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

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Form 10-Q for MEDICINES CO /DE


9-Nov-2012

Quarterly Report


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

You should read the following discussion and analysis of our financial condition and results of operations together with our financial statements and accompanying notes included elsewhere in this quarterly report. In addition to the historical information, the discussion in this quarterly report contains certain forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated by the forward-looking statements due to our critical accounting estimates discussed below and important factors set forth in this quarterly report, including under "Risk Factors" in Part II, Item 1A of this quarterly report.

Overview

Our Business


We are a global pharmaceutical company focused on advancing the treatment of critical care patients through the delivery of innovative, cost-effective medicines to the worldwide hospital marketplace. We have three marketed products, Angiomax® (bivalirudin), Cleviprex® (clevidipine butyrate) injectable emulsion and our ready-to-use formulation of Argatroban. We also have a pipeline of acute and intensive care hospital products in development, including three late-stage development product candidates, cangrelor, oritavancin and MDCO-157, and one early stage development product candidate, MDCO-216. We believe that our marketed products and products in development possess favorable attributes that competitive products do not provide, can satisfy unmet medical needs in the acute and intensive care hospital product market and offer, or, in the case of our products in development, have the potential to offer, improved performance to hospital businesses. In addition, in January 2012 we acquired from APP Pharmaceuticals, LLC, or APP, non-exclusive rights to market in the United States a portfolio of ten generic drugs, which we refer to as our acute care generic products. We expect to begin selling certain of those products in the fourth quarter of 2012. In May 2012, as part of our global collaboration agreement with AstraZeneca LP, or AstraZeneca, we and AstraZeneca commenced a four-year co-promotion arrangement for AstraZeneca's oral antiplatelet medicine, BRILINTA® (ticagrelor), tablets in the United States.

The following chart identifies each of our marketed products and our products in development, their stage of development, their mechanism of action and the indications for which they have been approved for use or which they are intended to address. The following chart also identifies each of our acute care generic products and the therapeutic areas which they are intended to address. All of our marketed products and products in development are administered intravenously. All of our acute care generic products are injectable products.

 Product or Product     Development Stage     Mechanism/Target             Clinical
   in Development                                                  Indication(s)/Therapeutic
                                                                             Areas
Angiomax                    Marketed           Direct thrombin     U.S. - for use as an
                                                  inhibitor        anticoagulant in
                                                                   combination with aspirin
                                                                   in patients with unstable
                                                                   angina undergoing
                                                                   percutaneous transluminal
                                                                   coronary angioplasty and
                                                                   for use in patients
                                                                   undergoing percutaneous
                                                                   coronary intervention, or
                                                                   PCI, including patients
                                                                   with or at risk of
                                                                   heparin induced
                                                                   thrombocytopenia and
                                                                   thrombosis syndrome, or
                                                                   HIT/HITTS
                                                                   Europe - for use as an
                                                                   anticoagulant in patients
                                                                   undergoing PCI, adult
                                                                   patients with acute
                                                                   coronary syndrome, or
                                                                   ACS, and for the
                                                                   treatment of patients
                                                                   with ST-segment elevation
                                                                   myocardial infarction, or
                                                                   STEMI, undergoing primary
                                                                   PCI
Cleviprex              Marketed in the         Calcium channel     U.S. - Blood pressure
                       United States               blocker         reduction when oral
                                                                   therapy is not feasible
                       Approved in the                             or not desirable
                       United Kingdom, the
                       Netherlands,                                Ex-U.S. - with
                       Sweden,                                     indications for blood
                       Switzerland,                                pressure control in
                       Australia and New                           perioperative settings
                       Zealand

