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| NBIX > SEC Filings for NBIX > Form 10-Q on 29-Oct-2009 | All Recent SEC Filings |
29-Oct-2009
Quarterly Report
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 September 30, 2009, we had an accumulated
deficit of $746.4 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 six programs
in clinical development. While we independently develop many of our product
candidates, we are in a collaboration for two of our programs.
In September 2009, we entered into a Committed Equity Financing Facility
(CEFF) with Kingsbridge Capital Limited (Kingsbridge) pursuant to which
Kingsbridge committed to purchase, subject to certain conditions, up to the
lesser of 7.8 million newly issued shares of our common stock or an aggregate of
$75.0 million newly issued shares over the three-year term of the CEFF. We may
access capital under the CEFF by making draw downs up to a maximum of the lesser
of (i) $15 million and (ii) the greater of (x) 1.75% of our market
capitalization as of the date of delivery of the draw down notice once per
calendar quarter and up to 1.25% of our market capitalization as of the date of
delivery of the draw down notice for any additional draw downs during such
calendar quarter and (y) the lesser of (a) 2.75% of our market capitalization as
of the date of delivery of the draw down notice and (b) a number of shares
determined by a formula based in part on the average trading volume and trading
price of our common stock prior to the delivery of the draw down notice issued
by us with respect to that draw down pricing period, subject to certain
conditions, including a minimum share price threshold of $1.00. Kingsbridge may
purchase shares of common stock pursuant to the CEFF at discounts ranging from 5
to 10 percent, depending on the average market price of our common stock during
the applicable pricing period for a draw down. As of September 30, 2009, we have
not issued any shares under the CEFF.
We held a Type C meeting with the Food and Drug Administration (FDA) in
August 2009 to discuss the daily non-menstrual pelvic pain scale proposed by the
FDA and used in the Lilac Petal Study (0702) of our lead clinical development
program, elagolix. Based on this meeting, we modified the wording of the daily
non-menstrual pain scale and launched a new clinical trial, the Daisy Petal
Study (0901). This double-blind placebo-controlled clinical trial is designed to
provide an assessment based on this modified scale over a two month treatment
period of 150 mg elagolix, followed by twenty weeks of open-label treatment.
The blinded baseline data from the initial subjects screened for the Daisy
Petal Study (0901) indicate that the modified daily non-menstrual pain scale
reflects a wider dynamic range of pain scores which was lacking in the previous
daily non-menstrual pelvic pain scale. This should allow for detection of
treatment difference between elagolix and placebo for non-menstrual pain in the
study population. The mean baseline score using the previous scale in the Lilac
Petal Study (0702) was 0.83 (using the 0-3 scale on non-menstrual days), while
preliminary Daisy Petal Study (0901) data with the new scale demonstrate a mean
baseline score of approximately 1.5 (using the 0-3 scale on non-menstrual days),
in the initial group of subjects recruited. Encouraged by the wider dynamic
range of this modified scale, the Company has proposed a modest increase in the
number of subjects for enrollment. This essentially moves the trial from a
directional characterization of the endpoint (i.e., to estimate sample size for
a Phase III trial) to a trial powered to provide statistical significance of the
new non-menstrual pain endpoint versus placebo. The Company expects top-line
data from the Daisy Petal Study (0901) in the second quarter of 2010.
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 $2.6 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 Accounting Standards Codification (ASC) 360-10-15,
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 ASC
718-10, Compensation- Stock Compensation (ASC 718-10). Share-based compensation
expense recognized under ASC 718-10 for each of the three months ended
September 30, 2009 and 2008 was $1.7 million. Share-based compensation expense
recognized under ASC 718-10 for the nine months ended September 30, 2009 and
2008 was $4.6 million and $6.2 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 ASC 718-10, 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.
ASC 718-10 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, 2009 AND 2008
Revenues were $0.7 million for the three months ended September 30, 2009
compared with $0.8 million for the respective period last year. During the third
quarters of both 2009 and 2008, we recognized $0.7 million in revenue under our
collaboration agreement with Dainippon Sumitomo Pharma Co. Ltd (DSP) from
amortization of up-front licensing fees.
Research and development expenses decreased to $7.4 million for the third
quarter of 2009 compared with $13.0 million for the respective period in 2008.
Laboratory costs decreased by $0.3 million in the third quarter of 2009 compared
to the same period in 2008 and external development costs decreased by
$1.7 million compared to the same period last year. External development
spending in our elagolix, pro drug and urocortin 2 programs decreased by
$1.1 million, $0.4 million and $0.4 million, respectively, in the third quarter
of 2009 compared with the same period in 2008. Research and development
personnel expenses decreased by $3.0 million in the third quarter of 2009
compared with the third quarter of 2008 as a result of our restructuring program
in the second quarter of 2009.
