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MNTA > SEC Filings for MNTA > Form 10-K on 28-Feb-2014All Recent SEC Filings

Show all filings for MOMENTA PHARMACEUTICALS INC

Form 10-K for MOMENTA PHARMACEUTICALS INC


28-Feb-2014

Annual Report


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

Our Management's Discussion and Analysis of Financial Condition and Results of Operations include the identification of certain trends and other statements that may predict or anticipate future business or financial results. There are important factors that could cause our actual results to differ materially from those indicated. See "Risk Factors" in Item 1A of this Annual Report on Form 10-K.

Business Overview

The Company

We are a biotechnology company operating in three product areas: Complex Generics, Biosimilars and Novel Drugs. Our approach is built around a complex systems analysis platform that we use to obtain a detailed understanding of complex chemical and biologic systems, design product candidates based on this knowledge, analyze sets of biological data to evaluate the biological function of our products, and develop manufacturing processes that enable our products to be reliably produced. Our first product, developed in collaboration with Sandoz, Enoxaparin Sodium Injection, a generic version of Lovenox®, was approved in July 2010, validating the commercial value of our platform. In the period from commercial launch through September 2011, we capitalized on the advantage of having the only generic Lovenox in the marketplace and recognized over $340 million in revenue from this product.

Our Programs

The first product area we entered was complex generics. Our complex generics programs target marketed products that were originally approved by the United States Food and Drug Administration, or FDA, as New Drug Applications, or NDAs. Therefore, we have been able to access the existing 505(j) generic regulatory pathway and have submitted Abbreviated New Drug Applications, or ANDAs, for these products. Our first commercial product, Enoxaparin Sodium Injection, which has been developed and commercialized in collaboration with Sandoz Inc. and Sandoz AG, collectively Sandoz, affiliates of Novartis AG, received FDA marketing approval in July 2010 as a generic version of Lovenox® (enoxaparin sodium injection). Lovenox is a complex mixture of polysaccharide chains derived from naturally sourced heparin which is used to prevent and treat deep vein thrombosis, or DVT, and to support the treatment of acute coronary syndromes, or ACS. The Enoxaparin Sodium Injection ANDA submitted by Sandoz was the first ANDA for a generic Lovenox to be approved by FDA, validating our novel approaches to the structural characterization, process engineering and biologic systems analysis of complex molecules. From July 2010 through early October 2011, the Enoxaparin Sodium Injection marketed by Sandoz was the sole generic version of Lovenox, and consequently, under the terms of our collaborative agreement with Sandoz, we earned 45% profit share on Sandoz's sales of Enoxaparin Sodium Injection. The product now faces other generic competitors and we receive a royalty on net sales.

Our second complex generic product candidate, M356, is designed to be a generic version of Copaxone® (glatiramer acetate injection), a drug that is indicated for the reduction of the frequency of relapses in patients with relapsing-remitting multiple sclerosis, or RRMS. Copaxone consists of a synthetic mixture of polypeptide chains. With M356, we extended our core polysaccharide characterization and process engineering capabilities to develop capabilities for the structural characterization, process engineering and biologic systems analysis of this complex polypeptide mixture. We are also collaborating with Sandoz to develop and commercialize M356, and the Sandoz ANDA for M356 is currently under FDA review.

Our second product area is biosimilars, which is targeted toward developing biosimilar versions of marketed therapeutic proteins, with a goal of obtaining FDA designation as interchangeable. The subset of biosimilars receiving an interchangeability designation are known as interchangeable biologics.


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In March 2010, an abbreviated regulatory process was codified in Section 351(k) of the Patient Protection and Affordable Care Act of 2010. This new pathway opened the market for biosimilar and interchangeable versions of a broad array of biologic therapeutics, including antibodies, cytokines, fusion proteins, hormones and other recombinant proteins. By 2015, sales of biosimilars are expected to reach between $1.9 billion to $2.6 billion. Most biologic therapies are complex mixtures, and for several years we have been investing in developing novel approaches to the structural characterization, process engineering and analysis of the biologic activities of these products. In February 2012, FDA released three documents containing their preliminary guidelines for applications under the Section 351(k) pathway. These guidelines state that FDA will use a step-wise review that considers the totality-of-the-evidence in determining extent of the clinical development program. This approach puts a substantial emphasis on structural and functional characterization data in evaluating biosimilar products for approval. We believe that our strategy for the development of biosimilars aligns well with the framework that the FDA has outlined in the draft guidance documents. Our goal is to engineer biologic products that will show minimal to no structural or functional differences from the reference brand product, thereby justifying a more selective and targeted approach to human clinical testing and to support demonstration of interchangeability. In December 2011, we and Baxter International, Inc., Baxter Healthcare Corporation and Baxter Healthcare SA, collectively, Baxter, entered into a global collaboration and license agreement, or the Baxter Agreement, to develop and commercialize biosimilars. The Baxter Agreement became effective in February 2012. Baxter is an established healthcare company with global product development, manufacturing and commercial capabilities.

