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| NBIX > SEC Filings for NBIX > Form 10-Q on 30-Jul-2009 | All Recent SEC Filings |
30-Jul-2009
Quarterly Report
The following Management's Discussion and Analysis of Financial Condition and
Results of Operations section contains forward-looking statements, which involve
risks and uncertainties. Our actual results could differ materially from those
anticipated in these forward-looking statements as a result of various factors,
including those set forth below in Part II, Item 1A under the caption "Risk
Factors." The interim financial statements and this Management's Discussion and
Analysis of Financial Condition and Results of Operations should be read in
conjunction with the Financial Statements and Notes thereto for the year ended
December 31, 2008 and the three months ended March 31, 2009 and the related
Management's Discussion and Analysis of Financial Condition and Results of
Operations, which are contained in our Annual Report on Form 10-K for the year
ended December 31, 2008 and our Quarterly Report on Form 10-Q for the three
months ended March 31, 2009, respectively.
OVERVIEW
We discover, develop and intend to commercialize drugs for the treatment of
neurological and endocrine-related diseases and disorders. Our product
candidates address some of the largest pharmaceutical markets in the world,
including endometriosis, anxiety, depression, pain, diabetes, irritable bowel
syndrome, insomnia, and other neurological and endocrine related diseases and
disorders. To date, we have not generated any revenues from the sale of
products. We have funded our operations primarily through private and public
offerings of our common stock and payments received under research and
development agreements. We are developing certain products with corporate
collaborators and intend to rely on existing and future collaborators to meet
funding requirements. We expect to generate future net losses due to increases
in operating expenses as product candidates are advanced through the various
stages of clinical development. As of June 30, 2009, we had an accumulated
deficit of $738.2 million and expect to incur operating losses in the near
future, which may be greater than losses in prior years. We currently have eight
programs in various stages of research and development, including five programs
in clinical development. While we independently develop many of our product
candidates, we are in a collaboration for two of our programs.
In May 2009, we announced a restructuring program to implement cost
containment measures and to focus research and development efforts. As a result,
we reduced our research and development and general and administrative staff in
San Diego by approximately 65 employees and incurred a net restructuring charge
of approximately $2.9 million. Restructuring charges are comprised of salary
continuation, outplacement services, and other miscellaneous costs related to
this reduction in force. Substantially all of these expenses were paid in cash
during the second quarter of 2009. We expect this restructuring to save
approximately $12.0 million per annum through a reduction of personnel-related
and other research and development costs.
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 (SFAS) 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 SFAS No. 123, "Share-Based Payment" (SFAS 123R). Share-based
compensation expense recognized under SFAS 123R for the three months ended
June 30, 2009 and 2008 was $1.0 million and $2.2 million, respectively.
Share-based compensation expense recognized under SFAS 123R for the six months
ended June 30, 2009 and 2008 was $2.9 million and $4.4 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.
During the six months ended June 30, 2009, we recognized additional cease-use
expense under SFAS 146 of $5.8 million due to an estimated increase in
construction costs, and a change in assumptions on the timing of tenant
occupancy and rental rates for the Front Building. See Note 11, "Real Estate" to
the accompanying financial statements.
Other income (expense) was $(1.2) million during the first six months of 2008
compared to $22,000 for the first six months of 2009. The change resulted
primarily from rental payments made in 2008 under our facilities sale-leaseback
agreement that were recorded as interest expense under sale-leaseback accounting
rules. The rental payments are components of operating expense during 2009.
Additionally, we recognized $1.4 million in deferred gains on real estate during
the first six months of 2009, which was partially offset by a net recognized
loss on auction rate securities of $1.2 million during the same period.
Net loss for the first half of 2009 was $34.9 million, or $0.90 per share,
compared to $42.0 million, or $1.10 per share, for the same period in 2008. This
decrease in net loss was primarily due to a reduction in expenses as a result of
our restructuring programs implemented in the fourth quarter of 2007 and second
quarter of 2009.
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 our 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 three and six months ended June 30, 2009 and
2008.
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 June 30, 2009, our cash, cash equivalents, and investments totaled
$74.0 million compared with $101.5 million at December 31, 2008. The decrease in
cash and investment balances at June 30, 2009 resulted primarily from our net
loss of $34.9 million, which includes various non-cash expenditures.
Our long-term investments at June 30, 2009 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. 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).
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.
The valuation of our auction rate securities investment portfolio is subject
to uncertainties that are difficult to predict. The fair values of these
securities were estimated utilizing a discounted cash flow analysis as of
June 30, 2009. The significant assumptions of this valuation model were discount
margins ranging from 191 to 491 basis points which are based on industry
recognized student loan sector indices, an additional liquidity discount of 150
basis points and an estimated term to liquidity of 5.5 to 7.5 years. Other items
this analysis considers are the collateralization underlying the security
investments, the creditworthiness of the counterparty, and the timing of
expected future cash flows. These securities were also compared, when possible,
to other observable market data with similar characteristics as the securities
held by us. 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 recognized in the consolidated statement of
operations for the six months ended June 30, 2009 a loss of approximately
$1.3 million in other expense, net for auction rate securities that we have
concluded that an other-than-temporary impairment exists.
