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ARIA > SEC Filings for ARIA > Form 10-K on 3-Mar-2014All Recent SEC Filings

Show all filings for ARIAD PHARMACEUTICALS INC

Form 10-K for ARIAD PHARMACEUTICALS INC


3-Mar-2014

Annual Report


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

The information set forth below should be read in conjunction with the audited consolidated financial statements, and the notes thereto, and other financial information included herein.

Overview

ARIAD is a global oncology company whose vision is to transform the lives of cancer patients with breakthrough medicines. Our mission is to discover, develop and commercialize small-molecule drugs to treat cancer in patients with the greatest unmet medical need - aggressive cancers where current therapies are inadequate.

Our first approved cancer medication, Iclusig® (ponatinib), and our product candidates, AP26113 and ridaforolimus, were discovered internally by our scientists based on our expertise in computational and structure-based drug design. Ridaforolimus is being developed for cardiovascular indications by Medinol, Ltd., or Medinol, and ICON Medical Corp., or ICON, pursuant to license agreements entered into in 2005 and 2007, respectively.

Iclusig (ponatinib)

United States

On December 14, 2012, we obtained accelerated approval from the U.S. Food and Drug Administration, or FDA, to sell our first new cancer medicine, Iclusig. Iclusig is a tyrosine kinase inhibitor, or TKI, that was initially approved in the United States for the treatment of adult patients with chronic, accelerated or blast phase chronic myeloid leukemia, or CML, who were resistant or intolerant to prior TKI therapy, and the treatment of adult patients with Philadelphia chromosome-positive acute lymphoblastic leukemia, or Ph+ ALL, who were resistant or intolerant to prior TKI therapy. The approved United States prescribing information, or USPI, included a boxed warning specifying that arterial thrombosis and hepatoxicity had occurred in some patients during clinical trials of Iclusig. We commenced sales and marketing of Iclusig in the United States in the first quarter of 2013 through a limited number of specialty pharmacies and specialty distributors and we charged approximately $115,000, on a wholesale basis, for an annual supply of the approved dose of Iclusig.

On October 9, 2013, we announced results of our review of updated clinical data from the pivotal PACE (Ponatinib Ph+ ALL and CML Evaluation) clinical trial of Iclusig and our actions following consultations with the FDA. In the review of the clinical data, with a median follow up of 24 months, serious arterial thrombosis occurred in 11.8% of Iclusig-treated patients, compared to 8% after 11 months of follow-up reflected in the previously approved USPI. In addition, at 24 months, serious venous occlusion occurred in 2.9% of Iclusig-treated patients, compared to 2.2% in the previously approved USPI. Based upon our review and the FDA consultations, we paused patient enrollment in all clinical trials of Iclusig and the FDA placed a partial clinical hold on all additional patient enrollment in clinical trials of Iclusig.

On October 31, 2013, in response to a request by the FDA, we announced that we temporarily suspended the marketing and commercial distribution of Iclusig in the United States while we negotiated updates to the USPI for Iclusig and the implementation of a risk mitigation strategy with the FDA.

On December 20, 2013, we announced that the FDA had approved revised USPI and a Risk Evaluation and Mitigation Strategy, or REMS, that allowed for the immediate resumption of the marketing and commercial distribution of Iclusig. Iclusig is now approved in the United States for the treatment of adult patients with:

• T315I-positive CML (chronic phase, accelerated phase, or blast phase) or T315I-positive Ph+ ALL, and


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• Chronic phase, accelerated phase, or blast phase CML or Ph+ ALL for whom no other tyrosine-kinase inhibitor therapy is indicated.

The FDA granted approval of the revised USPI based on its review of the Iclusig clinical trial data, including 24-month follow-up of the PACE trial. The boxed warning has been revised to alert patients and healthcare professionals to the risk of vascular occlusive events and includes a new warning for heart failure. In addition, neuropathy and ocular toxicity have been added as warnings, and dose reduction recommendations have been strengthened. We also agreed to additional post-marketing requirements as described further below. The starting dose of Iclusig remains 45mg daily. On January 17, 2014, we announced that we had resumed marketing and distribution of Iclusig in the United States through an exclusive specialty pharmacy with a wholesale price of approximately $125,000 for an annual supply of the approved dose of Iclusig.

