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OPTR > SEC Filings for OPTR > Form 10-Q on 3-Nov-2011All Recent SEC Filings




Quarterly Report

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis should be read in conjunction with our consolidated financial statements and accompanying notes appearing elsewhere in this report, as well as the audited financial statements and accompanying notes included in our annual report on Form 10-K for the fiscal year ended December 31, 2010, as filed with the Securities and Exchange Commission, or SEC. This discussion and other parts of this report may contain forward-looking statements based upon current expectations that involve risks and uncertainties. Our actual results and the timing of selected events could differ materially from those anticipated in these forward-looking statements as a result of several factors, including those set forth under "Risk Factors" and elsewhere in this report.


We are a biopharmaceuticals company currently focused on commercializing and further developing our antibiotic product DIFICID™ (fidaxomicin). DIFICID is the first antibacterial drug indicated for Clostridium difficile-associated diarrhea, or CDAD, to be approved in the United States in nearly 30 years. It is indicated for the treatment of CDAD in adults 18 years of age or older. We are currently marketing DIFICID in the United States through our own sales force and through our co-promotion agreement with Cubist Pharmaceuticals, Inc, or Cubist. In addition, we have filed a Marketing Authorization Application with the European Medicines Agency, or EMA, for approval of fidaxomicin, and the Committee for Medicinal Products for Human Use of the EMA recently expressed a positive opinion for fidaxomicin tablets for the treatment of adults suffering with Clostridium difficile infection, or CDI, also known as CDAD. If approved by the EMA, we expect that DIFICID will be marketed by Astellas under the name DIFICLIR™ in Europe.

In February 2011, we entered into an exclusive collaboration and license agreement with Astellas to develop and commercialize DIFICID in Europe, Africa and certain other countries in the Middle East and the Commonwealth of Independent States, or CIS, which we refer to as the Astellas territory. In return for an exclusive license to DIFICID in the Astellas territory, Astellas paid to us an upfront cash payment of $69.2 million and we are eligible to receive additional cash payments totaling up to 115 million Euros upon the achievement of certain regulatory and commercial milestones and contingent events. Furthermore, we will be entitled to receive escalating double-digit royalties ranging from the high teens to low twenties on net sales of DIFICID in the Astellas territory, if approved. Astellas is responsible for all future costs associated with the development and commercialization of DIFICID in the Astellas territory including the costs associated with the MAA for DIFICID in Europe. In connection with the collaboration and license agreement, we also entered into a supply agreement with Astellas pursuant to which we will be the exclusive supplier of DIFICID to Astellas in the Astellas territory and Astellas is obligated to pay us an amount equal to cost plus an agreed mark-up for such supply.

In April 2011, we entered into a co-promotion agreement with Cubist pursuant to which we engaged Cubist as our exclusive partner for the promotion of DIFICID in the United States. Under the terms of the agreement, we and Cubist have agreed to co-promote DIFICID to physicians, hospitals, long-term care facilities and other healthcare institutions as well as jointly

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provide medical affairs support for DIFICID. Under the terms of the agreement, we will be responsible for the distribution of DIFICID in the United States and for recording revenue from sales of DIFICID, and we agreed to use commercially reasonable efforts to maintain adequate inventory and third party logistics support for the supply of DIFICID in the United States. The initial term of the agreement is two years from the date of first commercial sale of DIFICID in the United States, subject to renewal or early termination.

In exchange for Cubist's co-promotion activities and personnel commitments, we are obligated to pay a quarterly fee of approximately $3.75 million to Cubist ($15.0 million per year) upon the commencement of the DIFICID sales program in the United States. Cubist is also eligible to receive an additional $5.0 million in the first year after first commercial sale and $12.5 million in the second year if mutually agreed upon annual sales targets are achieved, as well as a portion of our gross profits derived from net sales above the specified annual targets, if any.

We are developing additional product candidates using our proprietary technology, including our OPopS drug discovery platform. OPopS is a computer-aided technology that allows the development of potential drug candidates through carbohydrate mediated medicinal chemistry and enables the rapid synthesis of a wide variety of proprietary molecules. It includes GlycoOptimization, which enables the modification of a carbohydrate group on an existing drug to improve its properties, and De Novo Glycosylation, which introduces new carbohydrate groups on existing drugs to create new patentable compounds with improvement of pharmacokinetics.

