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

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Form 10-Q for OPTIMER PHARMACEUTICALS INC


10-May-2013

Quarterly Report


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

The following discussion and analysis should be read in conjunction with our consolidated financial statements and accompanying notes appearing elsewhere in this report, as well as the audited financial statements and accompanying notes included in our annual report on Form 10-K for the fiscal year ended December 31, 2012, as filed with the Securities and Exchange Commission, or SEC. This discussion and other parts of this report may contain forward-looking statements based upon current expectations that involve risks and uncertainties. Our actual results and the timing of selected events could differ materially from those anticipated in these forward-looking statements as a result of several factors, including those set forth under "Risk Factors" and elsewhere in this report.

Overview

We are a global biopharmaceutical company currently focused on commercializing our antibiotic product DIFICIDŽ (fidaxomicin) in the United States and Canada, and on developing other fidaxomicin products in the United States and worldwide, both independently and with our partners and licensees. DIFICID is a macrolide antibacterial drug indicated in adults 18 years of age or older for the treatment of CDAD and is the first antibacterial drug to be approved in the United States for the treatment of CDAD in more than 25 years. We currently are marketing DIFICID in the United States through our own sales force and through our co-promotion agreement with Cubist Pharmaceuticals, Inc., or Cubist.

We continue to pursue regulatory approval for, and commercialization of, fidaxomicin in other geographies outside the United States and Canada through various collaboration partners. In December 2011, the European Medicines Agency, or EMA, approved the Marketing Authorization Application for DIFICLIR (fidaxomicin) for the treatment of adults suffering from CDI in Europe. In June 2012, our collaboration partner, APEL, achieved the first sales of DIFICLIR tablets in its European territories. In addition, in June 2012, our subsidiary Optimer Pharmaceuticals Canada, Inc., or Optimer Canada, began marketing DIFICID in Canada. In April, 2013 the Therapeutic Goods Administration, the Australian regulatory body for therapeutic goods such as medicines, approved DIFICID for the treatment of confirmed CDI in adults. STA, our Australia and New Zealand licensee, plans to commence commercialization in Australia in May 2013. We have entered into an agreement with Astellas Japan for the development and commercialization of fidaxomicin in Japan.

In November 2012 we entered an exclusive agreement with AstraZeneca to commercialize fidaxomicin tablets for the treatment of CDI in Latin America, including Brazil, Central America, Mexico and the Caribbean.

We were incorporated in November 1998 and have incurred significant net losses since our inception. At March 31, 2013, we had an accumulated deficit of $283.3 million. These losses have resulted principally from costs incurred in connection with research and development activities, including the costs of clinical trial activities, license fees and general and administrative expenses and, more recently, expenses incurred in connection with our commercial efforts with respect to DIFICID in the United States and Canada. We expect to incur operating losses for at least the next two years as we commercialize DIFICID and pursue further development of DIFICID, including conducting post-marketing studies for label expansion and continuing further development, regulatory approval and commercialization of fidaxomicin worldwide. For example, in October 2012, we initiated a Phase 3b clinical trial of DIFICID for the prevention of CDAD in patients undergoing hematopoietic stem cell transplantation, or HSCT. We may acquire or in-license additional products or product candidates, technologies or businesses that are complementary.

Critical Accounting Policies

Our Management's Discussion and Analysis of our Financial Condition and Results of Operations is based on our consolidated financial statements, which have been prepared in conformity with generally accepted accounting principles in the United States. The preparation of these consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, expenses and related disclosures. Actual results could differ from those estimates. While our significant accounting policies are described in more detail in Note 2 of the Notes to Consolidated Financial Statements appearing elsewhere in this report, we believe the following accounting policies to be critical to the judgments and estimates used in the preparation of our consolidated financial statements.

Product Sales

DIFICID is available in the United States and Canada through three major wholesalers - AmerisourceBergen Corporation, Cardinal Health, Inc. and McKesson Corporation - and through regional wholesalers and specialty pharmacies that provide DIFICID to purchasing customers, such as hospitals, retail pharmacies, long-term care facilities and other purchasing outlets that may dispense DIFICID. We recognize revenue from product sales when persuasive evidence of an arrangement exists, delivery has occurred, title has passed to the customer, the price is fixed and determinable, the buyer is obligated to pay us, the obligation to pay is not contingent on resale of the product, the buyer has economic substance apart from us, we have no obligation to bring about the sale of the product, the amount of returns can be reasonably estimated and collectability is reasonably assured. We recognize product sales of DIFICID upon delivery of product to the wholesalers, specialty pharmacies and certain direct purchasers.


