Summary of Significant Accounting Policies | 9 Months Ended |
Sep. 30, 2013 |
Accounting Policies [Abstract] | ' |
Summary of Significant Accounting Policies | ' |
Summary of Significant Accounting Policies |
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Basis of Presentation |
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Our accompanying condensed financial statements have been prepared following the requirements of the Securities and Exchange Commission, or SEC, for interim reporting. As permitted under those rules, certain footnotes or other financial information that are normally required by U.S. generally accepted accounting principles, or GAAP, have been condensed or omitted. The condensed financial statements are unaudited and reflect all adjustments, consisting of only normal recurring adjustments, which, in the opinion of management, are necessary to fairly state the financial position at, and the results of operations and cash flows for, the interim periods presented. The financial information included herein should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2012, which includes our audited financial statements and the notes thereto. |
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Revenues, expenses, assets and liabilities can vary during each quarter of the year. Therefore, the results and trends in the condensed financial statements and accompanying notes may not be indicative of the results for the full year or any future period. |
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Concentration of Risk |
Financial instruments that potentially subject us to a concentration of credit risk consist of cash, cash equivalents and investments. We deposit excess cash in accounts with major financial institutions in the U.S. Deposits in these banks may exceed the amount of insurance provided on such deposits. We have not experienced any realized losses on our deposits of cash and cash equivalents. |
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Our future revenue is based on only one source of product-related revenue, OMONTYS. If Takeda is not successful in identifying the cause and is unable or unwilling to reintroduce OMONTYS, we have no prospects for other sources of revenue. |
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Use of Estimates |
The preparation of financial statements in conformity with U.S. GAAP, requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. |
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Revenue Recognition |
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Collaboration Revenue |
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We recognize revenue for contracts entered into prior to 2011 in accordance with the SEC Staff Bulletin No. 101, Revenue Recognition in Financial Statements, as amended by Staff Accounting Bulletin or SAB, No. 104, Revision of Topic 13 and Accounting Standards Codification or ASC, 605-25, Multiple Element Arrangements. When evaluating multiple element arrangements, we consider whether the components of the arrangement represent separate units of accounting as defined in the authoritative guidance for revenue arrangements with multiple deliverables. Application of this guidance requires subjective determinations and requires management to make judgments about the fair value of the individual elements and whether such elements are separable from the other aspects of the contractual relationship. We continue to follow the guidance of ASC 605-25 to determine whether the components of the Arrangement represent separate units of accounting. To determine if a delivered item can be treated as a separate unit of accounting, we evaluate (1) if the delivered item(s) has value to Takeda on a standalone basis; (2) there is objective and reliable evidence of fair value of the undelivered item(s) and (3) if a general right of return exists for the delivered item (e.g. contingencies), delivery or performance of the undelivered item(s) is considered probable and is substantially within the control of the Company. We recognize revenue for contracts entered into or materially modified after January 1, 2011, in accordance with Accounting Standards Update, or ASU, No. 2009-13, Multiple Deliverable Revenue Arrangements. This update amends the guidance on accounting for arrangements with multiple deliverables to require that each deliverable be evaluated to determine whether it qualifies as a separate unit of accounting. This determination is generally based on whether the deliverable has stand-alone value to the customer. This update also establishes a selling price hierarchy for determining how to allocate arrangement consideration to identified units of accounting. The selling price used for each unit of accounting will be based on vendor-specific objective evidence, or VSOE, if available, third-party evidence if VSOE is not available, or estimated selling price if neither VSOE nor third-party evidence is available. We may be required to exercise considerable judgment in determining whether a deliverable is a separate unit of accounting and the estimated selling price of identified units of accounting for new or modified agreements. |
