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PSDV > SEC Filings for PSDV > Form 10-K on 27-Sep-2013All Recent SEC Filings

Show all filings for PSIVIDA CORP.

Form 10-K for PSIVIDA CORP.


27-Sep-2013

Annual Report


ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis of financial condition and results of operations should be read in conjunction with our audited consolidated financial statements and related notes beginning on page F-1 of this Annual Report on Form 10-K. This discussion contains forward-looking statements, based on current expectations and related to future events and our future financial performance, that involve risks and uncertainties. Our actual results may differ significantly from those anticipated or implied in these forward-looking statements as a result of many important factors, including, but not limited to, those set forth under Item 1A, "Risk Factors", and elsewhere in this report.

Overview

We develop tiny, sustained-release products designed to deliver drugs and biologics at a controlled and steady rate for weeks, months or years. Utilizing our core technology platforms, Durasert™ and BioSilicon™, we are focused on treatment of chronic diseases of the back of the eye and are also exploring applications outside ophthalmology. We have developed three of the four sustained-release products for treatment of retinal diseases currently approved in the U.S. or European Union (EU), and our lead product candidate began a Phase III clinical trial in June 2013. Our strategy includes developing products independently while continuing to leverage our technology platforms through collaboration and license agreements.

ILUVIEN®, our most recently approved product, is an injectable, sustained-release micro-insert that provides treatment of vision impairment associated with chronic diabetic macular edema (DME) considered insufficiently responsive to available therapies over a period of up to three years. ILUVIEN is licensed to and sold by Alimera Sciences, Inc. (Alimera), and we are entitled to a share of the net profits, as defined, from Alimera's sales of ILUVIEN for DME. Alimera commenced the commercial launch of ILUVIEN for DME in the U.K. and Germany in the second quarter of 2013 and expects to launch in France in the first quarter of 2014. The International Diabetes Federation has estimated that approximately 19.0 million people have diabetes in the seven EU countries where ILUVIEN has received or been recommended for marketing authorization, of which Alimera has estimated that approximately 1.1 million people suffer from vision loss associated with DME. Alimera is also seeking marketing approval for ILUVIEN for DME in the U.S. In the second quarter of 2013, Alimera received a new Prescription Drug User Fee Act (PDUFA) goal date of October 17, 2013 after resubmitting its New Drug Application (NDA) for ILUVIEN for DME. The resubmission responded to a second Complete Response Letter (CRL) received from the U.S. Food and Drug Administration (FDA) in November 2011.

Medidur™, our lead development product, commenced the first of our two planned Phase III clinical trials for the treatment of chronic non-infectious uveitis affecting the posterior segment of the eye (posterior uveitis) in June 2013. Medidur uses the same Durasert micro-insert used in ILUVIEN and delivers a lower dose of the same drug as our FDA-approved Retisert® for posterior uveitis, which is licensed to Bausch & Lomb. We are developing Medidur independently.

We are also developing a bioerodible, injectable micro-insert delivering latanoprost (the Latanoprost Product) to treat glaucoma and ocular hypertension. Under an amended collaboration agreement, Pfizer has an option, under certain circumstances, to license the development and commercialization of the Latanoprost Product worldwide.

We are engaged in pre-clinical research with respect to both our BioSilicon and Durasert technology platforms. The primary focus of our BioSilicon technology research is the sustained delivery of peptides, proteins, antibodies and other large biologic molecules using our Tethadur™ technology in both ophthalmic and non-ophthalmic applications. Our research program also includes the use of Durasert technology in orthopedic applications and for systemic delivery of therapeutic agents.


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Our FDA-approved Retisert provides sustained release treatment of posterior uveitis for approximately two and a half years and is licensed to and sold by Bausch & Lomb.

Summary of Critical Accounting Policies and Estimates

Our discussion and analysis of our financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with United States generally accepted accounting principles, or U.S. GAAP. The preparation of these financial statements requires that we make certain estimates, judgments and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. We base our estimates on historical experience, anticipated results and trends and various other factors believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily available from other sources. By their nature, these estimates, judgments and assumptions are subject to an inherent degree of uncertainty and management evaluates them on an ongoing basis for changes in facts and circumstances. Changes in estimates are recorded in the period in which they become known. Actual results may differ from our estimates under different assumptions or conditions.