Our third product area is novel drugs. M402, our novel drug in Phase 1 clinical development, is an oncology candidate derived from unfractionated heparin and engineered to have significantly reduced anticoagulant activity while preserving the anti-tumor properties of heparin. Nonclinical data showed potent binding of M402 to multiple growth factors, adhesion molecules, and chemokines to inhibit tumor progression, metastasis, and angiogenesis. In addition to this development candidate, we are also seeking to discover and develop additional novel drugs. We believe our core analytical tools and approach may enable new insights into the complex biology underlying many diseases. This enhanced understanding should help us establish the relative role of different biological targets and related cell-to-cell signaling pathways in contributing to the disease process. Our goal is to leverage this knowledge to identify novel targets, novel combinations of therapies, and possibly exploit the multi-targeting nature of complex mixture molecules to develop novel drugs which may positively modulate multiple pathways in a disease.

Our Collaborations

In 2003, we entered into a collaboration and license agreement, or the 2003 Sandoz Collaboration, with Sandoz N.V. and Sandoz Inc. to jointly develop, manufacture and commercialize Enoxaparin Sodium Injection in the United States. Sandoz N.V. later assigned its rights in the 2003 Sandoz Collaboration to Sandoz AG, an affiliate of Novartis Pharma AG. We refer to Sandoz AG and Sandoz Inc. together as Sandoz.

In 2006 and 2007, we entered into a series of agreements, including a Stock Purchase Agreement and an Investor Rights Agreement, with Novartis Pharma AG, and a collaboration and license agreement, as amended, or the Second Sandoz Collaboration Agreement, with Sandoz AG. Together, this series of agreements is referred to as the 2006 Sandoz Collaboration. Under the Second Sandoz Collaboration Agreement, we and Sandoz AG expanded the geographic markets for Enoxaparin Sodium Injection covered by the 2003 Sandoz Collaboration to include the European Union. Further, under the Second Sandoz Collaboration Agreement, we and Sandoz AG agreed to exclusively collaborate on the development and commercialization of M356, among other products. In connection with the 2006 Sandoz Collaboration, we sold 4,708,679 shares of common stock to Novartis Pharma AG at a per share price of $15.93 (the closing price of our common stock on the NASDAQ Global Market


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was $13.05 on the date of purchase) for an aggregate purchase price of $75.0 million, resulting in an equity premium of $13.6 million. As of December 31, 2013, Novartis AG owned approximately 9% of our outstanding common stock.

Prior to the launch of Enoxaparin Sodium Injection in 2010, the collaboration revenues derived from our 2003 Sandoz Collaboration and 2006 Sandoz Collaboration primarily consisted of amounts earned by us for reimbursement by Sandoz of research and development services and development costs. In July 2010, Sandoz began the commercial sale of Enoxaparin Sodium Injection. The profit-share or royalties Sandoz is obligated to pay us under the 2003 Sandoz Collaboration differ depending on whether (i) there are no third-party competitors marketing an interchangeable generic version of Lovenox, or Lovenox-Equivalent Product (as defined in the 2003 Sandoz Collaboration),
(ii) a Lovenox-Equivalent Product is being marketed by Sanofi-Aventis, which distributes the brand name Lovenox, or licensed by Sanofi-Aventis to another company to be sold as a generic drug, both known as authorized generics, or
(iii) there are one or more third-party competitors which are not Sanofi-Aventis marketing a Lovenox-Equivalent Product. From July 2010 through September 2011, no third-party competitor was marketing a Lovenox-Equivalent Product; therefore, during that period, Sandoz paid us 45% of the contractual profits from the sale of Enoxaparin Sodium Injection. In September 2011, FDA approved the ANDA for the enoxaparin product of Amphastar Pharmaceuticals, Inc. or Amphastar. In October 2011, Sandoz confirmed that an authorized generic Lovenox-Equivalent Product was being marketed, which meant that Sandoz was obligated to pay us a royalty on its net sales of Enoxaparin Sodium Injection until the contractual profits from those net sales in a product year (July 1-June 30) reached a certain threshold. Upon the achievement of the contractual profit threshold in December 2011, Sandoz was obligated to pay us a profit share for the remainder of the product year. In January 2012, following the Court of Appeals for the Federal Circuit granting a stay of the preliminary injunction previously issued against them by the United States District Court, Watson Pharmaceuticals, Inc. (now Actavis, Inc., or Actavis) and Amphastar launched their third-party competitor enoxaparin product. Consequently, in each product year, for net sales of Enoxaparin Sodium Injection up to a pre-defined sales threshold, Sandoz is obligated to pay us a royalty on net sales at a 10% rate, and for net sales above the sales threshold, at a 12% rate.