During the fourth quarter of 2008, UBS AG (UBS) extended an offer of Auction
Rate Securities Rights (ARS Rights) to holders of illiquid auction rate
securities that were maintained by UBS as of February 13, 2008. The ARS Rights
provide the holder with the ability to sell the auction rate securities, along
with the ARS Rights, to UBS at the par value of the auction rate securities,
during an applicable exercise period. The ARS Rights grant UBS the sole
discretion and right to sell or otherwise dispose of auction rate securities at
any time up until July 2, 2012, without any prior 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
closed on November 14, 2008 and ARS Rights were issued by UBS during the fourth
quarter of 2008.
We have elected to participate in the ARS Rights program for all of our
outstanding auction rate securities maintained by UBS. We have $14.6 million (at
par value) of auction rate securities that are 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 auction rate securities, should a loan be needed.
It is our intention to sell the auction rate securities and ARS Rights to UBS on
June 30, 2010.
We elected to measure the ARS Rights under the fair value option of SFAS 159,
"The Fair Value Option for Financial Assets and Financial Liabilities -
including an amendment of FASB Statement No. 115" (SFAS 159), to mitigate
volatility in reported earnings due to their linkage to the auction rate
securities. Simultaneously, due to the ARS Rights granted by UBS, we made a
one-time election to transfer the related auction rate security holdings from
available-for-sale securities to trading securities. We anticipate that any
changes in the fair value of the ARS Rights will be offset by the changes in the
fair value of the related auction rate securities with no material net impact to
the consolidated statement of operations. The ARS Rights will continue to be
measured at fair value under SFAS 159 until the earlier of their maturity or
exercise. At June 30, 2009, we valued these ARS Rights at $1.9 million.
These ARS Rights together with the auction rate securities held at UBS (fair
value of $12.6 million as of June 30, 2009) are carried as short-term
investments on the condensed consolidated balance sheet at June 30, 2009. In
addition to the election of the fair value option for the ARS Rights, we made a
one-time election in the fourth quarter of 2008 to transfer the related auction
rate security holdings from available-for-sale securities to trading securities.
This enabled the changes in the fair value of the ARS Rights to be offset by the
changes in the fair value of the related auction rate securities with no
material net impact to our condensed consolidated statement of operations.
Our remaining auction rate securities that are not maintained by UBS continue
to be treated as available-for-sale investments. These auction rate securities
have a par value of $8.0 million. During the three months ended March 31, 2009,
certain ratings agencies downgraded these auction rate securities and we
recognized an other-than-temporary impairment of $1.5 million in the
consolidated statement of operations for the three months ended March 31, 2009.
During the second quarter of 2009, global credit markets improved and credit
spreads narrowed resulting in an increase in the fair value of these investments
of approximately $1.4 million which was recorded as an unrealized gain in other
comprehensive income as of June 30, 2009. At June 30, 2009, we valued these
investments at $6.7 million and they are carried as long-term investments on our
condensed consolidated balance sheet at June 30, 2009.
Changes to estimates and assumptions used in estimating the fair value of the
auction rate securities and related ARS Rights may provide materially different
values. In addition, actual market exchanges, if any, may occur at materially
different amounts. For example, a reduction of the expected term to redemption
assumption by approximately two years for the auction rate securities and
related ARS Rights would yield a net increase in the valuation of these
investments of $0.3 million. Other factors that may impact the valuation of our
auction rate securities and related ARS Rights 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.
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, 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 currently anticipate a
need to access these funds for operational purposes in 2009, nor the outstanding
auction rate securities with UBS prior to June 30, 2010, the beginning of the
ARS Rights exercise period. We will continue to monitor and evaluate these
investments on an ongoing basis for impairment.
Net cash used in operating activities during the first half of 2009 was
$28.0 million compared with $43.2 million during the same period last year. Net
loss for the first six months of 2009 was $34.9 million compared to
$42.0 million for the same period in 2008. This decrease in net loss was
primarily due to a reduction in expenses as a result of our restructuring
programs and expense management efforts.
Net cash used in investing activities during the first six months of 2009 was
$1.8 million compared to net cash provided by investing activities of
$36.3 million for the first six months of 2008. 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.
No cash was utilized in financing activities during the first six months of
2009 compared to $0.9 million used in 2008 related to cash payments made on
outstanding debt obligations.
The terms of our facility lease agreement require that we maintain
$50.0 million in cash and investments at all times, or increase our security
deposit by $5.0 million.
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
. . .
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