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We account for our Arrangement with Takeda under ASC 605-25 and through the date of the recall, had been operating in the commercialization period as defined in the Arrangement. Before the recall, we were performing commercialization services such as promotions and marketing as well as development work related to OMONTYS post approval. In return for these services, we received a 50/50 share of operating profit from the sale and distribution of OMONTYS (as described below), certain milestone payments and contingent payments due under the Arrangement. We also received reimbursement of costs for commercial and development costs as described in the Arrangement. Prior to approval of OMONTYS, our primary source of revenue consisted of milestone payments and Takeda’s reimbursement of commercialization and development costs. |
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In addition to the profit sharing and reimbursement of the costs described above, the Arrangement provides us the potential to earn substantive at risk milestone payments upon achievement of contractual criteria (see Note 3 of Notes to Financial Statements). However, timing and amounts of these milestones are highly uncertain due to the recall. |
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During the commercialization period, our obligations included ongoing regulatory work to obtain and maintain FDA approval and commercialization efforts related to our product launch and promotion and marketing of OMONTYS. |
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For each source of collaboration revenue, we apply the following revenue recognition model: |
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• | Expense reimbursement revenue. Revenues related to reimbursements by Takeda of third-party development expenses (70/30 split per the Arrangement) and commercialization expenses (shared 50/50 according to the Arrangement) are recognized as revenue in the period the related costs are incurred. Revenues related to reimbursement of costs of full-time equivalents, or FTEs, engaged in development related activities such as post-marketing studies, are recognized as revenue in the period the related costs are incurred. Such reimbursement is based on contractually negotiated reimbursement rates for each FTE as specified in the Arrangement. Subsequent to the launch of OMONTYS and recognition of product revenue by Takeda, reimbursement of commercialization expenses and development costs (both FTE and out of pocket costs) associated with post-marketing development activities, is incorporated into the profit equalization revenue as required under the Arrangement in order to effect the 50/50 profit split, as described below. As part of the Amendment with Takeda, both Parties agreed that they will no longer share expenses related to third-party development (70/30 split) and commercialization (50/50 split) as of April 1, 2013. Except for certain transition services that we performed in April 2013 for full reimbursement of $0.5 million, any expenses incurred by either us or Takeda after April 1, 2013 shall be the responsibility of the respective party and neither us or Takeda has the obligation to share expenses with each other. | | | | | | | | | | | | | | |
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• | Profit equalization revenue/loss. Subsequent to the launch of OMONTYS and prior to the Amendment, as to the recognition of product revenue by Takeda, Takeda allocates the quarterly profit equalization revenue/loss to us in order to effect the 50/50 profit/loss split from the sale of OMONTYS, as called for by the Arrangement. Profit equalization revenue/loss is calculated as the amount required so that the profit or loss realized by both us and Takeda on the product equates to 50% of the total product profit or loss. Total product profit or loss on OMONTYS is calculated on a quarterly basis as gross product sales recorded by Takeda less the following deductions also recorded by Takeda: rebates and discounts, cost of goods, and other gross-to-net adjustments incurred by Takeda; royalty expenses incurred by us, commercialization expenses (FTE related and out of pocket costs) incurred by both Takeda and us, and certain development costs associated with post-marketing development activities (FTE related and out of pocket costs) incurred by both Takeda and us. Profit equalization revenue is recognized as revenue in the period product revenue is recognized by Takeda. As a result of the voluntary recall of OMONTYS in February 2013, all marketing activities were suspended. As part of the Amendment with Takeda, the profit equalization revenue for the three months ended March 31, 2013 will be the final profit equalization payment under the Arrangement. Upon signing the Amendment with Takeda, the economics of the collaboration changed from a profit sharing arrangement to a milestone and royalty-based compensation structure to us, effective April 1, 2013. | | | | | | | | | | | | | | |