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During the three months ended March 31, 2013, the $16.8 million in net product sales to wholesalers reflected a total of 7,393 DIFICID bottles shipped to wholesalers and specialty pharmacies. We believe net product sales were negatively impacted by an inventory sell-down by wholesalers. Wholesalers and specialty pharmacies shipped approximately 7,600 DIFICID bottles to hospitals, retail pharmacies, long-term care facilities and other purchasing outlets that may dispense DIFICID in the United States and Canada during the three months ended March 31, 2013. Our sales representatives primarily target approximately 1,200 hospitals, although approximately 3,100 hospitals have ordered DIFICID.

Our net product sales represent total gross product sales in the United States and Canada less allowances for customer credits, including estimated rebates, chargebacks, discounts and returns. These allowances are established by management as its best estimate, based on available information, and are adjusted to reflect known changes in the factors that impact such allowances. Allowances for rebates, chargebacks, discounts and returns are established based on the contractual terms with customers, communications with customers, as well as expectations about the market for the product and anticipated introduction of competitive products. Product shipping and handling costs are included in cost of product sales.

Our total product sales allowance, as a percentage of gross product sales, increased from 12.6% at March 31, 2012 to 22.6% at March 31, 2013 primarily due to higher hospital discounts.

Product Sales Allowances. We establish reserves for prompt-payment discounts, fee-for-service arrangements, government and commercial rebates, product returns and other applicable allowances, such as our hospital discount. Allowances relate to prompt-payment discounts and fee-for-service arrangement with our contracted wholesalers and direct purchase discounts, and are recorded at the time of sale, resulting in a reduction in product sales. Accruals related to government and commercial rebates, product returns and other applicable allowances are recognized at the time of sale, resulting in a reduction in product sales and an increase in accrued expenses.

Prompt-payment Discounts. We offer a prompt-payment discount to our customers. Since we expect our customers will take advantage of this discount, we accrue 100% of the prompt-payment discount that is based on the gross amount of each invoice, at the time of sale. .

Government and Commercial Rebates and Chargebacks. We estimate commercial rebates as well as government-mandated rebates and discounts relating to federal and state programs such as Medicaid, the Veterans' Administration, or VA, and Department of Defense programs, the Medicare Part D Coverage Discount Program and certain other qualifying federal and state government programs. We estimate the amount of these rebates and chargebacks based on historical trends for DIFICID. These allowances are adjusted periodically based on actual experience.

Medicaid rebate reserves relate to our estimated obligations to states under statutory "best price" obligations which also may include supplemental rebate agreements with certain states. Rebate accruals are recorded during the same period in which the related product sales are recognized. Actual rebate amounts are determined at the time of claim by the state, and we generally will make cash payments for such amounts after receiving billings from the state.

VA rebates or chargeback reserves represent our estimated obligations resulting from contractual commitments to sell DIFICID to qualified healthcare providers at a price lower than the list price charged to our distributors. A distributor will charge us for the difference between what the distributor pays for the product and the ultimate selling price to the qualified healthcare provider. Rebate and chargeback accruals are established during the same period in which the related product sales are recognized. Actual chargeback amounts for Public Health Service are determined at the time of resale to the qualified healthcare provider from the distributor, and we generally will issue credits for such amounts after receiving notification from the distributor.

Although allowances and accruals are recorded at the time of product sale, certain rebates generally will be paid, on average, in six months or longer after the sale. Reserve estimates are evaluated quarterly and, if necessary, adjusted to reflect actual results. Any such adjustments will be reflected in our operating results in the period of the adjustment.

Product Returns. Our policy in the United States is to accept returns of DIFICID for six months prior to, and twelve months after, the product expiration date. Our policy in Canada is to accept returns of DIFICID for three months prior to, and twelve months after, the product expiration date. We permit returns if the product is damaged or defective when received by our customers. We will provide a credit for such returns to customers with whom we have a direct relationship. Once product is dispensed it cannot be returned, but we allow partial returns in states where such returns are mandated. We do not exchange product from inventory for the returned product.