                       Marketing
                       Authorization
                       Application, or
                       MAA, submitted in
                       other European
                       Union countries
Cangrelor                    Phase 3         Antiplatelet agent    Prevention of platelet
                                                                   activation and
                                                                   aggregation when oral
                                                                   therapy is not feasible
                                                                   or not desirable
Oritavancin                  Phase 3             Antibiotic        Treatment of serious
                                                                   gram-positive bacterial
                                                                   infections, including
                                                                   acute bacterial skin and
                                                                   skin structure
                                                                   infections, or ABSSSI,
                                                                   and including infections
                                                                   that are resistant to
                                                                   conventional treatment


MDCO-157 (IV            Pre-registration     Platelet inhibitor    Platelet inhibition
clopidogrel)                  stage                                in patients suffering
                                                                   from ACS or patients
                                                                   recently experiencing
                                                                   myocardial
                                                                   infarction, stroke,
                                                                   or peripheral
                                                                   arterial disease when
                                                                   oral therapy is not
                                                                   feasible or not
                                                                   desirable
MDCO-216                     Phase 1         Naturally occurring   Reversal cholesterol
                                                variant of a       transport agent to
                                              protein found in     reduce
                                                high-density       atherosclerotic
                                             lipoprotein, or HDL   plaque burden
                                                                   development and
                                                                   thereby reduce the
                                                                   risk of adverse
                                                                   thrombotic events
Ready-to-Use             Marketed in the       Direct thrombin     Approved for
Argatroban                United States           inhibitor        prophylaxis or
                                                                   treatment of
                                                                   thrombosis in adult
                                                                   patients with HIT and
                                                                   for use as an
                                                                   anticoagulant in
                                                                   adult patients with
                                                                   or at risk for HIT
                                                                   undergoing PCI
Acute care generic       Approved in the           Various         Cardiovascular
products: Adenosine,      United States
Amiodarone, Esmolol
and Milrinone
Acute care generic       Approved in the           Various         Serious infection
products:                 United States
Azithromycin and
Clindamycin
Acute care generic       Approved in the           Various         Neurocritical care
products:                 United States
Haloperidol,
Ondansetron,
Midazolam and
Rocuronium

Our revenues to date have been generated primarily from sales of Angiomax in the United States. We continue to expand our sales and marketing efforts outside the United States. We believe that by establishing operations outside the United States, we can increase our sales of Angiomax outside of the United States and be positioned to commercialize Cleviprex and our products in development, if and when they are approved outside the United States.

Research and development expenses represent costs incurred for licenses of rights to products, clinical trials, nonclinical and preclinical studies, activities relating to regulatory filings and manufacturing development efforts. We outsource much of our clinical trials, nonclinical and preclinical studies and all of our manufacturing development activities to third parties to maximize efficiency and minimize our internal overhead. We expense our research and development costs as they are incurred. Selling, general and administrative expenses consist primarily of salaries and related expenses, costs associated with general corporate activities and costs associated with marketing and promotional activities. Research and development expense, selling, general and administrative expense and cost of revenue also include stock-based compensation expense, which we allocate based on the responsibilities of the recipients of the stock-based compensation.

As of September 30, 2012, we had an accumulated deficit of approximately $81.1 million. We expect to make substantial expenditures to further develop and commercialize our products and to develop our product candidates, including costs and expenses associated with clinical trials, nonclinical and preclinical studies, regulatory approvals and commercialization.

Angiomax Patent Litigation

The principal U.S. patents covering Angiomax include U.S. Patent No. 5,196,404, or the '404 patent, U.S. Patent No. 7,582,727, or the '727 patent, and U.S. Patent No. 7,598,343, or the '343 patent.

The '404 patent was set to expire in March 2010, but the term was extended to December 15, 2014 by the U.S. Patent and Trademark Office, or the PTO, under the Hatch-Waxman Act following our litigation against the PTO, the U.S. Food and Drug Administration, or the FDA, and the U.S. Department of Health and Human Services, or HHS. In addition, as a result of our study of Angiomax in the pediatric setting, we are entitled to a six-month period of pediatric exclusivity following expiration of the '404 patent, which extends exclusivity to June 15, 2015.