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• | Milestone revenue. We account for milestones under ASU No. 2010-17, Milestone Method of Revenue Recognition. Under the milestone method, contingent consideration received from the achievement of a substantive milestone is recognized in its entirety in the period in which the milestone is achieved, which we believe is more consistent with the substance of our performance under the collaboration. A milestone is defined as an event (i) that can only be achieved based in whole or in part on either the entity’s performance or on the occurrence of a specific outcome resulting from the entity’s 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 the entity. A milestone is substantive if the consideration earned from the achievement of the milestone is consistent with our performance required to achieve the milestone or the increase in value to the collaboration resulting from our performance, relates solely to our past performance, and is reasonable relative to all of the other deliverables and payments within the collaboration. Although we are eligible to receive future milestones from Takeda, timing and amounts of future milestone payments, if any are highly uncertain due to the recall. | | | | | | | | | | | | | | |
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Below is a summary of the components of our collaboration revenue for the three and nine months ended September 30, 2013, and 2012 (in thousands): |
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| Three months ended September 30, 2013 | | Nine months ended September 30, 2013 |
| 2013 | | 2012 | | 2013 | | 2012 |
Profit equalization payment | $ | — | | | $ | 10,377 | | | $ | 5 | | | $ | 13,048 | |
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Milestone payments | — | | | 2,250 | | | — | | | 60,250 | |
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Revenue previously deferred related to API | — | | | 441 | | | — | | | 441 | |
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Net expense reimbursement after CAPM | — | | | 535 | | | 1,364 | | | 5,823 | |
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Total collaboration revenue | $ | — | | | $ | 13,603 | | | $ | 1,369 | | | $ | 79,562 | |
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License and Royalty Revenue |
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Royalties are recognized as earned in accordance with contract terms, when third party results are reported and collectability is reasonably assured. Royalties received under agreements that were acquired by us in the 2001 spin out from GlaxoSmithKline or Glaxo are recorded net of the 50% that we are required to remit to Glaxo. |
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If Takeda decides to reintroduce OMONTYS, which is highly uncertain, we are eligible to receive potential milestones and royalties. The royalties are tiered in the range of 13% to 17% with respect to net sales in the U.S. and in the range of 13% to 24% depending on the level of net sales by Takeda worldwide outside of the U.S. |
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Inventory |
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We value our inventories at the lower of cost or net realizable value which is contractually determined in our collaboration with Takeda to be our cost plus a markup. We determine the cost of inventory using the specific identification method. We record active pharmaceutical ingredient, or API, as inventory when the title transfers to us from the contract manufacturing organization, or CMO, until the point of acceptance by Takeda. We initiate orders for API with our CMOs based on forecasts from Takeda. To date, all orders have generally commenced once there was a contractual commitment for the API from Takeda. |
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We analyze our inventory levels quarterly and write down inventory that has become obsolete or has a cost basis in excess of its expected net realizable value, as well as any inventory quantities in excess of expected requirements. Any expired inventory is disposed of and the related costs are recognized as expense. The voluntary recall of OMONTYS in February 2013 impacted the recoverability of our inventories based on assumptions about expected demand and net realizable value. In the December 31, 2012 balance sheet, given the significant uncertainty of demand following the recall, we had written down our API inventory and prepayments made to our CMOs to the net realizable value of zero. We also established an accrual for estimated losses on firm inventory purchase commitments by applying the same lower of cost or market approach that is used to value inventory. As of March 31, 2013 this accrued commitment was $32.9 million. However, in the second quarter, we were able to settle these obligations for $11.0 million resulting in a favorable adjustment to our operating results of $21.9 million in the quarter ended June 30, 2013. As of September 30, 2013, there was no remaining accrued balance. |
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We expense costs relating to the production of API as research and development or R&D expense in the period incurred until we receive FDA approval for a new product or product configuration and began to capitalize the subsequent inventory costs relating to that product or product configuration. Prior to approval of OMONTYS for commercial sale in March 2012 by the FDA, we had expensed all costs associated with the production of API as R&D expense. Subsequent to receiving FDA approval of OMONTYS, we commenced capitalization of third party costs which are incurred to manufacture the API used in the production of OMONTYS. |
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Property and Equipment |