We previously acquired exclusive rights to OPT-822/821, a combination of a novel carbohydrate-based cancer immunotherapy together with an adjuvant, which we licensed from Memorial Sloan-Kettering Cancer Center, or MSKCC. In October 2009, we assigned to OBI certain of our patent rights and know-how related to OPT-822/821 and also assigned to OBI our rights and obligations under a related license agreement with MSKCC. In April 2010, OBI filed an investigational new drug application, or IND, in Taiwan for OPT-822/821, and in January 2011, OBI initiated a Phase 2/3 clinical trial for the treatment of metastatic breast cancer and is currently conducting the clinical trial in Taiwan and Hong-Kong. We have the right to receive up to $10 million from OBI in future milestone payments related to the development of OPT-822/821 as well as royalties on net sales of this product candidate. In February 2011, pursuant to an amendment to an October 2009 financing agreement, OBI sold newly-issued shares of its common stock for gross proceeds of approximately 462.0 million New Taiwan Dollars (approximately $15.5 million based on then-current exchange rates). We purchased 277.2 million New Taiwan Dollars (approximately $9.3 million based on then-current exchange rates) of the shares issued in the financing, and we currently maintain a 60% equity interest in OBI.

We were incorporated in November 1998. Since inception, we have focused on developing and commercializing DIFICID. We have never been profitable in any fiscal year and have incurred significant net losses since our inception. As of September 30, 2011, we had an accumulated deficit of $228.3 million. These losses have resulted principally from costs incurred in connection with research and development activities, including the costs of clinical trial activities, license fees and general and administrative expenses. We expect to continue to incur

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operating losses for the next several years as we pursue the commercialization of DIFICID, conduct post-marketing and Phase 4 studies and undertake life cycle management projects for DIFICID. We may also acquire or in-license additional products or product candidates, technologies or businesses that are complementary to our own.

Critical Accounting Policies

Our Management's Discussion and Analysis of Financial Condition and Results of Operations is based on our consolidated financial statements, which have been prepared in conformity with generally accepted accounting principles in the United States. The preparation of these consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, expenses and related disclosures. Actual results could differ from those estimates. While our significant accounting policies are described in more detail in Note 2 of the Notes to Consolidated Financial Statements appearing elsewhere in this report, we believe the following accounting policies to be critical to the judgments and estimates used in the preparation of our consolidated financial statements.


Inventory is stated at the lower of cost or market. Cost is determined in a manner which approximates the first-in, first-out (FIFO) method. We capitalize inventory produced in preparation for product launches upon FDA approval when costs are expected to be recoverable through the commercialization of the product. We reserve for potentially excess, dated or obsolete inventories based on an analysis of inventory on hand compared to forecasts of future sales. As of September 30, 2011, inventories consist of $954,455 in raw materials, $479,975 in work in progress and $810,732 in finished goods.

Revenue Recognition

DIFICID is available only through three major wholesalers, AmerisourceBergen Corporation, Cardinal Health, Inc., and McKesson Corporation, and regional wholesalers that provide the DIFICID to hospital and retail pharmacies, and long-term care facilities. We apply the revenue recognition guidance in Staff Accounting Bulletin ("SAB") 104 and do not recognize revenue from product sales until there is persuasive evidence of an arrangement, delivery has occurred, title has passed to the customer, the price is fixed and determinable, the buyer is obligated to pay us, the obligation to pay is not contingent on resale of the product, the buyer has economic substance apart from us, we have no obligation to bring about the sale of the product, the amount of returns can be reasonably estimated and collectability is reasonably assured. We recognize product sales of DIFICID upon delivery of product to the wholesalers.

During the three months ended and nine months ended September 30, 2011, the $10.6 million in net product revenue to wholesalers reflected a total of 4,335 DIFICID treatments. 2,505 DIFICID treatments were shipped to hospitals, retail pharmacies and long-term care facilities. As of September 30, 2011, 535 hospitals had ordered DIFICID with 304 of those hospitals having placed DIFICID on their formularies.