In addition to focusing our efforts on the re-launch of Iclusig in the United States, in 2014, we plan to invest in studies designed to better understand the safety profile of Iclusig in resistant and intolerant CML and Ph+ ALL patients, with the objective of improving the balance of benefit and risk for these patients as post-marketing commitments. We expect that these studies will include a randomized clinical trial of Iclusig in this patient population to evaluate multiple dose levels, and we expect to begin this trial in the second half of 2014. Our post-marketing commitments with regulatory authorities also include a pharmacovigilance study and a prospective observational study of safety events.

Except as noted below with respect to the EPIC clinical trial of Iclusig, patients receiving Iclusig in clinical trials continue on therapy and reductions in Iclusig dose from 45mg daily, the approved dosage, are being implemented or considered on a trial-by-trial basis for patients. Before being able to restart enrollment, we expect that the eligibility criteria for the various Iclusig trials will also need to be modified. On December 20, 2013, we announced that the partial clinical hold was lifted for a trial of Iclusig for the treatment of medullary thyroid cancer. We expect that the partial clinical hold will be lifted for other Iclusig trials in 2014.

In November 2013, following the decision to suspend the marketing and commercial distribution of Iclusig in the United States, we announced a reduction in our work force in the United States and other actions to significantly reduce operating expenses and extend our cash runway. We eliminated approximately 40 percent of the U.S. workforce. In addition to personnel-related expense reductions, we implemented reductions in expenses related to marketing and commercial distribution of Iclusig in the United States, development and manufacturing activities for Iclusig, including reductions related to the discontinuation of the EPIC clinical trial discussed below and certain other trials, as well as AP26113, and reductions in expenses for discovery research and general and administrative activities.

International Markets

In 2012, we established operations in Europe, with headquarters in Switzerland, in preparation for the European approval of Iclusig. We hired management and other key personnel in Switzerland and other selected countries in Europe. We established early-access programs for Iclusig in Europe, established the supply chain in key markets and implemented initial pricing and reimbursement activities in various countries.

On July 2, 2013, we announced the granting of our marketing authorization for Iclusig by the European Commission, or EC, as an orphan medicinal product for two indications:

• The treatment of adult patients with chronic phase, accelerated phase or blast phase CML who are resistant to dasatinib or nilotinib; who are intolerant to dasatinib or nilotinib and for whom subsequent treatment with imatinib is not clinically appropriate; or who have the T315I mutation, and


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• The treatment of adult patients with Ph+ ALL who are resistant to dasatinib; who are intolerant to dasatinib and for whom subsequent treatment with imatinib is not clinically appropriate; or who have the T315I mutation.

We began to obtain pricing and reimbursement approvals in certain European countries in 2013 and began selling Iclusig in those countries. In 2013, the price charged for an annual supply of Iclusig in these European countries was approximately 80% of the price charged in the United States, on a wholesale basis.

Based upon the announcements and actions taken in October 2013 concerning the safety, marketing and commercial distribution, and further clinical development of Iclusig in the United States, we engaged in discussions with the European Medicines Agency, or EMA, regarding revised prescribing information for Iclusig. On November 8, 2013, the EMA announced that Iclusig's product information should be updated to include strengthened warnings for cardiovascular risk and guidance on optimizing the patient's cardiovascular therapy before starting treatment. In addition, the EMA has commenced an in-depth review, known as an Article 20 referral, of the benefits and risks of Iclusig to better understand the nature, frequency and severity of events obstructing the arteries or veins, the potential mechanism that leads to these side effects and whether there needs to be a revision in the dosing recommendation for Iclusig. We expect the results of this review in mid-2014.

We have also filed marketing authorization applications for Iclusig in Switzerland (which was approved in February 2014), Canada and Australia and plan to file for marketing authorization for Iclusig with regulatory authorities in Japan. Each of these regulatory authorities has its own processes and timelines for the review and approval of marketing authorization applications and such reviews are ongoing at this time. We are discussing the announcements regarding updated Iclusig clinical data with these other foreign regulatory agencies.

Other Development Matters

In July 2012, we initiated a randomized Phase 3 clinical trial, the EPIC trial, of ponatinib, in adult patients with newly diagnosed CML in the chronic phase. However, in October 2013, based upon the assessment of the clinical trial data discussed above and further discussions with the FDA, we announced the discontinuation of this trial.

In August 2012, we initiated a multi-center Phase 1/2 clinical trial in Japan of Iclusig in Japanese patients with CML who have failed treatment with dasatinib or nilotinib or who have Ph+ ALL and have failed prior treatment with TKIs. The trial is fully enrolled. In January 2013, we announced an agreement with Newcastle University, U.K., on behalf of the U.K. National Cancer Research Institute, or NCRI, to collaborate on a multi-center, randomized Phase 3 investigator sponsored trial, named SPIRIT 3. This trial is designed to assess the impact of switching CML patients treated with a first-line TKI to Iclusig, upon suboptimal response or treatment failure. Based upon our announcements and actions in October 2013 concerning the safety, marketing and commercial distribution and further clinical development of Iclusig in the United States, this trial has been delayed.