Property and equipment are stated at cost less accumulated depreciation and amortization. Depreciation and amortization of property and equipment are calculated using the straight-line method over the estimated useful lives of the assets, generally three to five years. Assets under capital lease and leasehold improvements are amortized over the lesser of their estimated useful lives or the term of the related lease. Maintenance and repairs are charged to operations as incurred. All equipment was determined to be held for sale in May 2013 and accordingly no further depreciation was recorded after that determination. Equipment categorized as held for sale on the balance sheet at May 31, 2013 had a net book value of $0.5 million. All equipment other than computers retained for data storage was sold as of June 30, 2013 and the carrying value of equipment was reduced to zero upon completion of the sale. |
Valuation of Long-Lived Assets, Prepaids and Other Assets |
We assess the impairment of long-lived assets when events or changes in circumstances indicate that the carrying value of the assets or the asset grouping may not be recoverable. Factors that we consider in deciding when to perform an impairment review include significant negative industry or economic trends, and significant changes or planned changes in our use of the assets. We measure the recoverability of assets that will continue to be used in our operations by comparing the carrying value of the asset grouping to our estimate of the related total future undiscounted net cash flows. If an asset grouping's carrying value is not recoverable through the related undiscounted cash flows, the asset grouping is considered to be impaired. The impairment is measured by comparing the difference between the asset grouping's carrying value and its fair value. Fair value is the price that would be received from selling an asset in an orderly transaction between market participants at the measurement date. Long-lived assets such as intangible assets and property, plant and equipment are considered non-financial assets, and are recorded at fair value only when an impairment charge is recognized. The recall of OMONTYS was considered to be an impairment indicator for certain assets. We evaluated the recoverability of our assets and determined that certain assets were impaired. We recorded impairment charges for the nine months ended September 30, 2013 of $4.4 million. These charges are reflected in the statement of comprehensive income (loss) under the caption "Impairment (gain on disposal) of prepaid expenses, fixed assets, and intangible assets." |
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Net Loss Per Common Share |
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Basic net loss per share is computed by dividing net loss by the weighted-average number of shares of common stock outstanding during the period, without consideration for potential common shares. |
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Diluted net loss per share is computed similarly to basic net loss per share, except that the denominator is increased to include all dilutive potential common shares using the treasury stock method. For purposes of this calculation, options to purchase common stock, common stock issuable pursuant to the 2006 Employee Stock Purchase Plan, restricted stock units, or RSUs, and warrants are considered to be potential common shares and are only included in the calculation of diluted (loss) income per share when their effect is dilutive. |
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The following shares were excluded in the computation of diluted net loss per common share for the periods presented because including them would have an anti-dilutive effect (in thousands): |
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| Three months ended September 30, 2013 | | Nine months ended September 30, 2013 | | | |
| 2013 | | 2012 | | 2013 | | 2012 | | | | |
Options to purchase common stock | 1,893 | | | 5,311 | | | 1,893 | | | 5,311 | | | | | |
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Common stock issuable pursuant to the 2006 Employee Stock Purchase Plan | — | | | 125 | | | — | | | 125 | | | | | |
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Restricted stock units | — | | | 317 | | | — | | | 317 | | | | | |
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Warrant to purchase common stock | 424 | | | 504 | | | 424 | | | 504 | | | | | |
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Stock-Based Compensation |
We account for equity instruments issued to employees and directors under the authoritative guidance for share-based payments. |
The equity instruments we most typically grant are stock options and RSUs. Stock options are valued using the Black-Scholes valuation model while the fair value of RSUs is equivalent to the market value of the equivalent number of shares of common stock on the date of grant. The measurement of stock-based compensation is subject to periodic adjustments as the underlying equity instruments vest or do not vest as a result of employee terminations prior to vest. |
We have issued stock options to non-employees. We account for equity instruments issued to non-employees in accordance with the authoritative guidance for equity-based payments to non-employees, using a fair value approach. |
During the quarter ended June 30, 2013, we terminated the Employee Stock Purchase Plan and the Restricted Stock Award Plan. |