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Our net revenues represent total revenues less allowances for customer credits, including estimated rebates, discounts and returns. These allowances are established by management as its best estimate based on available information and will be adjusted to reflect known changes in the factors that impact such allowances. Allowances for rebates, discounts and returns are established based on the contractual terms with customers, communications with customers as well as expectations about the market for the product and anticipated introduction of competitive products. Product shipping and handling costs are included in cost of sales.

Product Sales Allowances. We establish reserves for prompt payment discounts and fee for service arrangements with our contracted wholesalers, government rebates, product returns and other applicable allowances. Reserves established for these discounts and allowances are classified as a reduction of accounts receivable.

Allowances against receivable balances primarily relate to prompt payment discounts and are recorded at the time of sale, resulting in a reduction in product sales revenue. Accruals related to government rebates, product returns and other applicable allowances are recognized at the time of sale, resulting in a reduction in product sales revenue and the recording of an increase in accrued expenses.

Prompt Payment Discounts. We offer a prompt payment discount to our contracted wholesalers. Since we expect our customers will take advantage of this discount, we accrue 100% of the prompt payment discount that is based on the gross amount of each invoice, at the time of sale. The accrual is adjusted quarterly to reflect actual earned discounts.

Government Rebates and Chargebacks. We estimate government mandated rebates and discounts relating to into federal and state programs such as Medicaid, Veterans' Administration, or VA, and Department of Defense programs, the Medicare Part D Coverage Discount Program, as well as with respect to certain other qualifying federal and state government programs. We estimate the amount of these reductions based on historical trends for similar competitive products, until such time as DIFICID patient data, actual sales data and market research data related to payor mix has reached an established steady state. These allowances are adjusted each period based on actual experience.

Medicaid rebate reserves relate to our estimated obligations to states under statutory "best price" obligations which may also include supplemental rebate agreements with certain states. Rebate accruals are recorded during the same period in which the related product sales are recognized. Actual rebate amounts are determined at the time of claim by the state, and we will generally make cash payments for such amounts after receiving billings from the state.

VA rebates or chargeback reserves represent our estimated obligations resulting from contractual commitments to sell DIFICID to qualified healthcare providers at a price lower than the list price charged to our distributor. The distributor will charge us for the difference between what the distributor pays for the product and the ultimate selling price to the qualified healthcare provider. Rebate accruals are established during the same period in which the related product sales are recognized. Actual chargeback amounts for Public Health Service are determined at the time of resale to the qualified healthcare provider from the distributor, and we will generally issue credits for such amounts after receiving notification from the distributor.

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Although allowances and accruals are recorded at the time of product sale, certain rebates will be generally paid out, on average, up to six months or longer after the sale. Reserve estimates are evaluated quarterly and, if necessary, adjusted to reflect actual results. Any such adjustments will be reflected in our operating results in the period of the adjustment.

Product Returns. Our policy is to accept returns of DIFICID for six months prior to and twelve months after the product expiration date. We also permit returns if the product is damaged or defective when received by its customers. We will provide a credit for such returns to customers with whom we have a direct relationship. Once product is dispensed it cannot be returned, but we allow partial returns in states where such returns are mandated. We do not exchange product from inventory for the returned product.

Allowances for product returns are recorded during the period in which the related product sales are recognized, resulting in a reduction to product revenue. We estimate product returns based upon historical trends in the pharmaceutical industry and trends for similar products sold by others.

Collaborations, Milestones and Royalties

In order to determine the revenue recognition for contingent milestones, we evaluate the contingent milestones using the criteria as provided by the Financial Accounting Standards Boards, or FASB, guidance on the milestone method of revenue recognition at the inception of a collaboration agreement.