Certain development and legal expenses may reduce the amount of profit-share, royalty and milestone payments paid to us by Sandoz. Any product liability costs and certain other expenses arising from patent litigation may also reduce the amount of profit-share, royalty and milestone payments paid to us by Sandoz, but only up to 50% of these amounts due to us from Sandoz each quarter. Our contractual share of these development and legal expenses is subject to an annual adjustment at the end of each product year, and ends with the product year ending June 2015. Annual adjustments of $3.8 million, $3.9 million and $4.1 million, respectively, were recorded as a reduction in product revenue in the years ended December 31, 2013, 2012 and 2011, respectively.

In December 2011, we and Baxter entered into the Baxter Agreement under which we agreed to collaborate, on a world-wide basis, on the development and commercialization of biosimilars. The Baxter Agreement became effective in February 2012. Baxter is an established healthcare company with global product development, manufacturing and commercial capabilities. To accelerate efforts in the biosimilars space and address this growing global market, we significantly increased the headcount and related operating expenses dedicated to our biosimilars program in 2012 and 2013. We expect that the increase in operating expenses will be partially offset in future years by revenues from option fees and milestone payments under the Baxter Agreement, subject to achievement of technical and regulatory criteria.


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Under the Baxter Agreement, we and Baxter agreed to collaborate, on a world-wide basis, on the development and commercialization of two biosimilars, M923 and M834, which are:

º •
º M923, a biosimilar for a branded biologic indicated for certain autoimmune and inflammatory diseases, is our most advanced biosimilar. We are working towards progressing this program to the clinic in Europe in the second half of 2014.

º •
º M834, a biosimilar also indicated for certain autoimmune and inflammatory diseases. We are working toward achievement of a pre-defined "minimum development criteria" license payment in 2014.

In July 2012, Baxter selected a third product for inclusion in the collaboration, a monoclonal antibody for oncology which has been designated as M511. In December 2013, Baxter terminated its option to license M511 under the Baxter Agreement following an internal portfolio review. We continue to develop M511 as part of our biosimilars program. Baxter has the right, until February 2015, to select up to three additional biosimilars to be included in the collaboration. We may also consent, at our option, to allow Baxter to name a replacement product for M511, if Baxter requests such replacement.

As of December 31, 2013, we had an accumulated deficit of $270.5 million. To date, we have devoted substantially all of our capital resource expenditures to the research and development of our product candidates. In the second half of 2010, we began to derive revenue from our profit share on Sandoz's commercial sale of Enoxaparin Sodium Injection. Due to the launch by Actavis and Amphastar of their enoxaparin product in January 2012, our Enoxaparin Sodium Injection product revenue has significantly decreased and we have been incurring operating losses. We expect that our return to profitability, if at all, would most likely come from the commercialization of our generic Copaxone product, which is subject to FDA approval. Even if our generic Copaxone is approved, there can be no assurance that we will return to profitability. Unless and until generic Copaxone is approved, we expect to incur annual operating losses over the next several years as we expand our drug commercialization, development and discovery efforts. Even if our generic Copaxone is approved, there can be no assurance that we will return to profitability. Additionally, we plan to continue to evaluate possible acquisitions or licensing of rights to additional technologies, products or assets that fit within our growth strategy. Accordingly, we will need to generate significant revenue to return to profitability.

