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| MDCO > SEC Filings for MDCO > Form 10-K on 1-Mar-2013 | All Recent SEC Filings |
1-Mar-2013
Annual Report
You should read the following discussion and analysis of our financial condition and results of operations together with "Selected Consolidated Financial Data" and our financial statements and accompanying notes included elsewhere in this annual report. In addition to the historical information, the discussion in this annual report contains 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 annual report on Form 10-K, including under "Risk Factors" in Item 1A of this annual report.
Overview
Our Business
We are a global biopharmaceutical company focused on saving lives, alleviating
suffering and improving the economic efficiency of the world's leading
hospitals. We have four marketed products, Angiomax® (bivalirudin), Recothrom®
Thrombin, topical (Recombinant), 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 four
late-stage development product candidates, cangrelor, oritavancin, MDCO-157 and
IONSYS TM (fentanyl iontophoretic transdermal system), and early stage
development product candidates, MDCO-216 and ALN-PCS02 and ALN-PCSsc of our
ALN-PCS program. 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 to these products and product candidates, we have a portfolio of ten
generic drugs, which we refer to as our acute care generic products that we have
the non-exclusive right to market in the United States. We expect to begin
selling certain of our acute care generic products in the first quarter of 2013.
We also co-promote the oral tablet antiplatelet medicine BRILINTA® (ticagrelor)
in the United States, as part of our global collaboration agreement with
AstraZeneca LP, or AstraZeneca.
Angiomax, Recothrom, Cleviprex, ready-to-use Argatroban 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 are described in more detail in Part I, Item 1 of this annual report
on Form 10-K. In addition, each of our acute care generic products and the
therapeutic areas which they are intended to address are described in Part I,
Item 1 of this annual report on Form 10-K.
Our revenues to date have been generated primarily from sales of Angiomax in the United States. We had net sales revenue from sales of Angiomax in 2012 of approximately $548.2 million and net revenue from sales of Cleviprex and ready-to-use Argatroban of approximately $10.4 million in the aggregate. We commenced sales of Recothrom in the first quarter of 2013. BMS reported net revenue from sales of Recothrom in 2012 of approximately $67.0 million.
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 Recothrom and our products in development, if and when they are approved and ready to be marketed outside of the United States.
Research and development expenses represent costs incurred for licenses of rights to products, clinical trials, nonclinical and preclinical studies, 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.
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.
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.
The license agreement also contains a grant by Teva to us of an exclusive (except as to Teva), license under Teva's bivalirudin patents and right to enforce Teva's bivalirudin patents.
On January 22, 2012, we settled our patent litigation with APP, including our litigation with respect to the extension of the patent term of the '404 patent and our patent infringement litigation with respect to the '727 patent and the '343 patent. 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.
We remain in patent infringement litigation involving the '727 patent and '343 patent with other ANDA filers, as described in in Part I, Item 3, Legal Proceedings, of this annual 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
Business Development Activity
ALN-PCS Program. In February 2013, we entered into a license and collaboration
agreement with Alnylam to develop, manufacture and commercialize therapeutic
products targeting the human PCSK-9 gene based on certain of Alnylam's RNAi
technology. Under the terms of the agreement, we obtained the exclusive,
worldwide right under Alnylam's technology to develop, manufacture and
commercialize PCSK-9 products for the treatment, palliation and/or prevention of
all human diseases. We paid Alnylam $25 million in an initial license payment
and agreed to pay up to $180 million in success-based development and
commercialization milestones. In addition, Alnylam will be eligible to receive
scaled double-digit royalties based on annual worldwide net sales of PCSK-9
products by us or our affiliates and sublicensees. Royalties to Alnylam are
payable on a product-by-product and country-by-country basis until the last to
occur of the expiration of patent rights in the applicable country that cover
the applicable product, the expiration of non-patent regulatory exclusivities
for such product in such country, and the twelfth anniversary of the first
commercial sale of the product in such country. The royalties are subject to
reduction in specified circumstances. We are also responsible for paying
royalties, and in some cases milestone payments, owed by Alnylam to its
licensors with respect to intellectual property covering these products.
Recothrom. In February 2013, pursuant to a master transaction agreement with
Bristol-Myers Squibb Company, or BMS, we acquired the right to sell, distribute
and market Recothrom on a global basis for a two-year period, which we refer to
as the collaboration term, and certain limited assets exclusively related to
Recothrom, primarily the biologics license application for Recothrom and certain
related regulatory assets. BMS also granted to us, under the master transaction
agreement, an option to purchase from BMS and its affiliates, following the
expiration or earlier termination of the collaboration term, certain other
assets, including certain patent and trademark rights, contracts, inventory,
equipment and related books and records, held by BMS which are exclusively
related to Recothrom.
