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ARRY > SEC Filings for ARRY > Form 10-Q on 1-Nov-2013All Recent SEC Filings

Show all filings for ARRAY BIOPHARMA INC



Quarterly Report


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 partners, 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, 2013, 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 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, 2013, 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, 2013. The terms "we," "us," "our," "the Company," or "Array" refer to Array BioPharma Inc.


Array 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 oncology development company, with two wholly-owned hematology programs and two partnered MEK inhibitors in multiple pivotal trials. ARRY-520 is a targeted kinesin spindle protein, or KSP, inhibitor being developed to treat patients with multiple myeloma, or MM, and has demonstrated clinical activity as monotherapy, and in combination with both Kyprolis® (carfilzomib) and Velcade® (bortezomib). ARRY-614 is an oral p38/Tie2 inhibitor with a novel mechanism of action being developed to treat patients with myelodysplastic syndromes, or MDS. Both selumetinib, partnered with AstraZeneca, and MEK162, partnered with Novartis, are being studied in several pivotal trials in a variety of solid tumors.

Our most advanced wholly-owned clinical stage drugs include:
Proprietary Program Indication Clinical Status
1. ARRY-520 KSP inhibitor for MM Phase 2
2. ARRY-614 p38/Tie2 dual inhibitor for MDS Phase 1
3. ARRY-797 p38 inhibitor for pain Phase 2
4. ARRY-502 CRTh2 antagonist for asthma Phase 2

With our progress on ARRY-520 for MM and ARRY-614 for MDS, 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 2014 and beyond. Therefore, we are seeking partners to advance our pain and asthma programs.

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In addition, we have 10 ongoing partner-funded clinical programs, including two MEK inhibitors, both in Phase 3 clinical trials, MEK162 with Novartis and selumetinib with AstraZeneca:

      Drug Candidate          Indication                        Partner          Clinical Status
 1.   MEK162                  MEK inhibitor for cancer         Novartis              Phase 3
                                                          Pharmaceutical Ltd.
 2.   Selumetinib             MEK inhibitor for cancer     AstraZeneca, PLC          Phase 3
 3.   Danoprevir              Hepatitis C virus          InterMune (danoprevir       Phase 2
                              protease inhibitor          now owned by Roche
                                                              Holding AG)
 4.   ARRY-543/ASLAN001       HER2 / EGFR inhibitor      ASLAN Pharmaceuticals       Phase 2
                              for gastric cancer               Pte Ltd.
 5.   GDC-0068                AKT inhibitor for cancer      Genentech, Inc.          Phase 2
 6.   LY2606368               Chk-1 inhibitor for        Eli Lilly and Company       Phase 2
 7.   VTX-2337                Toll-like receptor for            VentiRx              Phase 2
                              cancer                     Pharmaceuticals, Inc.
 8.   GDC-0575 and GDC-0425   Chk-1 inhibitors for          Genentech, Inc.         Phase 1b
 9.   ARRY-380/ONT-380        HER2 inhibitor for           Oncothyreon Inc.         Phase 1b
                              breast cancer
10.   GDC-0994                Undisclosed cancer            Genentech, Inc.          Phase 1

We also have a portfolio of proprietary and partnered preclinical drug discovery programs, including inhibitors that target Trk receptors for the treatment of pain and other indications. In July 2013, we partnered with Loxo Oncology, Inc., a newly-formed, venture backed company, for continued development of certain preclinical compounds invented by Array in the field of oncology that Loxo has the exclusive right to develop in clinical trials and to commercialize. Also in July 2013, we partnered with Celgene to discover and develop drugs targeting a novel inflammation pathway. We may out-license other select promising candidates through research partnerships in the future.

We have received a total of $610.4 million in research funding and in up-front and milestone payments from our partnerships and collaborations from inception through September 30, 2013, including $154 million in initial payments from strategic agreements with Amgen, Celgene, Genentech, Novartis and Oncothyreon that we entered into over the last four years. Our existing partnered programs entitle Array to receive a total of approximately $2.7 billion in additional 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 licensing or commercialization from 11 partnered programs.

In August 2013, we completed a reduction in force of approximately 50 employees, mainly in our drug discovery organization. After the 20% reduction, we have approximately 200 employees whose capabilities are more tightly aligned with our strategy to fund our discovery organization with strategic collaborations and focusing development and commercialization resources on our hematology/oncology programs. See "Restructuring Charges" below.