Accounting Standard Codification ("ASC") Topic 605-28, Revenue Recognition - Milestone Method ("ASC 605-28"), established the milestone method as an acceptable method of revenue recognition for certain contingent event-based payments under research and development arrangements. Under the milestone method, a payment that is contingent upon the achievement of a substantive milestone is recognized in its entirety in the period in which the milestone is achieved. A milestone is an event (i) that can be achieved based in whole or in part on either our performance or on the occurrence of a specific outcome resulting from our performance, (ii) for which there is substantive uncertainty at the date the arrangement is entered into that the event will be achieved, and
(iii) that would result in additional payments being due to us. The determination that a milestone is substantive is judgmental and is made at the inception of the arrangement. Milestones are considered substantive when the consideration earned from the achievement of the milestone is (i) commensurate with either our performance to achieve the milestone or the enhancement of value of the item delivered as a result of a specific outcome resulting from our performance to achieve the milestone, (ii) relates solely to past performance and (iii) is reasonable relative to all deliverables and payment terms in the arrangement.

Other contingent event-based payments received for which payment is either contingent solely upon the passage of time or the results of a collaborative partner's performance are not considered milestones under ASC 605-28. In accordance with ASC Topic 605-25, Revenue Recognition - Multiple-Element Arrangements ("ASC 605-25"), such payments will be recognized as revenue when all of the following criteria are met: persuasive evidence of an arrangement exists; delivery has occurred or services have been rendered; price is fixed or determinable; and collectability is reasonably assured.

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Revenues recognized for royalty payments, if any, are recognized as earned in accordance with the terms of various research and collaboration agreements.

For collaboration agreements with multiple deliverables, we recognize collaboration revenues and expenses by analyzing each element of the agreement to determine if it is to be accounted for as a separate element or single unit of accounting. If an element is to be treated separately for revenue recognition purposes, the revenue recognition principles most appropriate for that element are applied to determine when revenue is to be recognized. If an element is not to be treated separately for revenue recognition purposes, the revenue recognition principles most appropriate for the bundled group of elements are applied to determine when revenue is to be recognized.

Cash received in advance of services being performed is recorded as deferred revenue and recognized as revenue as services are performed over the applicable term of the agreement. In connection with certain research collaboration agreements, revenues are recognized from non-refundable upfront fees, which we do not believe are specifically tied to a separate earnings process, ratably over the term of the agreement. Research fees are recognized as revenue as the related research activities are performed.

With respect to revenues derived from reimbursement of direct out-of-pocket expenses for research costs associated with grants, where we act as a principal, with discretion to choose suppliers, bear credit risk and perform part of the services required in the transaction, we record revenue for the gross amount of the reimbursement. The costs associated with these reimbursements are reflected as a component of research and development expense in the consolidated statements of operations.

Research and Development

Research and development costs are expensed as incurred and consist primarily of costs associated with clinical trials, compensation, including stock-based compensation, and other expenses related to research and development, including personnel costs, facilities costs and depreciation.

When nonrefundable payments for goods or services to be received in the future for use in research and development activities are made, we defer and capitalize these types of payments. The capitalized amounts are expensed when the related goods are delivered or the services are performed.

Stock-Based Compensation

The FASB authoritative guidance requires that share-based payment transactions with employees be recognized in the financial statements based on their fair value and recognized as compensation expense over the vesting period. We used the modified prospective method and accordingly we did not restate the results of operations for the prior periods.

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Total consolidated stock-based compensation expense of $2.7 million and $1.9 million was recognized in the three months ended September 30, 2011 and 2010, respectively. Total consolidated stock-based compensation expense of $7.4 million and $5.0 million was recognized in the nine months ended September 30, 2011 and 2010, respectively. The stock-based compensation expense recognized during the three months and nine months ended September 30, 2011 included expense from performance-based stock options and restricted stock units.

Stock-based compensation expense is estimated as of the grant date based on the fair value of the award and is recognized as expense over the requisite service period, which generally represents the vesting period. We estimate the fair value of our stock options using the Black-Scholes option-pricing model and the fair value of our stock awards based on the quoted market price of our common stock.