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Allowances for product returns are recorded during the period in which the related product sales are recognized, resulting in a reduction to product sales. We estimate product returns based upon the sales pattern of DIFICID, management's experience with similar products, historical trends in the pharmaceutical industry and trends for similar products sold by others.

During the three months ended March 31, 2013 and 2012, the provisions for product sales allowances reduced gross product sales as follows:

                                                     Three Months Ended March 31,
                                                        2013               2012
Total gross product sales                         $     21,729,014    $    16,447,200

Returns reserve and allowance                             (323,401 )         (246,708 )
Government and commercial rebates and
chargebacks                                             (2,988,698 )         (559,291 )
Prompt-pay discounts and fees                           (1,603,379 )       (1,260,660 )
Product sales allowance                           $     (4,915,478 )  $    (2,066,659 )
Total product sales, net                          $     16,813,536    $    14,380,541
Total product sales allowances as a percent of
gross product sales                                           22.6 %             12.6 %

An analysis of the amount of, and change in, product sales reserves for the three months ended March 31, 2013 is as follows:

                                         Three Months Ended March 31, 2013
                                              Government
                                                 and
                                Returns       Commercial    Prompt-pay
                              Reserve and    Rebates and     Discounts
                               Allowances    Chargebacks     and Fees        Total
Balance at January 1, 2013    $  1,475,124   $  1,642,849   $ 1,888,523   $ 5,006,496
Provisions related to sales        323,401      2,988,698     1,603,379     4,915,478
Returns and payments              (139,724 )   (2,630,641 )  (1,669,944 )  (4,440,309 )
Balance at March 31, 2013     $  1,658,801   $  2,000,906   $ 1,821,958   $ 5,481,665

Contract Revenue

Under certain of our licensing and collaboration agreements, we are entitled to receive payments upon the achievement of contingent milestone events. In order to determine the revenue recognition for contingent milestone-based payments, we evaluate the contingent milestones using the criteria as provided by the Financial Accounting Standards Boards, or FASB, guidance on the milestone method of revenue recognition at the inception of a collaboration agreement.

Accounting Standard Codification (ASC) Topic 605-28, Revenue Recognition - Milestone Method (ASC 605-28), established the milestone method as an acceptable method of revenue recognition for certain contingent, event-based payments under research and development arrangements. Under the milestone method, a payment that is contingent upon the achievement of a substantive milestone is recognized in its entirety in the period in which the milestone is achieved. A milestone is an event: (i) that can be achieved based in whole or in part on either our performance or on the occurrence of a specific outcome resulting from our performance; (ii) for which there is substantive uncertainty at the date the arrangement is entered into that the event will be achieved; and (iii) that would result in additional payments being due to us. The determination that a milestone is substantive is judgmental and is made at the inception of the arrangement. Milestones are considered substantive when the consideration earned from the achievement of the milestone is: (i) commensurate with either our performance to achieve the milestone or the enhancement of value of the item delivered as a result of a specific outcome resulting from our performance to achieve the milestone; (ii) relates solely to past performance; and (iii) is reasonable relative to all deliverables and payment terms in the arrangement.

Other contingent, event-based payments received for which payment is either contingent solely upon the passage of time or the results of a collaborative partner's performance are not considered milestones under ASC 605-28. In accordance with ASC Topic 605-25, Revenue Recognition - Multiple-Element Arrangements (ASC 605-25), such payments will be recognized as revenue when all of the following criteria are met: persuasive evidence of an arrangement exists; delivery has occurred or services have been rendered; the price is fixed or determinable; and collectability is reasonably assured.


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Revenues recognized for royalty payments are recognized as earned in accordance with the terms of various research and collaboration agreements.

For collaboration agreements with multiple deliverables, we recognize collaboration revenues and expenses by analyzing each element of the agreement to determine if it is to be accounted for as a separate element or single unit of accounting. If an element is to be treated separately for revenue recognition purposes, the revenue recognition principles most appropriate for that element are applied to determine when revenue is to be recognized. If an element is not to be treated separately for revenue recognition purposes, the revenue recognition principles most appropriate for the bundled group of elements are applied to determine when revenue is to be recognized.

