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| NBIX > SEC Filings for NBIX > Form 10-Q on 28-Oct-2008 | All Recent SEC Filings |
28-Oct-2008
Quarterly Report
During the fourth quarter, we will complete the process of relocating all of
our operations into the Rear Building. Upon completion of this relocation and
certain other events, a cease-use date will occur as defined under the
provisions of SFAS No. 146, "Accounting for Costs Associated with Exit or
Disposal Activities." On that date, we will record a present value liability and
a corresponding charge based on the remaining lease rentals offset by any
potential sublease rentals and other costs that we will incur to lease the Front
Building. We are currently analyzing the impact that this a cease-use date event
will have on our financial statements.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Our discussion and analysis of our financial condition and results of
operations is based upon financial statements that we have prepared in
accordance with accounting principles generally accepted in the United States.
The preparation of these financial statements requires management to make
estimates and judgments that affect the reported amounts of assets, liabilities
and expenses, and related disclosures. On an on-going basis, we evaluate these
estimates, including those related to revenues under collaborative research
agreements and grants, clinical trial accruals (research and development
expense), debt, share-based compensation, investments, and fixed assets.
Estimates are based on historical experience, information received from third
parties and on various other assumptions that are believed to be reasonable
under the circumstances, the results of which form the basis for making
judgments about the carrying values of assets and liabilities that are not
readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions. The items in our financial
statements requiring significant estimates and judgments are as follows:
Revenues under collaborative research and development agreements are
recognized as costs are incurred over the period specified in the related
agreement or as the services are performed. These agreements are on a
best-efforts basis, do not require scientific achievement as a performance
obligation, and provide for payment to be made when costs are incurred or the
services are performed. All fees are nonrefundable to the collaborators.
Upfront, nonrefundable payments for license fees, grants, and advance payments
for sponsored research revenues received in excess of amounts earned are
classified as deferred revenue and recognized as income over the contract or
development period. Estimating the duration of the development period includes
continual assessment of development stages and regulatory requirements.
Milestone payments are recognized as revenue upon achievement of pre-defined
scientific events, which requires substantive effort, and for which achievement
of the milestone was not readily assured at the inception of the agreement.
Research and development (R&D) expenses include related salaries, contractor
fees, facilities costs, administrative expenses and allocations of corporate
costs. All such costs are charged to R&D expense as incurred. These expenses
result from our independent R&D efforts as well as efforts associated with
collaborations, grants and in-licensing arrangements. In addition, we fund R&D
and clinical trials at other companies and research institutions under
agreements, which are generally cancelable. We review and accrue clinical trials
expense based on work performed, a method that relies on estimates of total
costs incurred based on patient enrollment, completion of studies and other
events. We follow this method since reasonably dependable estimates of the costs
applicable to various stages of a research agreement or clinical trial can be
made. Accrued clinical costs are subject to revisions as trials progress to
completion. Revisions are charged to expense in the period in which the facts
that give rise to the revision become known. Historically, revisions have not
resulted in material changes to R&D costs; however a modification in the
protocol of a clinical trial or cancellation of a trial could result in a charge
to our results of operations.
In accordance with Statement of Financial Accounting Standards No. 144 (SFAS
144), "Accounting for the Impairment or Disposal of Long-Lived Assets," if
indicators of impairment exist, we assess the recoverability of the affected
long-lived assets by determining whether the carrying value of such assets can
be recovered through undiscounted future operating cash flows. If impairment is
indicated, we measure the amount of such impairment by comparing the carrying
value of the asset to the estimated fair value of the asset, which is generally
determined based on the present value of the expected future cash flows. We have
determined that no impairment exists on our long-lived assets.
We grant stock options to purchase our common stock to our employees and
directors under the 2003 Incentive Stock Plan, as amended (the 2003 Plan) and
grant stock options to certain employees pursuant to Employment Commencement
Nonstatutory Stock Option Agreements. We also grant certain employees stock
bonuses and RSUs under the 2003 Plan. Additionally, we have outstanding options
that were granted under option plans from which we no longer make grants. The
benefits provided under all of these plans are subject to the provisions of
revised Statement of Financial Accounting Standards No. 123, "Share-Based
Payment (SFAS 123R)." Share-based compensation expense recognized under SFAS
123R for the three months ended September 30, 2008 and 2007 was $1.7 million and
$2.6 million, respectively. Share-based compensation expense recognized under
SFAS 123R for the nine months ended September 30, 2008 and 2007 was $6.2 million
and $7.8 million, respectively.
