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ARRY > SEC Filings for ARRY > Form 10-Q on 7-May-2013All Recent SEC Filings

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Form 10-Q for ARRAY BIOPHARMA INC


7-May-2013

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, continuation, timing and success of drug discovery and development activities conducted by Array and by our collaborators, our ability to obtain additional capital to fund our operations, changes in our research and development spending, realizing new revenue streams and obtaining future out-licensing partnership or 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. under Part II of this Quarterly Report and under Item 1A. of our Annual Report on Form 10-K for the fiscal year ended June 30, 2012, and in other reports we file with the SEC. 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 our unaudited condensed financial statements and related notes included elsewhere in this Quarterly Report on Form 10-Q, our audited financial statements and related notes thereto included in our Annual Report on Form 10-K for the fiscal year ended June 30, 2012, and with the information under the heading "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our Annual Report on Form 10-K for the fiscal year ended June 30, 2012. The terms "we," "us," "our," "the Company," or "Array" refer to Array BioPharma Inc.

Overview

Array BioPharma Inc. is a biopharmaceutical company focused on the discovery, development and commercialization of targeted small molecule drugs to treat patients afflicted with cancer. Array is evolving into a late-stage development company and currently expects significant progress toward generating data to support our upcoming Phase 3 / pivotal trial decisions. Novartis expects to begin Phase 3 trials evaluating Array-invented MEK162 in NRAS-mutant melanoma and in BRAF-mutant melanoma in 2013. In addition, Array will begin a Phase 3 trial evaluating MEK162 in low-grade serous ovarian cancer under the license agreement with Novartis in 2013. AstraZeneca expects to begin Phase 3 or pivotal registration trials with selumetinib (an Array-invented drug) in non-small cell lung cancer and thyroid cancer during the second half of 2013. Three other Array-invented drugs are also approaching Phase 3 or pivotal trial decisions, which are expected by the end of 2013. These include Array's wholly-owned drugs, ARRY-520 and ARRY-614, and one partnered program, danoprevir with InterMune/Roche.

Our most advanced wholly-owned clinical stage drugs include:
Proprietary Program 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 programs 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.


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In addition, we have nine partner-funded clinical programs:

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

We also have a portfolio of proprietary and partnered drug discovery programs generated by our internal discovery efforts including inhibitors that target Trk receptors for the treatment of pain. 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 partners 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.

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 drugs are GDC-0068, an AKT inhibitor for cancer, which is currently in a Phase 2 trial, and GDC-0575 and GDC-0425, which are both Chk-1 inhibitors for cancer being tested in Phase 1 trials.

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 by spending $563.4 million from our inception in 1998 through March 31, 2013. During the nine months ended March 31, 2013, we spent $42.6 million in research and


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development expenses for proprietary programs. In fiscal 2012, we spent $56.7 million in research and development expenses for proprietary programs, compared to $63.5 million and $72.5 million for fiscal years 2011 and 2010, respectively.

We have received a total of $588.7 million in research funding and in up-front and milestone payments from our partnerships and collaborations from inception through March 31, 2013, including $133 million in initial payments from strategic agreements with Amgen, Genentech and Novartis that we entered into over the past three and a half years. These three strategic agreements, as well as our other existing partnered programs, entitle Array to receive a total of over $3 billion in additional potential milestone payments if we or our partners 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 nine drug research and development programs.

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 third or current quarter refers to the quarter ended March 31, 2013.

Business Development and Partner Concentrations

We currently license or partner certain of our compounds and/or programs and enter into partnerships 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 60 to 180 days' prior notice. Our collaboration agreement and our oncology partnership agreement with Genentech can be terminated with 120 days' and 60 days' notice, respectively. 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 our agreement following a change in control of Array, and may terminate our 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 partners is reported in Note 2 - Segments, Geographic Information and Significant Partnerships to our unaudited condensed financial statements included elsewhere in this Quarterly Report on Form 10-Q.

All of our partnership and 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 conformity with U.S. GAAP and which 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. 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. We regularly review our estimates and assumptions; however, actual results could differ significantly from these estimates under different assumptions or conditions.

Revenue Recognition

We recognize revenue for the performance of services or the shipment of products when each of the following four criteria are met: (i) persuasive evidence of an arrangement exists; (ii) products are delivered or as services are rendered;
(iii) the sales price is fixed or determinable; and (iv) collectability is reasonably assured.

We follow ASC 605-25, Revenue Recognition - Multiple-Element Arrangements to determine the recognition of revenue under partnership and 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 the recognition of revenue under partnership and collaboration arrangements entered into prior to this date.

We evaluate the deliverables under our multiple-element arrangements to determine if they meet the separation criteria in ASC 605-25 and have stand-alone value. We allocate revenue to each identified deliverable based on its estimated stand-alone value in relation to the combined estimated stand-alone value of all deliverables, otherwise known as the relative selling price method. The allocated consideration for each deliverable is then recognized over the related obligation period for that deliverable. We treat deliverables in an arrangement that do not meet the separation criteria as a single unit of accounting, generally applying applicable revenue recognition guidance for the final deliverable to the combined unit of accounting.