Financial Operations Overview

Years Ended December 31, 2013, 2012 and 2011

Collaboration Revenue

Collaboration revenue includes product revenue and research and development revenue earned under our collaborative arrangements. Product revenue consists of profit share, royalties and commercial milestones earned from Sandoz on sales of Enoxaparin Sodium Injection following its commercial launch in July 2010. For the year ended December 31, 2013, we earned $16.7 million in royalties on Sandoz's reported net sales of Enoxaparin Sodium Injection of $213 million. For the years ended December 31, 2012 and 2011, we earned $54.8 million and $260.5 million, respectively, in part on a profit share and in part on a royalty on Sandoz's net sales of Enoxaparin Sodium Injection of $451 million and $1.0 billion, respectively. The decreases in our product revenue of $38.1 million, or 70%, and Sandoz's net sales of $238 million, or 53%, from the 2012 period to the 2013 period is due to decreased unit sales due to lower market share, and lower prices in response to competitor pricing reductions on enoxaparin. The decreases in our product revenue of $205.7 million, or 79%, and Sandoz's net sales of $549 million, or 55%, from the 2011 period to the 2012 period are due to a change in the contractual basis of our earned product revenues from profit share to royalty-based following the launch of an authorized generic in October 2011 and the January 2012 launch of a third-


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party competitor's generic Lovenox®, as well as decreased unit sales due to lower market share and lower prices in response to competitor pricing reductions on enoxaparin. Additionally, in 2011 we earned a $10.0 million commercial milestone on the one-year anniversary of FDA approval of Enoxaparin Sodium Injection as sole generic.

Research and development revenue generally consists of amounts earned by us:

º •
º under the 2003 Sandoz Collaboration and 2006 Sandoz Collaboration for reimbursement of research and development services and reimbursement of development costs;

º •
º under the 2006 Sandoz Collaboration for amortization of the equity premium;

º •
º under the Baxter Agreement for reimbursement of research and development services and reimbursement of development costs; and

º •
º under the Baxter Agreement for amortization of the $33 million upfront payment.

Research and development revenue for 2013 was $18.8 million, compared with $9.1 million for 2012 and $12.6 million for 2011. The increase in research and development revenue of $9.7 million, or 107%, from the 2012 period to the 2013 period is due to an increase in reimbursable M923 expenses incurred in connection with the Baxter Agreement. The decrease in research and development revenue of $3.5 million, or 28%, from the 2011 period to the 2012 period is primarily due to a decrease in reimbursable manufacturing expenses associated with our M356 program offset by amortization of the upfront payment from Baxter.

We expect collaborative research and development revenue earned by us related to expense reimbursement from Baxter and Sandoz will fluctuate from quarter to quarter in 2014 depending on our research and development activities. We expect to continue to amortize the $33.0 million upfront payment from Baxter as we deliver research and development services under the Baxter Agreement, with 2014 quarterly amortization of approximately $0.8 million related to the two licensed biosimilars.

There are a number of factors that make it difficult for us to predict the magnitude of future Enoxaparin Sodium Injection product revenue, including the impact of generic competition on the Sandoz market share; the pricing of products that compete with Enoxaparin Sodium Injection and other actions taken by our competitors; the inventory levels of Enoxaparin Sodium Injection maintained by wholesalers, distributors and other customers; the frequency of re-orders by existing customers and the change in estimates for product reserves. Accordingly, our Enoxaparin Sodium Injection product revenue in previous quarters may not be indicative of future Enoxaparin Sodium Injection product revenue. The change in Sandoz contractual payment terms, along with additional generic competition, has caused, and we expect will continue to cause, our future product revenue from Enoxaparin Sodium Injection to be significantly reduced compared to revenues earned during the product's exclusivity period.

Research and Development Expense

Research and development expenses consist of costs incurred in identifying, developing and testing product candidates. These expenses consist primarily of salaries and related expenses for personnel, license fees, consulting fees, nonclinical and clinical trial costs, contract research and manufacturing costs, and the costs of laboratory equipment and facilities. We expense research and development costs as incurred. Due to the variability in the length of time necessary to develop a product, the uncertainties related to the estimated cost of the projects and ultimate ability to obtain governmental approval for commercialization, accurate and meaningful estimates of the ultimate cost to bring our product candidates to market are not available.

Research and development expense for 2013 was $104.0 million, compared with $80.3 million in 2012 and $64.7 million in 2011. The increase of $23.7 million, or 30%, from the 2012 period to the


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2013 period primarily resulted from increases of: $14.7 million in process development and third-party contract research costs, of which approximately $13.0 million related to our M923 program; $5.0 million in personnel and related costs associated with our headcount growth to support our programs; $1.4 million in facility related costs due to additional subleased laboratory and office space; $1.3 million in professional fees primarily related to consulting fees to support our programs; and $0.5 million in depreciation expense due to higher investments in capital equipment in 2012 and 2013.