While our significant accounting policies are more fully described in Note 2 to the accompanying consolidated financial statements, we believe that the following accounting policies are critical to understanding the judgments and estimates used in the preparation of our financial statements. It is important that the discussion of our operating results that follows be read in conjunction with the critical accounting policies discussed below.

Revenue Recognition

Our business strategy includes entering into collaborative license and development agreements for the development and commercialization of product candidates utilizing our technology systems. The terms of these arrangements typically include multiple deliverables by us (for example, granting of license rights, providing research and development services and manufacturing of clinical materials, participating on joint research committees) in exchange for consideration to us of some combination of non-refundable license fees, funding of research and development activities, payments based upon achievement of clinical development, regulatory and sales milestones and royalties in the form of a designated percentage of product sales or profits.

Revenue arrangements with multiple deliverables are divided into separate units of accounting if certain criteria are met, including whether the delivered element has stand-alone value to the customer and based on the selling price of the deliverables. When deliverables are separable, consideration received is allocated to the separate units of accounting based on the relative selling price of the elements and the appropriate revenue recognition principles are applied to each unit.

The assessment of multiple deliverable arrangements requires judgment in order to determine the appropriate units of accounting, the estimated selling price of each unit of accounting, and the points in time that, or periods over which, revenue should be recognized.

For the year ended June 30, 2013, we reported $780,000 of collaborative research and development revenue. Revenue is recognized when there is persuasive evidence that an arrangement exists, delivery has occurred, the price is fixed and determinable and collection is reasonably assured.

We prospectively adopted the provisions of ASU No. 2009-13, Revenue Recognition (Topic 605): Multiple-Deliverable Revenue Arrangements ("ASU 2009-13") for new and materially modified arrangements originating on or after July 1, 2010. ASU 2009-13 requires a vendor to allocate revenue to each unit of accounting in arrangements involving multiple deliverables. It changes the level of evidence of standalone selling price required to separate deliverables by allowing a vendor to make its best estimate of the standalone selling price of deliverables when vendor-specific objective evidence or third-party evidence of selling price is not available.


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As discussed further in Note 3 to our consolidated financial statements, adoption of this accounting pronouncement in fiscal 2011 resulted in the recognition of revenue in connection with our 2007 Collaborative Research and License Agreement with Pfizer that became subject to the new accounting pronouncement after a material modification to the agreement occurred. As a result of the adoption of ASU 2009-13, deferred revenues associated with this Pfizer agreement will be recognized as revenues earlier than would otherwise have occurred.

We concluded that our deliverables under the Restated Pfizer Agreement are conducting the research and development program for the Latanoprost Product through completion of Phase II (the "R&D program") and participation on a Joint Steering Committee (JSC). We treat these as a single deliverable, having concluded that the JSC does not have standalone value separate from the R&D program. We concluded that the Pfizer exercise option for the worldwide exclusive license is not a deliverable of the arrangement, due to it being a substantive option and not being priced at a significant and incremental discount.

The total arrangement consideration of the Restated Pfizer Agreement totaled $10.05 million, which consisted of the $7.75 million of deferred revenue on our balance sheet at the effective date plus the $2.3 million upfront payment. The difference between the total arrangement consideration and the estimated selling price of the combined deliverables, or $3.3 million, was recognized as collaborative research and development revenue in the quarter ended June 30, 2011, the period of the modification. The remaining balance is being recognized as revenue using the proportional performance method over the estimated period of our performance obligations under the R&D program.

To determine the estimated selling price of the combined deliverable, we applied an estimated margin to our cost projections for the combined deliverable. A change in the estimated margin or our cost projections would have directly impacted the amount of revenue recognized during fiscal 2011. An increase of 10% in our estimated selling price of the combined deliverables would have reduced revenue recognized in fiscal 2011 by $670,000 and would have increased the amount of deferred revenue recognized in each of fiscal 2012 and fiscal 2013 by 10%, or $75,000 and $37,000, respectively. Application of the proportional performance method in any fiscal period would result in an increase or decrease in revenue recognized to the extent that the aggregate projected costs to conduct the R&D program decreases or increases, respectively, compared to the previous period.