We recognize revenue from non-refundable up-front payments and license fees in license and milestone revenue 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 on or after this date, the performance period is measured as the time between the execution date and the completion of the inseparable technology transfer, which is typically a shorter period, generally less than 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 during 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 obligations that have 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 record milestone payments as deferred revenue upon receipt until recognized.

We periodically review the expected performance periods under each of our agreements that provide for non-refundable up-front payments, 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 up-front payments, license fees 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 may be 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 our unaudited condensed financial statements included elsewhere in this Quarterly Report on Form 10-Q and in Note 8 - Long-Term Debt to the audited financial statements included in our Annual Report on Form 10-K for the fiscal year ended June 30, 2012. 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 we 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.


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Recent Accounting Pronouncements

In June 2011, the FASB issued 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. 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.

Results of Operations

License and Milestone Revenue

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

Below is a summary of our license and milestone revenue (dollars in thousands):

                          Three Months Ended               Change              Nine Months Ended              Change
                              March 31,                2013 vs. 2012               March 31,               2013 vs. 2012
                          2013            2012          $           %          2013          2012           $           %

License revenue      $    4,653        $ 12,589     $ (7,936 )    (63 )%   $   23,726     $ 43,485     $ (19,759 )    (45 )%
Milestone revenue         2,195           3,381       (1,186 )    (35 )%        9,614       10,142          (528 )     (5 )%
Total license and
milestone revenue    $    6,848        $ 15,970     $ (9,122 )    (57 )%   $   33,340     $ 53,627     $ (20,287 )    (38 )%

License revenue recognized during the three and nine months ended March 31, 2013, decreased compared to the same periods in the prior year. The majority of the revenue under our Chk-1 license agreement with Genentech was recognized during fiscal 2012, with no comparable new revenue in fiscal 2013, resulting in decreases of approximately $4 million and $17 million between the comparable three- and nine-month periods, respectively. Additionally, revenue recognized for the Amgen up-front fee was $4.9 million lower during the three and nine months ended March 31, 2013, as the Amgen up-front fee was fully recognized during the quarter ending on December 31, 2012. The decrease was slightly offset by additional revenue recognized during fiscal 2013 from the Celgene up-front payment for which recognition was suspended during part of the prior year as discussed under Note 4 - Deferred Revenue - Celgene Corporation.

Milestone revenue decreased during the three and nine months ended March 31, 2013, compared to the same periods in the prior year. The decrease during both the three- and nine-month periods was due to reduced milestone revenue under our collaboration with Genentech from which we recognized only $250 thousand during the nine months ended March 31, 2013, none of which was recognized during the current quarter, compared with $1.5 million and $4.5 million during the three and nine months ended March 31, 2012, respectively. Largely offsetting the decrease during the current nine-month period, was the recognition of a $1.5 million milestone payment received from VentiRx during the quarter ended December 31, 2012, as well as $1.3 million of revenue recognized for the previously deferred portion of the $8.5 million milestone payment received from Amgen during the fourth quarter of fiscal 2012 for which we did not have corresponding revenue in the first nine months of the prior year. Additionally, Celgene milestone revenue was higher in both the current three and nine month periods as compared to the prior year and the final deferred Celgene milestone revenue was fully recognized during the current quarter.

Collaboration Revenue

Collaboration revenue consists of revenue for our performance of drug discovery and development activities in collaboration with partners, which include 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.


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Below is a summary of our collaboration revenue (dollars in thousands):

Three Months Ended Change Nine Months Ended Change March 31, 2013 vs. 2012 March 31, 2013 vs. 2012 2013 2012 $ % 2013 2012 $ %

Collaboration revenue $ 3,107 $ 3,143 $ (36 ) (1 )% $ 10,825 $ 10,844 $ (19 ) - %

Collaboration revenue was comparable during the three and nine months ended March 31, 2013, compared to the prior year due to reduced revenues under our collaboration with Genentech and the completion of our funded discovery research under our collaboration with Amgen, which were largely offset by our new collaborations, as well as the 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 or with 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 partnership-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              Change              Nine Months Ended              Change
                            March 31,               2013 vs. 2012               March 31,              2013 vs. 2012
                         2013         2012           $            %         2013         2012           $            %

Cost of revenue      $   8,624      $ 5,291     $    3,333        63 %   $ 23,072     $ 18,002     $    5,070        28 %
Cost of revenue as a
percentage of total
revenue                     87 %         28 %                                  52 %         28 %

Cost of revenue increased during the three and nine months ended March 31, 2013, compared to the same periods in the prior year due to increasing costs to advance our MEK inhibitor through clinical trials under our co-development arrangement with Novartis, as well as our new collaborations and our extended collaboration with Celgene. Reduced costs under our collaboration with Genentech partially offset the increases and were associated with engaging fewer scientists in the current fiscal year periods compared with fiscal 2012.

Cost of revenue as a percentage of total revenue increased for the three and nine months ended March 31, 2013, 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 programs 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.


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Below is a summary of our research and development expenses by categories of costs for the periods presented (dollars in thousands):

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