In the second half of 2009, the PTO issued to us the '727 patent and the '343 patent, covering a more consistent and improved Angiomax drug product and the processes by which it is made. The '727 patent and the '343 patent are set to expire in July 2028. In response to Paragraph IV Certification Notice letters we received with respect to abbreviated new drug applications, or ANDAs, filed by a number of parties with the FDA seeking approval to market generic versions of Angiomax, we have filed lawsuits against the ANDA filers alleging patent infringement of the '727 patent and '343 patent.


On September 30, 2011, we settled our '727 patent and '343 patent infringement litigation with Teva Pharmaceuticals USA, Inc. and its affiliates, which we collectively refer to as Teva. In connection with the Teva settlement, we entered into a license agreement with Teva under which we granted Teva a non-exclusive license under the '727 patent and '343 patent to sell a generic bivalirudin for injection product under a Teva ANDA in the United States beginning June 30, 2019 or earlier under certain conditions.

On January 22, 2012, we settled our patent infringement litigation with APP. In connection with the APP settlement, we entered into a license agreement with APP under which we granted APP a non-exclusive license under the '727 patent and '343 patent to sell a generic bivalirudin for injection product under an APP ANDA in the United States beginning on May 1, 2019. In certain limited circumstances, the license to APP could become effective prior to May 1, 2019. In addition, in certain limited circumstances, this license to APP could include the right to sell a generic bivalirudin product under our NDA for Angiomax in the United States beginning on May 1, 2019 or, in certain limited circumstances, on June 30, 2019 or on a date prior to May 1, 2019. On January 24, 2012, the U.S. District Court for the District of Delaware entered a consent judgment and order of permanent injunction concluding our patent infringement suits against APP. On February 1, 2012, we and APP submitted the settlement documents to the U.S. Federal Trade Commission, or FTC, and the U.S. Department of Justice, or the DOJ.

We remain in patent infringement litigation involving the '727 patent and '343 patent with other ANDA filers, as described in Part II, Item 1, Legal Proceedings of this quarterly report. If we are unable to maintain our market exclusivity for Angiomax in the United States through enforcement of our U.S. patents covering Angiomax, then Angiomax could be subject to generic competition earlier than May 1, 2019.

In February 2011, we entered into a settlement agreement and release with the law firm Wilmer Cutler Pickering Hale and Dorr LLP, or WilmerHale, with respect to all potential claims and causes of action between the parties related to the '404 patent. Under the settlement agreement, WilmerHale agreed to make available to us up to approximately $232 million, consisting of approximately $117 million from the proceeds of professional liability insurance policies and $115 million of payments from WilmerHale itself. WilmerHale agreed to pay approximately $18 million from its professional liability insurance providers to us within 60 days after the date of the settlement agreement and delivered such amount in two equal payments in March 2011 and April 2011. The balance of the approximately $232 million aggregate amount provided in the settlement agreement remains available to pay future expenses incurred by us in continuing to defend the extension of the '404 patent, and any damages that may be suffered by us in the event that a generic version of Angiomax is sold in the United States before June 15, 2015 because the extension of the '404 patent is held invalid on the basis that the application for the extension was not timely filed. Payments by WilmerHale itself would be made only after payments from its insurance policies are exhausted and cannot exceed $2.875 million for any calendar quarter.

APP Settlement

On January 22, 2012, we settled our patent litigation with APP, including, as noted above, our patent infringement litigation with APP and our litigation with respect to the extension of the patent term of the '404 patent which was dismissed on January 24, 2012. In connection with the APP settlement, we entered into a settlement agreement, a license agreement with respect to the '727 patent and '343 patent, a contract manufacturing agreement with APP, under which APP has agreed to manufacture and supply Angiomax finished product to us, a license and supply agreement with APP under which APP has agreed to license and supply to us a portfolio of ten generic products and an AG supply agreement with APP under which we have agreed to supply APP with an authorized generic bivalirudin product, upon specified circumstances set forth in the APP license agreement.