Valuation of Intangible Assets

At December 31, 2011, we recorded a $11.7 million impairment of our BioSilicon intangible and a $3.1 million impairment of our Durasert intangible. The combination of the 2011 CRL and the subsequent significant decline in the Company's market capitalization were determined to be impairment indicators of the Company's finite-lived intangible assets. To assess the recoverability of the these assets (which had a carrying value of $19.4 million at December 31, 2011), we used both market-based and income-based valuation methodologies, and allocated the resulting fair value of the combined intangible assets to the individual assets based on values determined under the income-based approach.

We amortize our intangible assets using the straight-line method over their estimated economic lives, which currently extend through calendar year 2017 and is expected to result in a charge to operations of approximately $760,000 per year. We believe that the carrying value of our intangible assets will be recouped primarily through expected net cash flows from our existing or future collaboration agreements or through our own product development and commercialization.

We will continue to review our intangible assets for impairment whenever events or changes in business circumstances indicate that the asset carrying values may not be fully recoverable or that the useful lives of assets are no longer appropriate. Factors that could trigger an impairment review include the following:

• Change relative to historical or projected future operating results,

• Modification or termination of our existing collaboration agreements,


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• Factors affecting the development of products utilizing the intangible assets,

• Changes in the expected use of the intangible assets or the strategy for the overall business, and

• Industry or economic trends and developments.

If an impairment trigger is identified, we determine recoverability of an intangible asset by comparing projected undiscounted net cash flows to be generated by the asset to its carrying value. If the carrying value is not recoverable, an impairment charge is recorded equal to the excess of the asset's carrying value over its fair value, and the carrying value is adjusted. Estimated future undiscounted cash flows, which relate to existing contractual agreements as well as projected cash flows from future research and development collaboration agreements utilizing the underlying technology systems, require management's judgment regarding future events and probabilities. Actual results could vary from these estimates. Future adverse changes or other unforeseeable factors could result in an impairment charge with respect to some or all of the carrying value of our intangible assets. Such an impairment charge could materially impact future results of operations and financial position in the reporting period identified.

A significant change in the estimation of the projected undiscounted net cash flows for the products and product candidates utilizing the Durasert or BioSilicon technology systems, among other things, could result in the further impairment of the carrying value of the respective assets.

Results of Operations

Years Ended June 30, 2013 and 2012



                                         Year ended June 30,                Change
                                         2013           2012          Amounts         %
                                                (In thousands except percentages)
 Revenues                              $   2,143      $   3,526      $  (1,383 )       (39 )%

 Operating expenses:
 Research and development                  7,005          7,039            (34 )        (0 )%
 General and administrative                7,169          6,868            301           4 %
 Impairment of intangible assets              -          14,830        (14,830 )      (100 )%

 Total operating expenses                 14,174         28,737        (14,563 )       (51 )%

 Operating loss                          (12,031 )      (25,211 )       13,180          52 %

 Other income (expense):
 Change in fair value of derivatives          -             170           (170 )      (100 )%
 Interest income                              16             38            (22 )       (58 )%
 Other expense, net                           (2 )           (1 )           (1 )      (100 )%

 Total other income                           14            207           (193 )       (93 )%

 Loss before income taxes                (12,017 )      (25,004 )       12,987          52 %
 Income tax benefit                          117            169            (52 )       (31 )%

 Net loss                              $ (11,900 )    $ (24,835 )    $  12,935          52 %

Revenues

We recognized total revenue of $2.1 million for fiscal 2013 as compared to $3.5 million for fiscal 2012.

Collaborative research and development revenue declined to $780,000 in fiscal 2013, a 63% decrease from $2.1 million in fiscal 2012, primarily due to non-recurring revenue of $1.1 million in fiscal 2012, which was recognized upon the termination of a field-of-use license. Approximately half of our collaborative research and


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development revenue was recognition of deferred revenue from collaboration agreements in fiscal 2013 compared to substantially all in the prior year. $738,000 of the remaining deferred revenue balance of $6.0 million at June 30, 2013 is expected to be recognized as revenue during fiscal 2014.