Under the master transaction agreement, we paid to BMS a one-time collaboration
fee equal to $105.0 million and a one-time option fee equal to $10.0 million, We
did not assume, and if we exercise the option, we will not assume, any
pre-existing liabilities related to the Recothrom business, contingent or
otherwise, arising prior to the collaboration period, and we did not acquire,
and if we exercise the option, we will not acquire, any significant tangible
assets related to the Recothrom business. Under the master transaction
agreement, we agreed to pay to BMS quarterly tiered royalty payments during the
two-year collaboration term equal to a percentage of worldwide net sales of
Recothrom.
If we exercise the option, we would acquire such assets and assume certain
liabilities of BMS and its affiliates related to those assets and to pay to BMS
a purchase price equal to the net book value of inventory included in the
acquired assets, plus either:
• a multiple of average net sales over each of the two 12-month periods
preceding the closing of the purchase of the assets to be acquired in
connection with exercising the option (unless such closing occurs less
than 24 months after February 8, 2013, in which case the measurement
period would be the 12-month period preceding such closing); or
• if BMS has delivered a valid notice terminating the collaboration term early as a result of a material breach by us under the master transaction agreement, the amount described above plus an amount intended to give BMS the economic benefit of having received royalty fees for a 24-month collaboration term.
We expect to account for the transaction as a business combination and are in
the process of determining the allocation of the purchase price to acquired
assets and assumed liabilities.
Incline Therapeutics, Inc. In January 2013, we acquired Incline
Therapeutics, Inc., or Incline, a company focused on the development of IONSYS,
a compact, disposable, needleless patient-controlled system for the short-term
management of acute postoperative pain in the hospital setting.
Under the terms of our agreement with Incline, we paid to Incline's equityholders and optionholders an aggregate of approximately $156 million in cash, which is subject to a post-closing purchase price adjustment process. In addition, we paid approximately $13 million to Cadence Pharmaceuticals, Inc., or Cadence, to terminate Cadence's option to acquire Incline pursuant to an agreement between Cadence and Incline and deposited $18.5 million in cash into an escrow fund for the purposes of securing the indemnification obligations of the Incline equityholders to us for any and all losses for which we are entitled to indemnification pursuant to the agreement with Incline and to provide the source of recovery for any amounts payable to us as a result of the post-closing purchase price adjustment process.
Under the terms of our agreement with Incline, we agreed to pay up to $205
million in cash in the aggregate, less certain related expenses, if we enter
into a license agreement in Japan or achieve certain regulatory approval or
sales milestones with respect to IONSYS.
We expect to account for the Incline transaction as a business combination and
are in the process of determining the the allocation of the purchase price to
acquired assets and assumed liabilities.
Collaboration with AstraZeneca. On April 25, 2012, we entered into a global
collaboration agreement with AstraZeneca, LP, or AstraZeneca, pursuant to which
we and AstraZeneca agreed to collaborate globally to develop and commercialize
certain acute ischemic heart disease compounds. Under the terms of the
collaboration agreement, a joint development and research committee and a joint
commercialization committee have been established to prepare and deliver a
global development plan and a country-by-country collaboration and
commercialization plan, respectively, related to BRILINTA and Angiomax and
cangrelor. Implementation of these plans is subject to agreement between both
parties. The first joint activity agreed upon by the parties under the global
collaboration is a four-year co-promotion arrangement for BRILINTA in the United
States. Pursuant to the agreement, our sales force began supporting promotion
activities for BRILINTA in May 2012. Under the terms of the agreement,
AstraZeneca paid us $2.5 million for conducting BRILINTA co-promotion activities
in the second quarter of 2012. In addition, under the terms of the agreement,
AstraZeneca has agreed to pay us $7.5 million in base consideration for
conducting BRILINTA co-promotion activities during the period from July 1, 2012
to December 31, 2012, plus up to $2.5 million in additional consideration for
the same period, contingent upon the number of new prescriptions written during
that period, $15.0 million in base consideration per year from 2013 through 2015
for conducting BRILINTA co-promotion activities, plus up to an additional $5.0
million per year from 2013 to 2015 if certain performance targets with respect
to new prescriptions are achieved and $7.5 million in base consideration for
conducting BRILINTA co-promotion activities during the period from January 1,
2016 until June 30, 2016, plus up to an additional $2.5 million in additional
consideration for the same period if certain performance targets with respect to
new prescriptions are achieved.