We are also developing Iclusig in other blood cancers and solid tumors, such as gastrointestinal stromal tumors, or GIST, acute myeloid leukemia and certain forms of non-small cell lung cancer, or NSCLC. In June 2013, we announced the initiation of a Phase 2 trial to evaluate the efficacy and safety of Iclusig in adult patients with metastatic and/or unresectable GIST, following failure of prior TKI therapy. This trial remains on partial clinical hold by the FDA and we intend to address the FDA's clinical hold concerns in order to initiate further enrollment.

In addition, Iclusig is being studied in various investigator-sponsored trials in indications including first line and second line CML, acute myeloid leukemia or AML, non-small cell lung cancer or NSCLC, and medullary thyroid cancer or MTC. The FDA's partial clinical hold has been lifted on the MTC trial and we expect the clinical hold will be lifted on the other trials in 2014. We expect to initiate additional investigator-sponsored clinical trials in 2014 in indications including Ph+ ALL, blast phase CML, AML and endometrial cancer.


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AP26113

AP26113 is an investigational inhibitor of anaplastic lymphoma kinase, or ALK. In non-clinical studies, AP26113 also demonstrated that it inhibits epidermal growth factor receptor, or EGFR, and c-ros oncogene-1, or ROS1. All of these kinases are clinically validated targets in NSCLC.

We initiated patient enrollment in a Phase 1/2 clinical trial of AP26113 in the third quarter of 2011. The protocol was designed to enroll approximately 50 to 60 patients in the Phase 1 portion of the trial and approximately 125 patients in the Phase 2 portion of the trial. We began enrollment in the Phase 2 portion of the trial in the second quarter of 2013. In September 2013, we announced updated clinical results from the ongoing Phase 1/2 clinical trial. The study results show robust anti-tumor activity in patients with TKI-naïve and crizotinib-resistant ALK-positive NSCLC, including in patients with brain metastases after crizotinib treatment. Crizotinib is the currently available first-generation ALK inhibitor.

We plan to commence a pivotal trial of AP26113 in the first quarter of 2014 in ALK-positive NSCLC patients who are resistant to crizotinib, following confirmation of the safety and efficacy profile of the selected dose of AP26113 in the ongoing phase 1/2 clinical trial. We have decided to focus our development efforts on ALK-positive NSCLC patients, both treatment naïve and resistant, and those with CNS activity. We will no longer enroll EGFR, ROS1, or other patients in the ongoing Phase 1/2 clinical trial.

Ridaforolimus

Ridaforolimus is an investigational inhibitor of the mammalian target of rapamycin, or mTOR, that we discovered and developed internally and later licensed in 2010 to Merck & Co., Inc., or Merck. Under the license agreement, Merck was responsible for all activities related to the development, manufacture and commercialization of ridaforolimus and funds 100 percent of all ridaforolimus costs incurred after January 1, 2010. The agreement provided that Merck would develop ridaforolimus in multiple oncology indications. On February 20, 2014, we received notice from Merck that it is terminating the license agreement, which termination will become effective nine months from the date of the notice and at which time all rights to ridaforolimus in oncology licensed to Merck will be returned to us.

We also have license agreements with Medinol and ICON under which these companies are pursuing the development of stents and other medical devices to deliver ridaforolimus to prevent restenosis, or reblockage of injured vessels following interventions in which stents are used in connection with balloon angioplasty.

We are responsible for supplying Medinol and ICON with, and they have agreed to purchase from us, certain quantities of ridaforolimus for use in their development, manufacture and sale of the stents and other medical devices. Each of these licenses provide for potential milestone payments to us based on achievement of specified development, regulatory and/or sales objectives as well as royalty payments upon commercialization of products. There can be no assurance that any future payments will be received under these license agreements.

On January 14, 2014, we jointly announced with Medinol the initiation of two registration trials of Medinol's stent system that incorporates ridaforolimus. The two trials are randomized, single-blind, global studies. The studies will enroll approximately 2,200 patients with coronary artery disease. Under the terms of our agreement with Medinol, the commencement of enrollment in the clinical trials, along with the submission of an investigational device exemption, or IDE, with the FDA, will trigger milestone payments to us of $3.8 million, expected in 2014, with the potential for additional regulatory, clinical and sales milestones, as well as royalties on product sales.