Cash received in advance of services being performed is recorded as deferred revenue and recognized as revenue as services are performed over the applicable term of the agreement. In connection with certain research collaboration agreements, revenues are recognized from non-refundable, up-front fees that we do not believe are specifically tied to a separate earnings process, ratably over the term of the agreement. Research fees are recognized as revenue as the related research activities are performed.

With respect to revenues derived from reimbursement of direct out-of-pocket expenses for research costs associated with grants, where we act as a principal, with discretion to choose suppliers, bears credit risk and performs part of the services required in the transaction, we record revenue for the gross amount of the reimbursement. The costs associated with these reimbursements are reflected as a component of research and development expense in the consolidated statements of operations.

None of the payments we have received from collaborators to date, whether recognized as revenue or deferred, is refundable even if the related program is not successful.

Inventory

Inventory is stated at the lower of cost or market. Cost is determined using the first-in, first-out (FIFO) method. We reserve for potentially excess, dated or obsolete inventory based on an analysis of inventory on hand compared to forecasts of future sales. At March 31, 2013, inventory consisted of $16.9 million in raw materials and $5.2 million in finished goods.

Research and Development

We expense costs related to research and development as incurred. Our research and development expenses consist primarily of license fees, salaries and related employee benefits, costs associated with clinical trials managed by contract research organizations and costs associated with non-clinical activities and regulatory approvals. We use external service providers and vendors to conduct clinical trials, to manufacture supplies of product candidates to be used in clinical trials and to provide various other research and development-related products and services.

When non-refundable payments for goods or services to be received in the future for use in research and development activities are made, we defer and capitalize these types of payments. The capitalized amounts are expensed when the related goods are delivered or the services are performed.

Stock-based Compensation

The FASB authoritative guidance requires that share-based payment transactions with employees be recognized in the financial statements based on their fair value and recognized as compensation expense over the vesting period. Total consolidated stock-based compensation expense of $4.3 million and $3.1 million was recognized in the three months ended March 31, 2013 and 2012, respectively. The stock-based compensation expense recognized included expense from performance-based stock options and restricted stock units.

Stock-based compensation expense is estimated, as of the grant date, based on the fair value of the award and is recognized as expense over the requisite service period, which generally represents the vesting period. We estimate the fair value of our stock options using the Black-Scholes option-pricing model and the fair value of our stock awards based on the quoted market price of our common stock.

For performance-based stock options and performance-based restricted stock units, we begin to recognize the expense when it is deemed probable that the performance-based goal will be met. We evaluate the probability of achieving performance-based goals on a quarterly basis.

Equity instruments issued to non-employees are periodically revalued as the equity instruments vest and are recognized as expense over the related service period.


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Income Taxes

We estimate income taxes based on the jurisdictions where we conduct business. Significant judgment is required in determining our worldwide income tax provision. We estimate our current tax liability and assess temporary differences that result from differing treatments of certain items for tax and accounting purposes. These differences result in net deferred tax assets and liabilities. We then assess the likelihood that deferred tax assets will be realized.

We estimate that our federal and state taxable income, if any, for the current year will be fully offset by net operating losses and research and development credit carryovers. As such, no current tax provision has been recorded. We also have recorded a full valuation allowance for the remaining net deferred tax benefits.

For the quarter ended March 31, 2013, we recorded a deferred tax benefit of $15,000, which reflected our application of the intra-period tax allocation rules under which we are required to record a tax benefit in continuing operations to offset the tax provision we recorded directly to other comprehensive income primarily related to the unrealized gain on our investment in Cempra stock.

Segment Reporting

Our management has determined that we operate in one business segment which is the development and commercialization of pharmaceutical products.

Results of Operations

Comparison of Three Months Ended March 31, 2013 and 2012

Product Sales, Net

Net product sales for the three months ended March 31, 2013 and 2012 were $16.8 million and $14.4 million, respectively, an increase of $2.4 million. The increase was due to an increase in the number of customers ordering DIFICID and increased sales to existing DIFICID customers, as well as the impact of a price increase.