Stock option awards and RSUs generally vest over a three to four year period
and expense is ratably recognized over those same time periods. However, due to
certain retirement provisions in our stock plans, share-based compensation
expense may be recognized over a shorter period of time, and in some cases the
entire share-based compensation expense may be recognized upon grant of the
share-based compensation award. Employees who are age 55 or older and have five
or more years of service with us are entitled to accelerated vesting of certain
unvested share-based compensation awards upon retirement. This retirement
provision leads to variability in the quarterly expense amounts recognized under
SFAS 123R, and therefore individual share-based compensation awards may impact
earnings disproportionately in any individual fiscal quarter.
The determination of fair value of stock-based payment awards on the date of
grant using the Black-Scholes model is affected by our stock price, as well as
the input of other subjective assumptions. These assumptions include, but are
not limited to, the expected term of stock options and our expected stock price
volatility over the term of the awards. Our stock options have characteristics
significantly different from those of traded options, and changes in the
assumptions can materially affect the fair value estimates.
SFAS 123R requires forfeitures to be estimated at the time of grant and
revised, if necessary, in subsequent periods if actual forfeitures differ from
those estimates. If actual forfeitures vary from our estimates, we will
recognize the difference in compensation expense in the period the actual
forfeitures occur or when options vest.
THREE MONTHS ENDED SEPTEMBER 30, 2008 AND 2007
Revenues were $0.8 million for the three months ended September 30, 2008
compared with $0.5 million for the respective period last year. The increase in
revenues for the three months ended September 30, 2008, compared with the
respective period in 2007, is primarily from revenues recognized in 2008 under
our collaboration agreement with Dainippon Sumitomo Pharma Co. Ltd (DSP). During
the third quarter of 2008, we recognized $0.7 million in revenue under our
collaboration agreement with DSP from amortization of up-front licensing fees.
During the third quarter of 2007, we recognized $0.5 million in revenue related
to the out-licensing of our IL-4 program.
Research and development expenses decreased to $13.0 million for the third
quarter of 2008 compared with $19.8 million for the respective period in 2007.
This decrease in research and development expenses is primarily due to cost
savings related to our restructuring during the fourth quarter of 2007. The
decrease in staff levels reduced personnel costs by $2.9 million, from
$7.7 million in the third quarter of 2007 to $4.8 million in the third quarter
of 2008. Additionally, laboratory costs decreased by $0.6 million in the third
quarter of 2008 compared to the same period in 2007 and external development
costs decreased by $2.6 million. External development spending in our elagolix
program decreased from $4.6 million in the third quarter of 2007 to $3.5 million
in the third quarter of 2008. External development spending in our indiplon and
valnoctamide programs also decreased by $1.0 million and $1.1 million,
respectively, from the third quarter of 2007 to the third quarter of 2008. We
currently have eight programs in various stages of research and development,
including five programs in clinical development.
General and administrative expenses were $3.5 million for the third quarter
of 2008 compared with $9.6 million during the same period last year. This
decrease in general and administrative expenses is primarily due to cost savings
related to our restructuring implemented in the fourth quarter of 2007.
Other income (expense) decreased from $1.6 million during the third quarter
of 2007 to $(2.0) million for the third quarter of 2008. The decrease resulted
primarily from rental payments made under our facilities sale-leaseback
agreement that are recorded as interest expense under sale-leaseback accounting
rules. Additionally, investment income for the third quarter of 2008 was lower
than in the prior year period, primarily due to lower cash balances coupled with
lower overall interest rates, as well as a $0.7 million loss on an
other-than-temporary impairment of our auction rate securities.
Net loss for the third quarter of 2008 was $17.7 million, or $0.46 per share,
compared to $27.2 million, or $0.72 per share, for the same period in 2007. This
decrease in net loss was primarily due to a reduction in expenses as a result of
our restructuring program implemented in the fourth quarter of 2007.
NINE MONTHS ENDED SEPTEMBER 30, 2008 AND 2007
Revenues were $3.2 million for the nine months ended September 30, 2008
compared with $0.7 million for the respective period last year. During the nine
months ended September 30, 2008, we recognized a $1.0 million milestone payment
from GSK related to clinical advancements of our CRF program and $2.2 million in
revenue under our collaboration agreement with DSP from amortization of up-front
licensing fees. During the nine months ended September 30, 2007, we recognized
$0.5 million in revenue related to the out-licensing of our IL-4 program.
Research and development expenses decreased to $43.4 million for the first
nine months of 2008 compared with $57.6 million for the respective period in
2007. This decrease in research and development expenses is primarily due to
cost savings related to our restructuring implemented in the fourth quarter of
2007. The decrease in staff levels reduced personnel costs by $9.0 million, from
$24.4 million in the first nine months of 2007 to $15.4 million in the first
nine months of 2008. Additionally, laboratory costs decreased by $1.5 million in
the first nine months of 2008 compared to the same period in 2007. External
development costs decreased by $0.9 million to $15.4 million in the first nine
months of 2008 compared to $16.3 million in the same period last year. External
development spending in our elagolix program increased from $10.3 million in the
first nine months of 2007 to $12.9 million in the first nine months of 2008. The
increase in our elagolix external development spending was offset by decreased
costs in other external development programs.