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Critical Accounting Policies and Estimates

Our financial position and results of operations are affected by subjective and complex judgments, particularly in the areas of revenue recognition, accrued product development expenses, inventory, leased buildings under construction and stock-based compensation.

Revenue Recognition

Revenue is recognized when the four basic criteria of revenue recognition are met: (1) persuasive evidence that an arrangement exists; (2) delivery has occurred or services have been rendered; (3) the fee is fixed or determinable; and (4) collectability is reasonably assured. When the revenue recognition criteria are not met, we defer the recognition of revenue by recording deferred revenue until such time that all criteria are met.

Product Revenue, net

We commercially launched Iclusig in the United States on January 3, 2013 and in certain European countries in the second half of 2013. As noted above, in the fourth quarter of 2013, we temporarily suspended the marketing and commercial distribution of Iclusig in the United States. In January 2014, we resumed marketing and commercial distribution of Iclusig in the United States under the revised USPI and the REMS program.

Through October 31, 2013, we sold Iclusig in the United States through a limited number of specialty distributors and specialty pharmacies. Title and risk of loss transferred upon receipt of Iclusig by these customers. Specialty pharmacies dispensed Iclusig directly to patients in fulfillment of prescriptions. Specialty distributors sold Iclusig to hospital pharmacies and community practice pharmacies, referred to as healthcare providers, for treatment of patients. We provided the right of return to customers in the United States for unopened product for a limited time before and after its expiration date. Iclusig's shelf-life in the United States is eighteen months for 15mg tablets and twelve months for 45mg tablets, measured from date of manufacture. In the United States, we deferred the recognition of revenue until Iclusig was sold to the healthcare providers or dispensed to the patients. Revenue recognition was deferred due to the inherent uncertainties in estimating future returns of Iclusig from our United States customers, due to factors such as estimated product demand and the limited shelf life of Iclusig. Upon the temporary suspension of marketing and commercial distribution in the United States in the fourth quarter of 2013, we terminated our existing contracts with these specialty distributors and specialty pharmacies and we accepted product returns of Iclusig from these customers. The majority of these product returns related to product held by specialty distributors and specialty pharmacies that had not yet been sold to patients or recognized as revenue. As a result, these returns were recorded as a reduction of accounts receivable and deferred revenue. For customers that had already paid for delivered product, a liability was recorded in other current liabilities. Upon receiving approval to resume marketing and commercial distribution in the United States, we revised our distribution strategy and plan to sell Iclusig through one exclusive specialty pharmacy who will distribute Iclusig to customers.

In Europe, we sell Iclusig to retail pharmacies and hospital pharmacies that dispense product directly to patients. These customers are provided with a limited right of return, such as instances of damaged product, and the criteria for revenue recognition is met at the time of shipment to these customers provided all other revenue recognition criteria are met.

Product revenues are recorded net of estimated gross to net deductions, including government-mandated rebates and chargebacks, distribution fees and other deductions. Reserves are established for these deductions and actual amounts incurred are offset against applicable reserves. We reflect these reserves as either a reduction in the related account receivable from the customer or as an accrued liability, depending on the nature of the deduction. These reserves are based on management's estimates that consider payor mix in target markets, industry benchmarks and experience to date. These estimates involve a high degree of judgment and are periodically reviewed and adjusted as necessary.


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We have individual contracts or standard terms of sale with our customers and delivery occurs when a customer receives Iclusig. We evaluate the creditworthiness of each of our customers to determine whether collection is reasonably assured and have determined that all of our customers are creditworthy. In order to conclude that the price is fixed or determinable, we must be able to calculate our gross product revenues from our customers and reasonably estimate our net product revenues. Our gross product revenues are based on the fixed wholesale acquisition cost for Iclusig that we charge our customers. We estimate our net product revenues by deducting from our gross product revenues (i) trade allowances, such as invoice discounts for prompt payment and customer fees, (ii) estimated government and private payor rebates, chargebacks and discounts, such as Medicare and Medicaid reimbursements in the United States, and (iii) estimated costs of incentives offered to certain indirect customers including patients. These gross to net deductions, and in particular the estimates for rebates, chargebacks and discounts, require us to make significant judgments that materially affect our recognition of net product revenues related to Iclusig.

Trade Allowances: We provide invoice discounts on Iclusig sales to certain of our customers for prompt payment and pay fees for certain services, such as fees for certain data that customers provide to us. We expect our customers to earn these discounts and fees, and therefore deduct these discounts and fees from our gross product revenues when revenue is recognized.