Contract Revenue

Contract revenue for the three months ended March 31, 2013 was $2.6 million. The $2.6 million was related to fidaxomicin shipments to our collaborative partners, as well as royalties from APEL. In addition, during the period, we recognized approximately $0.3 million of revenue related to the up-front payment received from AstraZeneca in the prior year. There was no contract revenue in the quarter ended March 31, 2012.

Costs and Expenses

Cost of Product Sales. Cost of product sales for the three months ended March 31, 2013 and 2012 was $1.6 million and $1.2 million, respectively, an increase of $0.4 million. The increase generally was due to higher product sales in the quarter ended March 31, 2013, as compared to the quarter ended March 31, 2012.

Cost of Contract Revenue. Cost of contract revenue for the three months ended March 31, 2013 and 2012 was $1.7 million and $1.1 million, respectively, an increase of $0.6 million. The $1.7 million, for the three months ended March 31, 2013, included royalties on APEL sales, as well as inventory costs for fidaxomicin shipments to our collaboration partners. The $1.1 million, for the three months ended March 31, 2012, included the cost of bulk tablets, for which no revenue was recognized, as the bulk tablets did not meet quality standards.

Research and Development Expense. Research and development expense for the three months ended March 31, 2013 and 2012 was $9.9 million and $11.1 million, respectively, a decrease of $1.2 million. The decrease was primarily due to lower chemistry, manufacturing and control expenses as well as lower consulting expenses. The decrease was offset by higher health economics and outcomes research expenses. We also incurred higher expenses related to our prophylaxis and pediatric clinical trials.

Selling, General and Administrative Expense. Selling, general and administrative expense for three months ended March 31, 2013 and 2012 was $34.0 million and $25.5 million, respectively, an increase of $8.5 million. The increase primarily was due to higher legal, professional and outside service expenses. We also recognized higher stock compensation expense, primarily related to the departure of certain executives.


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Co-promotion Expenses with Cubist. Co-promotion expenses with Cubist for the three months ended March 31, 2013 and 2012 were $3.8 million and $10.1 million, respectively, a decrease of $6.3 million. The co-promotion expenses for the quarter ended March 31, 2012 included an accrual of the first year's sales target bonus and an accrual of the first year's gross profit on sales above the target. We did not accrue similar expenses in the quarter ended March 31, 2013.

Gain on De-consolidation of OBI. The $23.8 million gain in the quarter ended March 31, 2012 represented the gain on the de-consolidation of OBI. We did not have a similar gain in the quarter ended March 31, 2013.

Equity in Net Loss of OBI. The $0.5 million loss in the quarter ended March 31, 2012 represented the loss recognized in our investment in OBI, using the equity method from February 2012 through March 2012. We did not have a similar loss in the three months ended March 31, 2013.

Interest Income and Other, Net. Net interest income for the three months ended March 31, 2013 and 2012 was $159,000 and $76,000, respectively.

Net Loss Attributable to Non-controlling Interest. Net loss attributable to non-controlling interest for the three months ended March 31, 2012 was $280,000. The $280,000 represented approximately one month of non-controlling interest, prior to deconsolidation of OBI in February 2012. We did not have a similar loss in the three months ended March 31, 2013.

Liquidity and Capital Resources

Sources of Liquidity

Prior to the launch of DIFICID in July 2011, our operations were financed primarily through the sale of equity securities. Through March 31, 2013, we received gross proceeds of approximately $333.8 million from the sale of equity securities in various private and public financing transactions. Since July 2011, we entered into collaboration and license agreements and received a total of approximately $157.8 million from up-front and milestone payments pursuant to the agreements. In the fourth quarter of 2012, we sold our remaining equity interest in OBI for $60.0 million in gross proceeds. Through March 31, 2013, we had generated $100.7 million of net product sales.

Until required for operations, we invest a substantial portion of our available funds in marketable securities, consisting primarily of government agency securities. We have established guidelines relating to diversification and maturities of our investments to preserve principal and maintain liquidity.

The accompanying condensed consolidated financial statements have been prepared, assuming that we will continue as a going concern. A going concern basis of accounting contemplates the recovery of our assets and the satisfaction of our liabilities in the normal course of business. Based on our current forecast, we believe that our existing cash and cash equivalents of $93.3 million will be sufficient to fund our cash requirements through March 31, 2014. If we are not . . .

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