Our Retisert royalty income in fiscal 2013 increased to $1.4 million, a 3.6% increase over the prior year. Substantially all of the royalty income in both years was derived from sales of Retisert by Bausch & Lomb. During fiscal 2013, Bausch & Lomb discontinued sales of Vitrasert. We do not expect Retisert royalty income to increase significantly in the future, and it may decline.

Research and Development

Research and development totaled $7.0 million in each of fiscal 2013 and fiscal 2012. Periodic amortization of intangible assets decreased by $1.3 million in fiscal 2013 compared to fiscal 2012, which resulted from a $14.8 million intangible asset impairment write-down at December 31, 2011. This decrease was substantially offset in fiscal 2013 by approximately $700,000 of initial costs incurred for the first of two planned pivotal Phase III clinical trials of Medidur for posterior uveitis, which commenced in the quarter ended June 30, 2013, and an approximate $600,000 increase in personnel costs, which consisted primarily of additional headcount and cash incentive compensation accruals. We expect to significantly increase our research and development expense in fiscal 2014 in connection with patient enrollment for the Phase III clinical trial of Medidur.

General and Administrative

General and administrative costs increased by $301,000, or 4%, to $7.2 million for fiscal 2013 from $6.9 million for fiscal 2012, primarily attributable to $630,000 of cash incentive compensation accruals, which compared to zero in the prior year. This was partially offset by an approximate $430,000 decrease in professional fees.

Other Income

Other income decreased by $193,000, or 93%, to $14,000 for fiscal 2013 from $207,000 for fiscal 2012. Other income for fiscal 2012 consisted primarily of the change in fair value of derivatives of $170,000. This income, which reduced the derivative liability balance to zero, was determined using the Black-Scholes valuation model, and resulted from the July 2012 expiration of the remaining warrants denominated in Australian dollars (A$), which were recorded as derivative liabilities at issuance and revalued at subsequent period reporting dates. Interest income, net, decreased by $23,000 from fiscal 2012 to fiscal 2013 as a result of lower levels of marketable securities investments and further decreases in yields for investment grade corporate bonds and commercial paper of short maturities.

Income Tax Benefit

Income tax benefit, which consisted of foreign research and development tax credits, decreased by $52,000, or 31%, to $117,000 in fiscal 2013 from $169,000 in fiscal 2012, primarily attributable to the impact of third party funding of certain qualified research and development costs.


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Years Ended June 30, 2012 and 2011



                                         Year ended June 30,                Change
                                         2012           2011          Amounts         %
                                                (In thousands except percentages)
 Revenues                              $   3,526      $   4,965      $  (1,439 )       (29 )%

 Operating expenses:
 Research and development                  7,039          6,864            175           3 %
 General and administrative                6,868          8,104         (1,236 )       (15 )%
 Impairment of intangible assets          14,830             -          14,830          na

 Total operating expenses                 28,737         14,968         13,769          92 %

 Operating loss                          (25,211 )      (10,003 )      (15,208 )      (152 )%

 Other income (expense):
 Change in fair value of derivatives         170          1,140           (970 )       (85 )%
 Interest income                              38             30              8          27 %
 Other expense, net                           (1 )          (13 )           12          92 %

 Total other income                          207          1,157           (950 )       (82 )%

 Loss before income taxes                (25,004 )       (8,846 )      (16,158 )      (183 )%
 Income tax benefit                          169            218            (49 )       (22 )%

 Net loss                              $ (24,835 )    $  (8,628 )    $ (16,207 )      (188 )%

Revenues

We recognized total revenue of $3.5 million for fiscal 2012 as compared to $5.0 million for fiscal 2011. The decrease in revenue was primarily due to a $1.5 million decrease in collaborative research and development revenue, partially offset by a $93,000 increase in royalty income.

We restated the Pfizer Agreement in fiscal 2011, for which we received $2.3 million in upfront consideration, resulting in an aggregate $10.0 million balance of deferred revenue associated with that agreement. In fiscal 2011, we recognized $3.3 million of deferred revenue from that agreement, and the remainder is being recognized as revenue using the proportional performance method over the estimated period of our performance obligations under the Latanoprost Product research program.