Rebates, Chargebacks and Discounts: In the United States, we contract with Medicare, Medicaid, other government agencies and various private organizations (collectively, payors) to make Iclusig, when commercially available, eligible for purchase by, or for partial or full reimbursement from, such payors. We estimate the rebates, chargebacks and discounts we will provide to payors and deduct these estimated amounts from our gross product revenue at the time the revenue is recognized. We estimate rebates, chargebacks and discounts based on
(1) the contractual terms of agreements in place with payors, (2) the government-mandated discounts applicable to government-funded programs, and
(3) the estimated payor mix. Government rebates that are invoiced directly to us are recorded in accrued liabilities on our consolidated balance sheet. For qualified programs that can purchase our product at a lower contractual government or commercial price, the customers charge back to us the difference between their acquisition cost and the lower contractual government or commercial price, which we record as an allowance against accounts receivable on our consolidated balance sheet. In Europe, we are subject to mandatory rebates and discounts in markets where government-sponsored healthcare systems are the primary payers for healthcare. These rebates and discounts are recorded when revenue is recognized and included in accrued liabilities on our consolidated balance sheet.

The value of the rebates, chargebacks and discounts provided to third-party payors per course of treatment vary significantly and are based on government-mandated discounts and our arrangements with other third-party payors. In the United States, typically, government-mandated discounts are significantly larger than discounts provided to other third-party payors. In order to estimate our total rebates, chargebacks and discounts, we estimate the percentage of prescriptions that will be covered by each third-party payor, which is referred to as the payor mix. In order to estimate the payor mix for Iclusig, we used both (i) information obtained from our customers and third parties regarding the payor mix for Iclusig and (ii) historical industry information regarding the payor mix for competitive products. We track available information regarding changes, if any, to the payor mix for Iclusig, to our contractual terms with third-party payors and to applicable governmental programs and regulations. If necessary, we adjust our estimated rebates, chargebacks and discounts based on new information, including information regarding actual rebates, chargebacks and discounts for Iclusig, as it becomes available. If we increased our estimate of the percentage of patients receiving Iclusig covered by third-party payors entitled to government-mandated discounts by five percentage points, our United States net product revenues would have decreased by approximately 1.2% in 2013. In the European countries where we currently sell Iclusig, rebates, as applicable, are fixed percentages of product sales.


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Other Incentives: Other incentives that we offer include co-pay assistance for our patients and distribution fees offered to our customers. Our co-pay assistance programs assist commercially insured patients who have coverage for Iclusig and who reside in states that permit co-pay assistance programs. Our co-pay assistance program is intended to reduce each participating patient's portion of the financial responsibility for Iclusig's purchase price to a specified dollar amount. In each period, we record the amount of co-pay assistance provided to eligible patients based on the terms of the program.

Patients in Europe are also being treated with Iclusig in the framework of clinical trials and related studies and in named patient programs. In 2012, the French regulatory authority granted an Autorisation Temporaire d'Utilisation (ATU), or Temporary Authorization for Use, for Iclusig for the treatment of patients with CML and Ph+ ALL under a nominative program on a patient-by-patient basis. We began shipping Iclusig under this program during the year ended December 31, 2012. Until all revenue recognition criteria are met (including a fixed or determinable price), all amounts received under this program (approximately $8.8 million as of December 31, 2013) have not been recorded as revenue. This program concluded on September 30, 2013 and all outstanding amounts have been received. Upon completion of this program, we became eligible to ship Iclusig directly to customers in France as of October 1, 2013. These shipments have not met the criteria for revenue recognition as the price for these shipments is not yet fixed or determinable. These shipments totaled $4.1 million for the period from October 1, 2013 to December 31, 2013, of which $1.8 million was received as of December 31, 2013. We will record these shipments, as well as shipments under the ATU program, as revenue once the price is fixed or determinable.

Accrued Product Development Expenses

We accrue expenses for our product development activities based on our estimates of services performed or progress achieved pursuant to contracts and agreements with multiple vendors including research laboratories, contract manufacturers, contract research organizations and clinical sites. These estimates are recorded in research and development expenses in our consolidated statements of operations and are reflected in accrued product development expenses on our consolidated balance sheet. At December 31, 2013, we reported accrued product development expenses of $16.7 million on our consolidated balance sheet.

Our estimates of services performed or progress achieved are based on all available information we have from reports, correspondence and discussions with . . .

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