into two major categories: direct external expenses and all other R&D expenses. Direct external expenses consist of costs of outside parties to conduct laboratory studies, to develop manufacturing processes and manufacture product candidates, to conduct and manage clinical trials and similar costs related to our clinical and preclinical studies. These costs are accumulated and tracked by product candidate. All other R&D expenses consist of costs to compensate personnel, to purchase lab supplies and services, to lease, operate and maintain our facility, equipment and overhead and similar costs of our research and development efforts. These costs apply to our clinical and preclinical candidates as well as our discovery research efforts. Direct external expenses are further categorized as costs for clinical programs and costs for preclinical programs. Preclinical programs include product candidates undergoing toxicology, pharmacology, metabolism and efficacy studies and manufacturing process development required before testing in humans can begin. Product candidates are designated as clinical programs once we have filed an IND with the FDA, or a similar filing with regulatory agencies outside the United States, for the purpose of commencing clinical trials in humans.

Our R&D expenses for the three-month period ended September 30, 2012, as compared to the corresponding period in 2011, were as follows:

                                Three months ended September 30,
  In thousands                     2012                  2011              Increase
  Direct external expenses:
  Clinical programs           $        19,914       $         9,585     $        10,329
  Preclinical programs                     -                     -                   -
  All other R&D expenses               18,908                10,107               8,801

                              $        38,822       $        19,692     $        19,130

In 2012, our clinical programs consisted of (i) ponatinib, our pan BCR-ABL inhibitor, for which we are conducting a pivotal Phase 2 clinical trial and other trials, and (ii) AP26113, our ALK and EGFR inhibitor for which we filed an IND in June 2011 and commenced a Phase 1/2 clinical trial in the third quarter of 2011.

Direct external expenses for ponatinib were $17.7 million in the three-month period ended September 30, 2012, an increase of $9.1 million as compared to the corresponding period in 2011. The increase is due to


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increases in clinical trial costs of $6.2 million, contract manufacturing costs of $593,000, and supporting non-clinical costs of $2.4 million. Clinical trials costs increased primarily due to ongoing treatment of patients in our pivotal Phase 2 PACE clinical trial and increased enrollment and treatment of patients in our Phase 3 EPIC clinical trial in newly diagnosed CML patients, including purchases of the comparator drug, imatinib, for use in this trial, as well as costs related to initiation of a Phase 1/2 clinical trial of ponatinib in Japan, offset in part by a decrease in costs of our on-going Phase 1 clinical trial as treatment of patients and other activities in this trial have decreased over this time period. Contract manufacturing costs increased due primarily to the conduct of product and process development and qualification initiatives to support regulatory filings for this product candidate, as well as the production of ponatinib for use in our clinical trials and to provide for initial commercial supply in anticipation of potential regulatory approval of ponatinib. Supporting non-clinical costs increased due primarily to increased quality and stability studies and initiatives to develop and commercialize a companion diagnostic test to identify patients with the T315I mutation of the BCR-ABL gene. We collaborated with MolecularMD Corp. to establish this companion diagnostic test and MolecularMD Corp. had filed a PreMarketing Approval (PMA) application with the FDA. In September 2012, we and MolecularMD announced the voluntary withdrawal of the PMA following advice from the FDA that the FDA no longer considered this test to be a companion diagnostic test for ponatinib. We expect that our direct external expenses for ponatinib will increase in the fourth quarter of 2012 and into 2013 as we continue to treat more patients in our ongoing clinical trials, initiate additional clinical trials of this product candidate and conduct additional studies to support continued development of ponatinib.

Direct external expenses for AP26113 were $2.2 million in the three-month period ended September 30, 2012, an increase of $1.2 million as compared to the corresponding period in 2011. The increase in expenses for AP26113 was due primarily to costs of the Phase 1/2 clinical trial initiated in the third quarter of 2011, offset in part by the completion in 2011 of toxicology studies and product development initiatives required for filing of the IND. We expect that our direct external expenses for AP26113 will increase in the fourth quarter of 2012 and into 2013 as we continue to enroll patients in our on-going clinical trial of this product candidate and conduct additional studies to support continued development of AP26113.

All other R&D expenses increased by $8.8 million in the three-month period ended September 30, 2012, as compared to the corresponding period in 2011. This increase is primarily due to an increase in personnel costs of $4.5 million due primarily to an increase in number of employees to support expanding R&D activities, overall increase in compensation for existing employees, and an increase in recruiting costs; an increase in professional services of $1.8 million due primarily to initiatives to upgrade systems and technology used in our business; an increase in stock-based compensation expense of $1.0 million as a result of the impact of a significant increase in the market value of our common stock on the value of stock-based compensation awards in 2011 and 2012; an increase in rent expense of $1.1 million as a result of an amendment to our existing building lease and a new lease agreement for additional office space; and an increase in lab expenses of $279,000. We expect that all other R&D expenses will increase in the fourth quarter of 2012 and into 2013 to support the expanding development of ponatinib and AP26113 and our ongoing discovery research efforts.

The successful development of our product candidates is uncertain and subject to a number of risks. We cannot be certain that any of our product candidates will prove to be safe and effective or will meet all of the applicable regulatory requirements needed to receive and maintain marketing approval. Data from preclinical studies and clinical trials are susceptible to varying interpretations that could delay, limit or prevent regulatory approval. We, the FDA or other regulatory authorities may suspend clinical trials at any time if we or they believe that the patients participating in such trials are being exposed to unacceptable risks or if such regulatory agencies find deficiencies in the conduct of the trials or other problems with our products under development. Delays or rejections may be encountered based on additional . . .

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