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 2014 refers to the fiscal year ending June 30, 2014, and the first or current quarter refers to the quarter ended September 30, 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 partners may terminate their collaboration or license agreements with 60 to 180 days' prior notice. Specifics regarding termination provisions

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by agreement can be found in Note 4 - Collaboration and License Agreements to our unaudited financial statements included elsewhere in this Quarterly Report on Form 10-Q.

Additional information related to the concentration of revenue among our partners is reported in Note 1 - Overview and Basis of Presentation - Concentration of Business Risks to our unaudited 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 is based upon our accompanying financial statements, which have been prepared in conformity with U.S. GAAP and which require 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.

Accrued Outsourcing Costs

Substantial portions of our preclinical studies and clinical trials are performed by third-party laboratories, medical centers, contract research organizations and other vendors, or collectively CROs. These CROs generally bill monthly or quarterly for services performed, or bill based upon milestone achievement. For preclinical studies, we accrue expenses based upon estimated percentage of work completed and the contract milestones remaining. For clinical studies, expenses are accrued based upon the number of patients enrolled and the duration of the study. We monitor patient enrollment, the progress of clinical studies and related activities to the extent possible through internal reviews of data reported to us by the CROs, correspondence with the CROs and clinical site visits. Our estimates depend on the timeliness and accuracy of the data provided by the CROs regarding the status of each program and total program spending. We periodically evaluate the estimates to determine if adjustments are necessary or appropriate based on information we receive.

Convertible Senior Notes

Our 3.00% convertible senior notes due 2020 are accounted for in accordance with Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC") 470, Accounting for Convertible Debt Instruments That May be Settled in Cash upon Conversion (Including Partial Cash Settlement). ASC 470-20 requires the issuer of convertible debt that may be settled in shares or cash upon conversion at the issuer's option, such as our notes, to account for the liability (debt) and equity (conversion option) components separately. The value assigned to the debt component is the estimated fair value, as of the issuance date, of a similar debt instrument without the conversion option. The amount of the equity component (and resulting debt discount) is calculated by deducting the fair value of the liability component from the principal amount of the convertible debt instrument. The resulting debt discount is amortized as additional non-cash interest expense over the expected life of the notes utilizing the effective interest method. Although ASC 470 has no impact on our actual past or future cash flows, it requires us to record non-cash interest expense as the debt discount is amortized. For additional information, see Note 5 - Long-term Debt to our unaudited financial statements included elsewhere in this Quarterly Report on Form 10-Q.

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 Accounting Standards Codification, or ASC, 605-25, Revenue Recognition
- Multiple-Element Arrangements and ASC 808, Collaborative Arrangements, to determine the recognition of revenue under partnership and collaboration agreements that include multiple elements, including licenses for and transfer of intellectual property, research and development services, achievement of development and commercialization

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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.

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.

We defer up-front payments billed or received under our partnership and collaboration agreements for which there are future performance requirements, pending recognition over the applicable performance period. The deferred portions of payments are classified as a short-term or long-term liability in the accompanying 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 attributable to the milestone. 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 any portion of milestone payments associated with future performance obligations as deferred revenue when billed until recognized.

We periodically review the expected performance periods under each of our agreements that provide for non-refundable up-front payments, license fees or 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 or if our expectations change. Alternatively, we could decelerate such revenue recognition if programs are extended or delayed. 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.

See Note 4 - Collaboration and License Agreements to our unaudited financial statements included elsewhere in this Quarterly Report on Form 10-Q for further information about our partnerships.

Restructuring Charges

On August 5, 2013, we implemented a 20% reduction in our workforce and the affected employees were immediately notified. The reduction in force supports our strategy to fund our development organization with strategic collaborations and to focus our resources to progress our hematology and oncology programs to later stage development. The actions associated with the reductions were substantially completed during the first quarter of fiscal 2014 and, as a result of the reductions, we recorded a one-time restructuring charge of $2.8 million for post-termination benefits in the same period. Of this charge, $2.2 million was recorded in research and development for proprietary programs and $602 thousand was recorded in general and administrative expense. The restructuring charge is associated with cash payments of $2.6 million made during the first quarter of fiscal 2014 and an accrual of $192 thousand, which we expect to pay during the second quarter of fiscal 2014. An additional non-cash charge may occur later in the fiscal year, depending on decisions yet to be made by management, which could involve potential facility-related charges and other write-downs.