General and administrative expenses were $16.4 million for the nine months
ended September 30, 2008 compared with $26.7 million during the same period last
year. We incurred a $2.0 million restructuring charge (net) in the first nine
months of 2008. This charge was offset by cost savings related to the
restructuring implemented in the fourth quarter of 2007.
Other income (expense) decreased from $4.3 million during the first nine
months of 2007 to $(3.2) million for the first nine months of 2008. The decrease
resulted primarily from rent payments made under our facilities sale-leaseback
agreement that are recorded as interest expense under sale-leaseback accounting
rules. Additionally, investment income for the first nine months of 2008 was
lower than in the prior year period, primarily due to lower cash balances
coupled with lower overall interest rates.
Net loss for the first nine months of 2008 was $59.8 million, or $1.56 per
share, compared to $79.3 million, or $2.09 per share, for the same period in
2007. This decrease in net loss was primarily due to a reduction in expenses as
a result of our restructuring program implemented in the fourth quarter of 2007.
To date, our revenues have been derived primarily from funded research and
development, achievements of milestones under corporate collaborations, and
licensing of product candidates. The nature and amount of these revenues from
period to period may lead to substantial fluctuations in the results of
quarterly revenues and earnings. Accordingly, results and earnings for one
period are not predictive of future periods. Collaborations, including grant
revenue, accounted for 100% of our revenue for the nine months ended
September 30, 2008 and 2007.
We expect to incur operating losses for the foreseeable future because of the
expenses we expect to incur related to progressing programs through our
pipeline.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 2008, our cash, cash equivalents, and investments totaled
$118.2 million compared with $179.4 million at December 31, 2007. The decrease
in cash and investment balances at September 30, 2008 resulted primarily from
our net loss of $59.8 million, cash payments related to our December 2007
restructuring program of $6.8 million and a reduction in accounts payable and
accrued liabilities from the prior year of approximately $2.9 million.
Our long-term investments at September 30, 2008 included (at par value)
$22.6 million of auction rate securities. With the liquidity issues experienced
in global credit and capital markets, these auction rate securities have
experienced multiple failed auctions as the amount of securities submitted for
sale has exceeded the amount of purchase orders, and as a result, these affected
securities are currently not liquid. However, we now earn a higher interest rate
according to the terms of these securities. All of our auction rate securities
are secured by student loans, which are backed by the full faith and credit of
the federal government (up to approximately 98% of the value of the student
loan). Additionally, all of our auction rate securities maintain the highest
credit rating of AAA. All of these securities continue to pay interest according
to their stated terms (generally 120 basis points over the ninety-one day United
States Treasury bill rate) with interest rates resetting every 7 to 28 days.
While it is not our intent to hold these securities until their stated ultimate
maturity dates, these investments are scheduled to ultimately mature between
2030 and 2047.
At present, in the event we need to access the funds that are in an illiquid
state, we may not be able to do so without the possible loss of principal, until
a future auction for these investments is successful, another secondary market
evolves for these securities, until they are redeemed by the issuer or they
mature. If we are unable to sell these securities in the market or they are not
redeemed, we could be required to hold them to maturity. We do not have a need
to access these funds for operational purposes in the foreseeable future. We
will continue to monitor and evaluate these investments on an ongoing basis for
impairment. Although the auction rate security investments continue to pay
interest according to their stated terms, based on valuation models of the
individual securities, we have recorded an unrealized loss of approximately $0.6
million in accumulated other comprehensive loss as a reduction in shareholders'
equity, reflecting adjustments to auction rate security holdings that we
concluded have a temporary decline in value due to a lack of liquidity in the
global credit markets. In addition, we have recognized a realized loss of
approximately $0.7 million in other income(expense) on auction rate securities
for which we have concluded that an other-than-temporary impairment exists. The
carrying value in long-term investments for these auction rate securities at
September 30, 2008 is $21.3 million.
On October 7, 2008, UBS AG (UBS) extended an offer of Auction Rate Securities
Rights (ARS Rights) to holders of illiquid Auction Rate Securities (ARS) that
were maintained by UBS as of February 13, 2008. The ARS Rights provide the
holder with the ability to sell the ARS along with the ARS Rights to UBS, at the
par value of the ARS, during an applicable exercise period. The ARS Rights grant
UBS the sole discretion and right to sell or otherwise dispose of ARS without
any notification of the holder, so long as the holder receives a payment of par
upon any sale or disposition. The ARS Rights are not transferable, not
tradeable, and will not be quoted or listed on any securities exchange or any
other trading network. The offer period for the ARS Rights is scheduled to close
on November 14, 2008.