Collaborative research and development revenue for fiscal 2012 of $2.1 million consisted primarily of deferred revenue recognition of $754,000 related to the Restated Pfizer Agreement and $1.1 million resulting from the termination of a field-of-use license. This compares to $3.6 million of collaborative research and development revenue for fiscal 2011, which was predominantly associated with the Restated Pfizer Agreement.

Substantially all of our royalty income in fiscal 2012 and fiscal 2011 was from sales of Retisert. Our total royalty income increased by $92,000, or 6.8%, in fiscal 2012 compared to fiscal 2011, and approximated $1.4 million in each year. Our remaining royalty income was from Vitrasert sales.

Research and Development

Research and development increased by $175,000, or 3%, to $7.0 million for fiscal 2012 from $6.9 million for fiscal 2011. This increase was primarily attributable to increased personnel costs and the absence in fiscal 2012 of a federal therapeutic discovery grant received in fiscal 2011, substantially offset by decreased amortization of intangible assets in fiscal 2012 resulting from a $14.8 million intangible asset impairment write-down at December 31, 2011.


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General and Administrative

General and administrative costs decreased by $1.2 million, or 15%, to $6.9 million for fiscal 2012 from $8.1 million for fiscal 2011, primarily attributable to decreased stock-based compensation (including performance stock option forfeitures), professional fees and the absence in fiscal 2012 of cash incentive compensation, payment of which was subject to future conditions.

Change in Fair Value of Derivatives

Change in fair value of derivatives represented income of $170,000 for fiscal 2012 compared to income of $1.1 million for fiscal 2011. Warrants denominated in A$ were recorded as derivative liabilities, subject to revaluation at subsequent reporting dates. Fiscal 2011 income from the change in fair value of derivatives was predominantly due to the expiration of approximately 3.7 million, or 95%, of the A$-denominated warrants during that year. The derivative liabilities balance was reduced to zero during fiscal 2012 in connection with the July 2012 expiration of our last remaining A$-denominated warrants, with the result that we will not recognize income or loss relating to the change in the fair value of derivatives from these warrants in the future.

Income Tax Benefit

Income tax benefit decreased by $49,000, or 22%, to $169,000 in fiscal 2012 from $218,000 in fiscal 2011, primarily attributable to the absence in fiscal 2012 of a net reduction of deferred tax liabilities and federal alternative minimum tax expense in fiscal 2011, partially offset by higher foreign research and development tax credits.

Inflation and Seasonality

Our management believes inflation has not had a material impact on our operations or financial condition and that our operations are not currently subject to seasonal influences.

Recently Adopted and Recently Issued Accounting Pronouncements

New accounting pronouncements are issued periodically by the Financial Accounting Standards Board ("FASB") and are adopted by us as of the specified effective dates. Unless otherwise disclosed below, we believe that the impact of recently issued and adopted pronouncements will not have a material impact on our financial position, results of operations and cash flows or do not apply to our operations.

In June 2011, the FASB issued ASU 2011-5 Comprehensive Income (Topic 220) - Presentation of Comprehensive Income, which provides new guidance on the presentation of comprehensive income. This guidance requires a company to present components of net income (loss) and other comprehensive income in one continuous statement or in two separate, but consecutive, statements. There are no changes to the components that are recognized in net income (loss) or other comprehensive income under current GAAP. The Company adopted this standard for the quarter ended September 30, 2012 and has presented the required information in one continuous statement of operations and comprehensive loss on a comparative basis. Other than a change in presentation, the adoption of this guidance did not have a material impact on the Company's consolidated financial statements.

Liquidity and Capital Resources

During fiscal 2011 through fiscal 2013, we financed our operations primarily from registered direct offerings of our equity securities in January 2011 and August 2012, as well as operating cash flows from license fees and research and development funding from collaborations. At June 30, 2013, our principal source of liquidity consisted of cash, cash equivalents and marketable securities totaling $10.3 million. In July 2013, we


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enhanced our cash resources through the sale, in an underwritten public offering, of 3,494,550 shares of common stock for net proceeds of $9.9 million. Our cash equivalents are invested in institutional money market funds, and our marketable securities are invested in investment-grade corporate debt and commercial paper with maturities at June 30, 2013 ranging from one to seven months.

With the exception of net income in fiscal 2010 resulting from a non-recurring event, we have incurred operating losses since inception and, at June 30, 2013, . . .

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