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OPTR > SEC Filings for OPTR > Form 10-Q on 7-Aug-2013All Recent SEC Filings

Show all filings for OPTIMER PHARMACEUTICALS INC | Request a Trial to NEW EDGAR Online Pro

Form 10-Q for OPTIMER PHARMACEUTICALS INC


7-Aug-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 the commercialization of 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 Clostridium difficile-associated diarrhea, or 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.

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 Clostridium difficile infection, or CDI, in Europe. In June 2012, our collaboration partner, Astellas Pharma Europe Ltd., or APEL, achieved the first sales of DIFICLIR 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. Specialised Therapeutics Australia Pty. Ltd., or STA, our Australia and New Zealand licensee, commenced commercialization in May 2013. We have entered into agreements with Astellas Pharma Inc., or Astellas Japan, for the development and commercialization of fidaxomicin in Japan and with AstraZeneca UK Limited, or 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 June 30, 2013, we had an accumulated deficit of $310.2 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 on-going operating losses 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.


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Merger Agreement

On July 30, 2013, we entered into an Agreement and Plan of Merger, or the Merger Agreement, with Cubist Pharmaceuticals, Inc., or Cubist, a Delaware corporation, and PDRS Corporation, a Delaware corporation and a wholly owned subsidiary of Cubist, or Merger Sub. The Merger Agreement provides that, upon the terms and subject to the conditions set forth therein, Merger Sub will merge with and into us. As a result, we will become a wholly owned subsidiary of Cubist, also referred to as the Merger.

At the effective time of the Merger, each share of our common stock issued and outstanding immediately prior to the effective time (other than: (i) shares of common stock and shares of our preferred stock, par value $0.001 per share (if any), owned by Cubist, Merger Sub or any other directly or indirectly wholly owned subsidiary of Cubist and shares of common stock owned by us; and
(ii) shares owned by stockholders who have perfected and not withdrawn a demand for appraisal rights under Delaware law) will be converted into the right to receive: (i) $10.75 in cash, without interest, at the effective time; and
(ii) one contingent value right, or CVR. Each CVR will entitle its holder to a payment of $3.00 if net sales of DIFICID in the United States and Canada during the period from and including July 1, 2013 through and including December 31, 2015 are greater than $250.0 million, a payment of $4.00 if such net sales during the same period are greater than $275.0 million and a payment of $5.00 if such net sales during the same period are greater than $300.0 million. Cubist will file a registration statement on Form S-4 in order to register the CVRs under the Securities Act of 1933, as amended, and has agreed to use its reasonable best efforts to cause the CVRs to be listed for trading on the Nasdaq Stock Market, or Nasdaq, as of the effective time of the Merger and thereafter to cause such listing to be maintained for so long as any CVRs remain outstanding.

In addition, at the effective time of the Merger: (i) each outstanding option under the 1998 Plan, 2006 Plan or 2012 Plan will be converted into the right to receive an amount in cash equal to the excess, if any, of the last reported sale price of a share of the Company's common stock on Nasdaq prior to the effective time of the Merger, over the per-share exercise price of the option; (ii) each outstanding RSU (including performance-based RSUs, which will be deemed to be earned as if performance goals were met at maximum) will be converted into the right to receive $10.75 in cash plus one CVR; and (iii) the 1998 Plan, 2006 Plan, 2012 Plan and ESPP will be terminated, and no new awards will be made thereunder.

Consummation of the Merger is subject to certain conditions, including: (i) the approval of the holders of a majority of the outstanding shares of our common stock entitled to vote on the Merger; (ii) the expiration or termination of the waiting period applicable to the consummation of the Merger under the HSR Act;
(iii) the absence of any law, order or injunction prohibiting the consummation of the Merger; and (iv) the accuracy of the other party's representations and warranties (subject to materiality qualifiers) and the other party's compliance with its obligations and covenants contained in the Merger Agreement (subject to materiality qualifiers).