Under the APP license agreement, we granted APP a non-exclusive license under the '727 patent and '343 patent to sell in the United States a generic bivalirudin for injection product under an APP ANDA, or an APP product, beginning on May 1, 2019 or earlier under specified conditions, and, in certain limited circumstances, to sell a generic bivalirudin for injection product under our NDA for Angiomax, or an APP generic product, in the United States beginning on May 1, 2019 or, in certain limited circumstances, on June 30, 2019 or on a date prior to May 1, 2019. APP's right under the APP license agreement to sell an APP generic product is subject to the payment to us of a royalty on sales of the APP generic product. If APP has the right to sell an APP generic product, such right could extend for a period of as long as 180 days. The license also covers any other present or future patents owned, licensed or controlled by us that cover or would cover an APP product or an APP generic product other than the '404 patent. Under the APP license agreement, we and APP have also agreed to negotiate an agreement under which we would supply APP with bivalirudin bulk drug substance for use by APP in the manufacture of APP product to be sold under the APP license agreement. The APP license agreement will remain in effect until the later of the expiration of all of the patents covered by the APP license agreement, and the date six months after the expiration of the '404 patent.

Under the APP manufacturing agreement, we have agreed to purchase from APP a specified minimum percentage of the Company's requirements for Angiomax finished product for the sale of Angiomax product in the United States. We have agreed to pay APP a fixed price per vial supplied and to reimburse APP for specified development costs and capital expenditures made


by APP. The term of the APP manufacturing agreement ends on May 1, 2019, but may be extended, at our sole option, for an additional term of two years. If a generic form of bivalirudin for injection is marketed by APP or another third party during the term of the APP manufacturing agreement, we have the right to renegotiate the price and minimum quantity terms of the APP manufacturing agreement and, if such terms cannot be agreed to by the parties, we will have the right to terminate the APP manufacturing agreement upon 90 days prior written notice.

Under the APP generic supply and license agreement, APP has granted us a non-exclusive license under APP's marketing authorizations and intellectual property to sell ten specified generic products to hospitals and integrated delivery networks in the United States. We have agreed to purchase our entire requirements for these products from APP for a price equal to APP's cost of goods. We made a one-time, upfront payment of $30 million to APP. The term of the APP generic supply and license agreement ends January 22, 2022.

Under the AG supply agreement, we have agreed to supply APP with an authorized generic bivalirudin product in the event APP has the right to market the product under the APP license agreement. We have agreed to use commercially reasonable efforts to supply the authorized generic bivalirudin product during the period during which APP can market the product, or the supply period. APP shall purchase the authorized generic bivalirudin product from us at a price based on the costs we have paid to third parties in connection with the manufacture of the product. The AG supply agreement terminates upon the earlier of the end of the supply period or December 27, 2019.

Convertible Senior Note Offering
On June 11, 2012, we completed our private offering of $275.0 million aggregate principal amount of our 1.375% convertible senior notes due 2017, or the Notes, and entered into an indenture with Wells Fargo Bank, National Association, a national banking association, as trustee, or the Trustee, governing the Notes, which we refer to as the Indenture. The net proceeds from the offering were $266.2 million, after deducting the initial purchasers' discounts and commissions and our offering expenses.
The Notes will bear cash interest at a rate of 1.375% per year, payable semi-annually on June 1 and December 1 of each year, beginning on December 1, 2012. The Notes will mature on June 1, 2017. The Notes do not contain any financial or operating covenants or any restrictions on the payment of dividends, the incurrence of other indebtedness, or the issuance or repurchase of securities by us.
The Notes are our senior unsecured obligations and will rank senior in right of payment to our future indebtedness, if any, that is expressly subordinated in right of payment to the Notes and equal in right of payment to our existing and future unsecured indebtedness that is not so subordinated. The Notes are effectively junior in right of payment to any of our secured indebtedness to the extent of the value of the assets securing such indebtedness and are structurally junior to all existing and future indebtedness and other liabilities (including trade payables) incurred by our subsidiaries. Holders may convert their Notes at their option at any time prior to the close of business on the business day immediately preceding March 1, 2017 only under certain specified circumstances which are set forth in the Indenture. On or after March 1, 2017, until the close of business on the second scheduled trading day immediately preceding the maturity date, holders may convert their Notes at any time, regardless of the foregoing circumstances. Upon conversion, we will pay cash up to the aggregate principal amount of the Notes to be converted and deliver shares of our common stock in respect of the remainder, if any, of our conversion obligation in excess of the aggregate principal amount of the Notes being converted, subject to a daily share cap, as described in the Indenture. Holders of Notes will not receive any additional cash payment or additional shares representing accrued and unpaid interest, if any, upon conversion of a note, except in limited circumstances. Instead, accrued but unpaid interest will be deemed to be paid by the cash and shares, in any, of our common stock, together with any cash payment for any fractional share, paid or delivered, as the case may be, upon conversion of a Note.