General and administrative expenses were $3.0 million for the third quarter
of 2009 compared with $3.5 million during the same period last year. The
decrease in general and administrative expenses was almost entirely related to
expense management efforts during the third quarter of 2009.
Other income (expense) was $1.5 million during the third quarter of 2009
compared to $(2.0) million for the third quarter of 2008. The change resulted
primarily from rental payments made during the third quarter of 2008 under our
sale-leaseback agreement which were recorded as interest expense under
sale-leaseback accounting rules. These rental payments are components of
operating expense during 2009. Additionally, we recognized $0.7 million in
deferred gains on real estate and $0.6 million in gains from the sale of assets
in the third quarter of 2009.
Our net loss for the third quarter of 2009 was $8.2 million, or $0.21 per
share, compared to $17.7 million, or $0.46 per share, for the same period in
2008. This decrease in net loss primarily resulted from our restructuring
program in the second quarter of 2009 and expense management efforts during the
third quarter of 2009.
NINE MONTHS ENDED SEPTEMBER 30, 2009 AND 2008
Revenues were $2.2 million for the nine months ended September 30, 2009
compared with $3.2 million for the respective period last year. During the nine
months ended September 30, 2008, we recognized a $1.0 million milestone from GSK
related to clinical advancements of our CRF program. During both nine month
periods ended September 30, 2009 and 2008, we recognized $2.2 million in revenue
under our collaboration agreement with DSP from amortization of up-front
licensing fees.
Research and development expenses decreased to $29.1 million for the first
nine months of 2009 compared with $43.4 million for the respective period in
2008. This decrease in research and development expenses is primarily due to
cost savings related to our restructuring program in the second quarter of 2009.
The decrease in staff levels reduced personnel costs in the first nine months of
2009 by $3.0 million compared with the first nine months of 2008. Additionally,
laboratory costs decreased by $1.2 million in the first nine months of 2009
compared to the same period in 2008. External development costs decreased by
$8.3 million to $7.1 million in the first nine months of 2009 compared to
$15.4 million in the same period last year. External development spending in our
elagolix and pro drug program decreased by $6.4 million and $1.5 million,
respectively, in the first nine months of 2009 compared to the same
period in 2008. Other non-personnel cost management efforts have resulted in
approximately $1.9 million of year to date savings over the prior nine month
period.
General and administrative expenses were $12.0 million for the nine months
ended September 30, 2009 compared with $16.4 million during the same period last
year. Personnel expenses decreased by $3.0 million in the first nine months of
2009 compared to the first nine months of 2008 primarily as a result of our
restructuring program in the second quarter of 2009. Additionally, other
non-personnel cost reductions resulted in savings of approximately $1.6 million
compared with the prior year period.
During the nine months ended September 30, 2009, we recognized additional
cease-use expense under ASC 420-10 of $5.9 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 $1.6 million of income during the first nine
months of 2009 compared to a loss of $(3.2) million for the first nine months of
2008. 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 $2.1 million in deferred gains
on real estate during the first nine months of 2009, which was partially offset
by a net recognized loss on auction rate securities of $1.1 million during the
same period.
Net loss for the first nine months of 2009 was $43.1 million, or $1.11 per
share, compared to $59.8 million, or $1.56 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 program in the second quarter of 2009 and expense
management efforts in the first nine months 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 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 nine months ended September 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 September 30, 2009, our cash, cash equivalents, and investments totaled
$63.7 million compared with $101.5 million at December 31, 2008. The decrease in
cash and investment balances at September 30, 2009 resulted primarily from our
net loss of $43.1 million, which includes various non-cash expenditures.
Our investments at September 30, 2009 included (at par value) $22.4 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
September 30, 2009. The significant assumptions of this valuation model were
discount margins ranging from 165 to 372 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 5.25 to
7.25 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. The auction rate security
investments continue to pay interest according to their stated terms. These
securities were also compared, when possible, to other observable market data
with similar characteristics as the securities held by us.
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. At September 30, 2009 we
had $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 ASC
825-10, Financial Instruments (ASC 825-10), 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 ASC
825-10 until the earlier of their maturity or exercise. At September 30, 2009,
we valued these ARS Rights at $1.7 million. These ARS Rights together with the
auction rate securities held at UBS (which had a fair value of $12.9 million as
of September 30, 2009) are carried as short-term investments on the condensed
consolidated balance sheet at September 30, 2009.
Our remaining auction rate securities that are not maintained by UBS continue
to be treated as available-for-sale investments. These auction rate securities
had a par value of $7.8 million at September 30, 2009. 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 and third quarters 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 September 30, 2009. At
September 30, 2009, we valued these investments at $6.6 million and they are
carried as long-term investments on our condensed consolidated balance sheet at
September 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 at September 30, 2009 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 nine months of 2009
was $39.1 million compared with $57.8 million during the same period last year.
Net loss for the first nine months of 2009 was $43.1 million compared to
$59.8 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 provided by investing activities during the first nine months of . . .
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