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Results of Operations

License and Milestone Revenue

License and milestone revenue 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
                                         September 30,            2013 vs. 2012
                                        2013         2012          $          %

License revenue                     $     7,690    $  9,333    $ (1,643 )   (18 )%
Milestone revenue                         2,375       3,143        (768 )   (24 )%
Total license and milestone revenue $    10,065    $ 12,476    $ (2,411 )   (19 )%

License revenue recognized during the three months ended September 30, 2013, decreased compared to the same period in the prior year. During the three months ended September 30, 2012, we recognized $4.9 million and $813 thousand of license revenue from Amgen and Celgene, respectively, with no corresponding license revenue from these partners during the current quarter. We recognized all license revenue from both of these partners prior to the current quarter and will not receive further revenue as both the Amgen agreement and the 2007 Celgene agreement have been terminated. In addition, license revenue recognized under our Chk-1 License Agreement with Genentech decreased by $405 thousand between the comparable periods because we increased the expected obligation period under the Genentech collaboration by an additional six months, resulting in adjustments to the amount of the remaining license revenue recognized each quarter. These decreases were partially offset by the $4.5 million in non-cash license revenue recognized under our new collaboration with Loxo, representing the full estimated fair value of the preferred shares received as consideration for an exclusive license to our technology, as discussed under Note 4 - Collaboration and License Agreement - Loxo Oncology, Inc. to our unaudited financial statements included elsewhere in this Quarterly Report on Form 10-Q.

Milestone revenue decreased during the three months ended September 30, 2013, compared to the same period in the prior year. We recognized no milestone revenue from Amgen or Celgene during the current period compared with $698 thousand and $1.3 million, respectively, of milestone revenue recognized during the three months ended September 30, 2012. No Amgen or Celgene milestones were earned during the current period, and we fully recognized all previous milestones earned from these partners in prior periods. This decrease was partially offset by a $750 thousand increase in milestone revenue recognized under our 2003 agreement with Genentech and a $313 thousand increase in milestone revenue recognized under our Novartis collaboration related to the $5 million milestone earned during the fourth quarter of fiscal 2013. In addition, we earned a $1.0 million milestone from Genentech during the current period as compared to $250 thousand during the three months ended September 30, 2012. We are also amortizing milestone revenue for three separate milestones under the Novartis collaboration during the three months ended September 30, 2013, compared to only two milestones for the same period of the prior year.

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 September 30, 2013 vs. 2012 2013 2012 $ %

Collaboration revenue $ 4,163 $ 3,357 $ 806 24 %

Collaboration revenue increased during the three months ended September 30, 2013 as new collaborations with Loxo, Oncothyreon and Celgene more than offset the decreases in revenue under our 2003 agreement with Genentech following the conclusion of the research term in January 2013, and under our previous collaboration with DNA BioPharma, which concluded in February 2013.

Cost of Partnered Programs

Cost of partnered programs represents costs attributable to discovery and development including preclinical and clinical trials we may conduct for or with our partners and, to a small degree, 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 partnered programs (dollars in thousands):

                                                   Three Months Ended               Change
                                                      September 30,              2013 vs. 2012
                                                    2013          2012           $            %

Cost of partnered programs                      $   10,658     $  6,539     $    4,119         63 %
Cost of partnered programs as a percentage of
total revenue                                           75 %         41 %

Cost of partnered programs increased during the three months ended September 30, 2013 compared to the same period of 2012 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 with Loxo and Oncothyreon. Partially offsetting the increases were reduced costs under our 2003 agreement with Genentech following the conclusion of the research term, as well as engaging fewer scientists in the current period under the new Celgene agreement compared to the previous Celgene agreement during the same period of 2012.

Cost of partnered programs as a percentage of total revenue increased for the three months ended September 30, 2013, primarily because of the increased actual costs as noted above and the 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 for proprietary programs by categories of costs for the periods presented (dollars in thousands):

                                                    Three Months Ended               Change
                                                      September 30,              2013 vs. 2012
                                                    2013           2012          $            %

Salaries, benefits and share-based compensation $     5,758     $  5,480     $    278          5  %
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