The conversion rate for the Notes was initially, and remains, 35.8038 shares of our common stock per $1,000 principal amount of Notes, which is equivalent to an initial conversion price of $27.93 per share of our common stock. The conversion rate and the conversion price are subject to customary adjustments for certain events, including, but not limited to, the issuance of certain stock dividends on our common stock, the issuance of certain rights or warrants, subdivisions, combinations, distributions of capital stock, indebtedness, or assets, cash dividends and certain issuer tender or exchange offers, as described in the Indenture.

We may not redeem the Notes prior to maturity and are not required to redeem or retire the Notes periodically. However, upon the occurrence of a "fundamental change" (as defined in the Indenture), subject to certain conditions, in lieu of converting their Notes, holders may require us to repurchase for cash all or part of their Notes at a repurchase price equal to 100% of the principal amount of the Notes to be repurchased, plus accrued and unpaid interest to, but excluding, the fundamental change repurchase


date. Following certain corporate transactions that constitute a change of control, we will increase the conversion rate for a holder who elects to convert the Notes in connection with such change of control in certain circumstances.

The Indenture contains customary events of default with respect to the Notes, including that upon certain events of default (including our failure to make any payment of principal or interest on the Notes when due and payable) occurring and continuing, the Trustee by notice to us, or the holders of at least 25% in principal amount of the outstanding Notes by notice to us and the Trustee, may, and the Trustee at the request of such holders (subject to the provisions of the Indenture) shall, declare 100% of the principal of and accrued and unpaid interest, if any, on all the Notes to be due and payable. In case of an event of default involving certain events of bankruptcy, insolvency or reorganization, involving us or a significant subsidiary of ours, 100% of the principal of and accrued and unpaid interest on the Notes will automatically become due and payable. Upon a declaration of acceleration, such principal and accrued and unpaid interest, if any, will be due and payable immediately.

Convertible Note Hedge and Warrant Transactions On June 5, 2012, we entered into convertible note hedge transactions and warrant transactions with several of the initial purchasers of the Notes, their respective affiliates and other financial institutions, which we refer to as the Hedge Counterparties. We used approximately $19.8 million of the net proceeds from the offering to pay the cost of the convertible note hedge transactions (after such cost was partially offset by the proceeds to us from the sale of warrants in the warrant transactions).
We expect the convertible note hedge transactions to reduce the potential dilution with respect to shares of our common stock upon any conversion of the Notes in the event that the market price per share of our common stock, as measured under the terms of the convertible note hedge transactions, is greater than the strike price of the convertible note hedge transactions, which initially corresponds to the conversion price of the Notes and is subject to anti-dilution adjustments substantially similar to those applicable to the conversion rate of the Notes. The warrant transactions will have a dilutive effect with respect to our common stock to the extent that the market price per share of our common stock, as measured under the terms of the warrant . . .

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