The increase of $15.6 million, or 24%, from the 2011 period to the 2012 period resulted from increases of: $5.7 million in personnel and related costs associated with our headcount growth to support our programs; $4.1 million in rent and facility-related expenses, principally due to the commencement in the first quarter of 2012 of a sublease for additional research and development space; $3.0 million in laboratory expenses in support of our programs; $2.5 million in clinical trial expenses associated with our M402 Phase 1/2 clinical study; $1.9 million in depreciation and amortization expense primarily due to increased capital expenditures to support our programs; $1.6 million in process development, manufacturing and third-party research costs related to our biosimilars and novel products programs; $0.9 million in share-based compensation expense associated with grants of stock awards to new hires; and $0.4 million in consulting fees in support of our programs. These increases were offset by a $4.5 million in-process research and development charge in 2011 related to the acquisition of sialylation technology assets. We expect future research and development expenses to increase in support of our product candidates.

The lengthy process of securing FDA approval for new drugs requires the expenditure of substantial resources. Any failure by us to obtain, or any delay in obtaining, regulatory approvals would materially adversely affect our product development efforts and our business overall. Accordingly, we cannot currently estimate with any degree of certainty the amount of time or money that we will be required to expend in the future on our product candidates prior to their regulatory approval, if such approval is ever granted. As a result of these uncertainties surrounding the timing and outcome of any approvals, we are currently unable to estimate when, if ever, our product candidates will generate revenues and cash flows.

The following table sets forth the primary components of our research and development external expenditures, including amortization of our intangible assets, for each of our principal development programs for the years ended December 31, 2013, 2012 and 2011. The figures in the table include project expenditures incurred by us and reimbursed by our collaborators, but exclude project expenditures incurred by our collaborators. Although we track and accumulate personnel effort by percentage of time spent on our programs, a significant portion of our internal research and development costs, including salaries and benefits, share-based compensation, facilities, depreciation and laboratory supplies are not directly charged to programs. Therefore, our methods for accounting for internal research and development costs preclude us from reporting these costs on a project-by-project basis. Certain prior period amounts have been reclassified to conform to the current period presentation.

                                        Research and Development Expense (in thousands)

                                                                                     Project
                                       For the years ended December 31,           Inception to
                                                                                  December 31,
Development Programs (Status)        2013             2012            2011            2013
M356 (ANDA Filed)                $       2,525     $     3,880     $     6,618     $      47,087
M402 (Phase 1/2)                         3,930           5,053           3,258            18,335
Biosimilars (Development)               24,501           7,440             875            35,939
Discovery programs                       3,298           1,316           6,698
Research and development
internal costs                          69,745          62,656          47,208


Total research and
development expense              $     103,999     $    80,345     $    64,657


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The decrease of $1.4 million in M356 external expenditures from the 2012 period to the 2013 period was primarily due to timing of process development activities, manufacturing and third-party research costs. Our M402 external expenditures decreased by $1.1 million from the 2012 period to the 2013 period as we incurred start-up costs for our Phase 1/2 proof-of-concept clinical study in the 2012 period. The increase of $17.1 million in biosimilars external expenditures from the 2012 period to the 2013 period was due to the process development and third-party contract research costs to advance our biosimilars in development. The increase of $2.0 million in discovery program external expenditures from the 2012 period to the 2013 period was primarily due to research collaborations we entered into to support our novel drug program.

The decrease of $2.7 million in M356 external expenditures from the 2011 period to the 2012 period was primarily due to timing of process development activities, manufacturing and third-party research costs. The increase of $1.8 million in M402 external expenditures from the 2011 period to the 2012 period was principally due to costs incurred in connection with the initiation of a Phase 1/2 proof-of-concept clinical study. The increase of $6.6 million in biosimilars external expenditures from the 2011 period to the 2012 period was due to the timing of process development and third-party research costs to fund the build-out of our biologics infrastructure to support product development under our Baxter collaboration. Discovery program external expenditures decreased by $5.4 million from the 2011 period to the 2012 period primarily due to a $4.5 million in-process research and development charge in 2011 related to the acquisition of sialylation technology assets.

Research and development internal costs consist of compensation and other expense for research and development personnel, supplies and materials, facility costs and depreciation. The increases of $7.1 million from the 2012 period to the 2013 period and $15.4 million from the 2011 period to the 2012 period were due to additional research and development headcount and related costs in support of our development programs.

General and Administrative

General and administrative expenses consist primarily of salaries and other . . .

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