We have $14.6 million (par value) of ARS that are maintained by UBS. We have
elected to participate in the ARS Rights program for all of our outstanding ARS
maintained by UBS. Under the terms of the ARS Rights offer, our applicable
exercise period begins on June 30, 2010 and ends July 2, 2012. Additionally, we
are eligible for a loan of up to 75% of the market value of the ARS, should a
loan be needed. It is our intention to sell the ARS and ARS Rights to UBS on
June 30, 2010.
The valuation of our auction rate securities investment portfolio is subject
to uncertainties that are difficult to predict. The fair values of these
securities are estimated utilizing a discounted cash flow analysis as of
September 30, 2008. The key driver of this valuation model is the expected term
to redemption. The UBS auction rate securities were valued with a term to
redemption of 1.75 years consistent with the terms contained in the offer
described above. The Citi auction rate securities were valued with a term to
redemption of 5 years. Changes to this assumption for a 2 year term and an
8 year term to redemption for the Citi auction rate securities yielded an impact
on the valuation of these securities of $0.4 million and $(0.3) million,
respectively. Other items this analysis considers are the collateralization
underlying the security investments, the creditworthiness of the counterparty,
the timing of expected future cash flows, and the expected term to redemption as
discussed above. The significant assumptions of this valuation model were
discount margins ranging from 212 to 392 basis points and an estimated term to
liquidity of 1.75 to 5 years. These securities were also compared, when
possible, to other observable market data with similar characteristics to the
securities held by us.
Factors that may impact the valuation of our auction rate securities
portfolio include changes to credit ratings of the securities as well as to the
underlying assets supporting those securities, rates of default of the
underlying assets, underlying collateral value, discount rates, counterparty
risk and ongoing strength and quality of market credit and liquidity.
Net cash used in operating activities during the first nine months of 2008
was $57.9 million compared with $55.1 million during the same period last year.
Net loss for the first nine months of 2008 was $59.8 million compared to
$79.3 million for the same period in 2007. This decrease in net loss was
primarily due to a reduction in expenses as a result of our restructuring
program implemented in the fourth quarter of 2007. The fluctuation in cash used
in operating activities also resulted from $9.7 million in payments made to
reduce accounts payable and accrued liabilities (including accrued severance) in
the first nine months of 2008 and by a reduction in accounts receivable and
other current assets in the first nine months of 2007 of $7.7 million compared
to a corresponding decrease of only $1.7 million in the same period during 2008.
Net cash provided by investing activities during the first nine months of
2008 was $39.5 million compared to $27.4 million for the first nine months of
2007. The fluctuation in net cash provided by investing activities resulted
primarily from the timing differences in investment purchases, sales and
maturities, and the fluctuation of our portfolio mix between cash equivalents
and short-term investment holdings.
Net cash used in financing activities during the first nine months of 2008
was $1.2 million compared to $2.9 million for the respective period last year.
This fluctuation resulted primarily from cash payments made on outstanding debt
obligations.
We believe that our existing capital resources, together with interest income
and future payments due under our strategic alliances, will be sufficient to
satisfy our current and projected funding requirements for at least the next
12 months. However, we cannot guarantee that these capital resources and
payments will be sufficient to conduct all of our research and development
programs as planned. The amount and timing of expenditures will vary depending
upon a number of factors, including progress of our research and development
programs.
We will require additional funding to continue our research and product
development programs, to conduct preclinical studies and clinical trials, for
operating expenses, to pursue regulatory approvals for our product candidates,
for the costs involved in filing and prosecuting patent applications and
enforcing or defending patent claims, if any, the cost of product in-licensing
and any possible acquisitions, and we may require additional funding to
establish manufacturing and marketing capabilities in the future. We intend to
seek additional funding through strategic alliances, and may seek additional
funding through public or private sales of our securities, including equity
securities. In addition, we have financed capital purchases and may continue to
pursue opportunities to obtain additional debt financing in the future. However,
additional equity or debt financing might not be available on reasonable terms,
if at all, and any additional equity financings will be dilutive to our
stockholders. Recently, the credit markets and the financial services industry
have been experiencing a period of unprecedented turmoil and upheaval
characterized by the bankruptcy, failure, collapse or sale of various financial
institutions and an unprecedented level of intervention from the United States
federal government. These events have generally made equity and debt financing
more difficult to obtain. If adequate funds are not available, we may be
required to curtail significantly one or more of our research or development
programs or obtain funds through arrangements with collaborators or others. This
may require us to relinquish rights to certain of our technologies or product
candidates. To the extent that we are unable to obtain third-party funding for
such expenses, we expect that increased expenses will result in increased losses
from operations. We cannot assure you that we will be successful in the
development of our product candidates, or that, if successful, any products
marketed will generate sufficient revenues to enable us to earn a profit.
INTEREST RATE RISK
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