MDCO-157. In May 2011, we entered into a licensing agreement with Ligand
Pharmaceuticals Incorporated, or Ligand, through its subsidiary CyDex
Pharmaceuticals, Inc., under which we acquired an exclusive, worldwide license
to patents claiming a Captisol®-enabled intravenous formulation of clopidogrel
bisulfate, which we refer to as MDCO-157, and to related know-how. Under the
license agreement, we paid Ligand an upfront payment of approximately $1.8
million in June 2011 and agreed to make additional payments of up to $22 million
upon the achievement of certain clinical, regulatory and commercial milestones.
We also agreed to pay to Ligand tiered royalties from high single digits up to
low double digits on annual worldwide net sales. The license obligates us to use
commercially reasonable efforts to develop a licensed product, and to make $2.5
million per year in development expenditures until we submit a new drug
application, or NDA.
Curacyte Discovery Acquisition. In August 2008, we acquired Curacyte Discovery a
wholly owned subsidiary of Curacyte AG. Curacyte Discovery, a German limited
liability company, was primarily engaged in the discovery and development of
small molecule serine protease inhibitors. In connection with the acquisition,
we paid Curacyte AG an initial payment of €14.5 million in August 2008
(approximately $22.9 million at the time of payment) and €3.5 million in
December 2009 (approximately $5.2 million at the time of payment), €3.0 million
in December 2010 (approximately $4.3 million at the time of payment) and
€4.0 million in February 2012 (approximately $5.3 million at the time of
payment) upon achievement of clinical milestones. We also agreed to pay
contingent milestone payments of up to an additional €25.0 million if we proceed
with further clinical development of MDCO-2010 and achieve a commercial
milestone and to pay royalties based on net sales. On October 4, 2012, we
voluntarily discontinued our Phase 2b dose-ranging study of MDCO-2010 and ended
the development of MDCO-2010, as described below under " - MDCO-2010 Clinical
Trial Discontinuation".
Targanta Therapeutics Corporation. In February 2009, we acquired Targanta
Therapeutics Corporation, or Targanta, a biopharmaceutical company focused on
developing and commercializing innovative antibiotics to treat serious
infections in the hospital and other institutional settings.
Under the terms of our agreement with Targanta, we paid Targanta shareholders an
aggregate of approximately $42.0 million in cash at closing. In addition, we
originally agreed to pay contingent cash payments up to an additional $90.4
million in the aggregate. This amount has been reduced to $85.1 million in the
aggregate as certain milestones have not been achieved by specified dates. The
current contingent cash payments milestones are:
• Upon approval from the European Medicines Agency of a Marketing
Authorization Application for oritavancin for the treatment of serious
gram-positive bacterial infections, including acute bacterial skin and
skin structure infections, or ABSSSI (which were formerly referred to as
complicated skin and skin structure infections) on or before December 31,
2013, approximately $10.5 million.
• Upon final approval from the FDA of an NDA for oritavancin for the treatment of ABSSSI on or before December 31, 2013, approximately $10.5 million.
• Upon final approval from the FDA of an NDA for the use of oritavancin for the treatment of ABSSSI administered by a single dose intravenous infusion on or before December 31, 2013, approximately $14.7 million. This payment may become payable simultaneously with the payment described in the previous bullet above.
• If aggregate net sales of oritavancin in four consecutive calendar quarters ending on or before December 31, 2021 reach or exceed $400 million, approximately $49.4 million.
We expensed transaction costs as incurred, capitalized as an indefinite lived
intangible asset the value of acquired in-process research and development. We
recorded contingent payments at their estimated fair value. We allocated the
purchase price of approximately $64 million, which includes $42 million of cash
paid upon acquisition and $23 million that represents the fair market value of
the contingent purchase price on the date of acquisition, to the net tangible
and intangible assets of Targanta based on their estimated fair values. We have
included the results of Targanta's operations in our consolidated financial
statements since the acquisition date.
As a result of our acquisition of Targanta, we are a party to an asset purchase
agreement that Targanta entered into with InterMune, Inc., or InterMune, in
connection with Targanta's December 2005 acquisition of the worldwide rights to
oritavancin from InterMune. Under the agreement, we are obligated to use
commercially reasonable efforts to develop oritavancin and to make a
$5.0 million cash payment to InterMune if and when we receive from the FDA all
approvals necessary for the commercial launch of oritavancin. We have no other
milestone or royalty obligations to InterMune.
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 bear cash interest at a rate of 1.375% per year, payable semi-annually
on June 1 and December 1 of each year. We made our first payment of cash
interest on the Notes on December 1, 2012 in the amount of $1.8 million. 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 of the Notes 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
. . .
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