Interim Financing

Cubist has agreed to provide us with certain financing during the pendency of the Merger. On a quarterly basis during the pendency of the Merger, commencing on September 15, 2013, we will issue to Cubist $25.0 million of non-voting senior preferred stock, or Preferred Stock, for cash consideration, up to a potential total of $75.0 million. The Preferred Stock carries no dividend. In the event of a termination of the Merger Agreement due to a Cubist breach, the Preferred Stock becomes redeemable in exchange for nominal consideration. In all other instances, the Preferred Stock becomes convertible into common stock based on the value of the common stock at the time of conversion, subject to applicable legal restrictions, including limitations on the issuance of common stock in the absence of stockholder approval under the rules and regulations of Nasdaq and limitations under the HSR Act. Furthermore, in no circumstances will Cubist be entitled to hold more than 5% of the outstanding shares of our common stock at any time.

The Preferred Stock will be extinguished in exchange for no consideration if the Merger is consummated. The Preferred Stock will be redeemed in exchange for its aggregate liquidation preference in the event of a transaction resulting in a change of control of the Company as a result of which a termination fee is paid to Cubist pursuant to the terms of the Merger Agreement or on an as-converted-into-common-stock basis prior to the announcement of any other transaction resulting in a change of control of the Company. Cubist has agreed to various restrictions on its ability to sell the Preferred Stock and any common stock received upon conversion of the Preferred Stock, including that it will not sell any such stock until the first anniversary of any termination of the Merger Agreement or to any person or group filing a beneficial ownership report on Schedule 13D in respect of the Company.

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.


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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 or 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.

During the six months ended June 30, 2013, the $35.8 million in net product sales reflected a total of 15,916 DIFICID bottles shipped to wholesalers and specialty pharmacies. Wholesalers and specialty pharmacies shipped approximately 15,800 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 six months ended June 30, 2013. Our sales representatives primarily target approximately 1,200 hospitals, although approximately 3,500 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 15.1% for the three months ended June 30, 2012 to 23.6% for the three months ended June 30, 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.


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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.

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 six months ended June 30, 2013 and 2012, the provisions for product sales allowances reduced gross product sales as follows:

                                                        Six Months Ended June 30,
                                                          2013             2012
Total gross product sales                            $   46,856,205    $  34,885,303

Returns reserve and allowance                              (699,688 )       (990,095 )
Government and commercial rebates and chargebacks        (6,770,511 )     (1,467,126 )
Prompt-pay discounts and fees                            (3,605,367 )     (2,815,454 )
Product sales allowance                              $  (11,075,566 )  $  (5,272,675 )
Total product sales, net                             $   35,780,639    $  29,612,628
Total product sales allowances as a percent of
gross product sales.                                           23.6 %           15.1 %

An analysis of the amount of, and change in, product sales reserves for the six months ended June 30, 2013 is as follows:

                                           Six Months Ended June 30, 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        699,688      6,770,511     3,605,367     11,075,566
Returns and payments            (1,054,351 )   (5,666,719 )  (3,771,065 )  (10,492,135 )
Balance at June 30, 2013      $  1,120,461   $  2,746,641   $ 1,722,825   $  5,589,927

During the three months ended June 30, 2013, six launch batches of DIFICID had reached expiration and we experienced product returns. A financial reserve for such returns was appropriately established at the time of sale, and the return amounts are within the scope of our expectations.

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.


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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.

Revenues recognized for royalty payments are recognized as earned in accordance with the terms of various research and collaboration agreements. We also derive contract revenue from supplying raw material, bulk tablets or finished product to our collaboration partners under the supply 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.

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 June 30, 2013, inventory consisted of $22.5 million in raw materials and $4.4 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, up-front payments for goods or services are received for future research and development activities, 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 $2.8 million and $4.0 million was recognized in the three months ended June 30, 2013 and 2012, respectively. Total consolidated stock-based compensation expense of $7.1 million and $7.0 million was recognized in the six months ended June 30, 2013 and 2012, respectively. The stock-based compensation expense recognized included expense from performance-based stock options and performance-based restricted stock units.


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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.

The effect of the Merger on stock-based compensation is described above under "Merger Agreement".

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.

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 June 30, 2013 and 2012

Product Sales, Net

Net product sales for the three months ended June 30, 2013 and 2012 were $19.0 million and $15.2 million, respectively, an increase of $3.8 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 June 30, 2013 and 2012 was $1.1 million and $34.5 million, respectively, a decrease of $33.4 million. The contract revenue in 2013 was related to shipments to our collaborative partners and royalties from APEL. In 2012, pursuant to our collaboration and license agreement, we received a $20.0 million up-front payment from Astellas Japan. We recognized $19.9 million as contract revenue, as we determined that revenue was . . .

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