Estimating the fair value for stock options requires judgment, including estimating stock-price volatility, expected term, expected dividends and risk-free interest rates. Due to Optimer's and OBI's limited historical data, the expected volatility incorporates the historical volatility of comparable companies whose share prices are publicly available. The average expected term is calculated using the Simplified Method for Estimating the Expected Term. Expected dividends are estimated based on Optimer's and OBI's dividend history as well as Optimer's and OBI's current projections. The risk-free interest rate for Optimer is based on the United States Treasury rate for U.S. Treasury zero-coupon bonds with maturities similar to the periods approximating the expected terms of the options. The risk-free rate for OBI is based on the Central Bank of China interest rates. These assumptions are updated on an annual basis or sooner if there is a significant change in circumstances that could affect these assumptions.

Equity instruments issued to non-employees are recorded at their fair value and are periodically revalued as the equity instruments vest and are recognized as expense over the related service period.

Income taxes

We estimate income taxes based on the jurisdictions where we conduct business. Significant judgment is required in determining our worldwide income tax provision. We estimate our current tax liability and assess temporary differences that result from differing treatments of certain items for tax and accounting purposes. These differences result in net deferred tax assets and liabilities. We then assess the likelihood that deferred tax assets will be realized. A valuation allowance is recorded when it is more likely than not that some of the deferred tax assets will not be realized. We review the need for a valuation allowance each interim period to reflect uncertainties about whether we will be able to utilize deferred tax assets before they expire. The valuation allowance analysis is based on estimates of taxable income for the jurisdictions in which we operate and the periods over which our deferred tax assets may be realized. Changes in our valuation allowance could result in material increases or decreases in our income tax expense in the period such changes occur, which could have a material impact on our operating results.

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We estimate that our federal and state taxable income for the current year will be fully offset by net operating losses and research and development credit carryovers. As such, no current tax provision has been recorded. We also have recorded a full valuation allowance for the remaining net deferred tax benefits.

We have completed a section 382/383 analysis regarding the limitation of the net operating losses and credit carryovers and have considered the annual limitation when determining the amount available for utilization in the current year.

We recognize and measure benefits for uncertain tax positions using a two-step approach. The first step is to evaluate the tax position taken and expected to be taken in a tax return by determining if the weight of available evidence indicates that it is more likely than not that the tax position will be sustained upon audit, including resolution of any related appeals or litigation processes. For tax positions that are more likely than not to be sustained upon audit, the second step is to measure the tax benefit as the largest amount that has more than a 50% chance of being realized upon settlement. Significant judgment is required to evaluate uncertain tax positions. We evaluate uncertain tax positions on a quarterly basis. The evaluations are based upon a number of factors, including changes in facts or circumstances, changes in tax law, correspondence with tax authorities during the course of audits and effective settlement of audit issues. Changes in recognition or measurement of uncertain tax positions could result in material increases or decreases in our income tax expense in the period such changes occur, which could have a material impact on our effective tax rate and operating results.

Results of Operations

Comparison of Three Months Ended September 30, 2011 and 2010


Total revenues for the three months ended September 30, 2011 and 2010 were $11.1 million and $669,000, respectively. The increase was primarily due to recognition of $10.6 million of net product revenue from the sale of DIFICID. We launched DIFICID, our first commercial product, in July 2011.

Cost and expenses

Cost of product sales. Cost of product sales for the three months ended September 30, 2011 primarily represents the 5% royalty due to Par on net sales of DIFICID in the United States. A significant portion of the cost of DIFICID sold during the quarter was expensed when manufactured in the first quarter of 2011 since DIFICID had not been approved by the FDA at that time.

Research and development expense. Research and development expense for the three months ended September 30, 2011 and 2010 was $10.4 million and $8.1 million, respectively, an increase of $2.3 million. The increase was primarily due to higher health economics research, pharmacovigilance, medical affairs, and publication expenses. The increase was offset by a decrease in DIFICID and Pruvel development expenses.

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Selling, general and administrative expense. Selling, general and administrative expense for the three months ended September 30, 2011 and 2010 was $26.9 million and $4.8 million respectively, an increase of $22.1 million. The increase was related to the build-up of our commercial infrastructure for the launch of DIFICID as well as a significant increase in related marketing expenses in 2011.
We hired approximately 100 hospital account managers from May through July 2011 which significantly increased our compensation expenses and related personnel costs. In addition, we expensed $2.9 million related to the Cubist service fee as part of our co-promotion agreement. . . .

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