UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
Form 10-K
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the fiscal year ended
March 31, 2009
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OR
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the transition period
from to
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Commission file
number: 1-14131
ALKERMES, INC.
(Exact name of registrant as
specified in its charter)
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Pennsylvania
State or other jurisdiction
of
incorporation or organization
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23-2472830
(I.R.S. Employer
Identification No.)
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88 Sidney Street, Cambridge, MA
(Address of principal
executive offices)
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02139-4234
(Zip Code)
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(617) 494-0171
(Registrants telephone number, including area code)
Securities registered pursuant to Section 12(g) of the
Act:
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Common Stock, par value $.01 per share
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Series A Junior Participating Preferred Stock Purchase
Rights
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The NASDAQ Stock Market LLC
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Title of each class
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Name of exchange on which registered
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Securities registered pursuant to Section 12(b) of the
Act:
None
Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act.
Yes
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No
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Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the
Exchange
Act. Yes
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No
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Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been
subject to such filing requirements for the past
90 days. Yes
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No
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Indicate by check mark whether the registrant has submitted
electronically and posted on its corporate Web site, if any,
every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of
Regulation S-T
(§232.405 of this chapter) during the preceding
12 months (or for such shorter period that the registrant
was required to submit and post such
files).
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Yes
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No
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of
Regulation S-K
is not contained herein, and will not be contained, to the best
of registrants knowledge, in definitive proxy or
information statements incorporated by reference in
Part III of this
Form 10-K
or any amendment to this
Form 10-K.
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Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See the definitions of
large accelerated filer, accelerated
filer and smaller reporting company in
Rule 12b-2
of the Exchange Act. (Check one):
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Large accelerated
filer
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Accelerated
Filer
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Non-accelerated
filer
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(Do not check if a smaller reporting company)
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Smaller reporting company
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Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the Exchange Act).
Yes
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No
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As of September 30, 2008 (the last business day of the
second fiscal quarter) the aggregate market value of the
93,002,448 outstanding shares of voting and non-voting common
equity held by non-affiliates of the registrant was
$1,236,932,558. Such aggregate value was computed by reference
to the closing price of the common stock reported on the NASDAQ
Stock Market on September 30, 2008.
As of May 20, 2009, 94,525,706 shares of the
Registrants common stock were issued and outstanding and
382,632 shares of the Registrants non-voting common
stock were issued and outstanding.
DOCUMENTS
INCORPORATED BY REFERENCE
Portions of the Definitive Proxy Statement to be filed within
120 days after March 31, 2009 for the
Registrants Annual Shareholders Meeting are
incorporated by reference into Part III of this Report on
Form 10-K.
ALKERMES,
INC. AND SUBSIDIARIES
ANNUAL REPORT ON
FORM 10-K
FOR THE FISCAL YEAR ENDED MARCH 31, 2009
INDEX
2
PART I
The following business 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 certain factors. See
Risk Factors and Managements Discussion
and Analysis of Financial Condition and Results of
Operations Forward-Looking Statements.
General
Alkermes, Inc. (as used in this section, together with our
subsidiaries, us, we, our or
the Company) is a fully integrated biotechnology
company committed to developing innovative medicines to improve
patients lives. We developed, manufacture and
commercialize
VIVITROL
®
for alcohol dependence and manufacture
RISPERDAL
®
CONSTA
®
for schizophrenia and bipolar disorder. Our robust pipeline
includes extended-release injectable, pulmonary and oral
products for the treatment of prevalent, chronic diseases, such
as central nervous system disorders, addiction and diabetes. We
have research facilities in Massachusetts and a commercial
manufacturing facility in Ohio. We announced in April 2009 that
we will move our corporate headquarters from Cambridge,
Massachusetts, to Waltham, Massachusetts in early calendar 2010.
Our
Strategy
We leverage our formulation expertise and drug development
technologies to develop, both with partners and on our own,
innovative and competitively advantaged drug products that can
enhance patient outcomes in major therapeutic areas. We enter
into select collaborations with pharmaceutical and biotechnology
companies to develop significant new product candidates, based
on existing drugs and incorporating our technologies. In
addition, we apply our innovative formulation expertise and drug
development capabilities to create our own new, proprietary
pharmaceutical products. Each of these approaches is discussed
in more detail in Products and Development Programs.
Products
and Development Programs
RISPERDAL
CONSTA
RISPERDAL CONSTA is a long-acting formulation of risperidone, a
product of Janssen Pharmaceutica, Inc., a division of
Ortho-McNeil-Janssen Pharmaceuticals, Inc., and Janssen
Pharmaceutica International, a division of Cilag International
(together Janssen), and is the first and only
long-acting, atypical antipsychotic approved by the United
States (U.S.) Food and Drug Administration
(FDA). The medication uses our proprietary
Medisorb
®
technology to deliver and maintain therapeutic medication levels
in the body through just one injection every two weeks.
RISPERDAL CONSTA is marketed by Janssen and is exclusively
manufactured by us. RISPERDAL CONSTA was first approved by
regulatory authorities in the United Kingdom (UK)
and Germany in August 2002 and by the FDA in October 2003.
RISPERDAL CONSTA is approved for the treatment of schizophrenia
in approximately 85 countries and marketed in approximately 60
countries, and Janssen continues to launch the product around
the world. In the U.S., RISPERDAL CONSTA is also approved for
the treatment of bipolar I disorder.
Schizophrenia is a brain disorder characterized by disorganized
thinking, delusions and hallucinations. Studies have
demonstrated that as many as seventy-five percent of patients
with schizophrenia have difficulty taking their oral medication
on a regular basis, which can lead to worsening of symptoms.
Clinical data has shown that treatment with RISPERDAL CONSTA may
lead to improvements in symptoms, sustained remission and
decreases in hospitalization in patients with schizophrenia.
Bipolar disorder is a brain disorder that causes unusual shifts
in a persons mood, energy and ability to function. It is
often characterized by debilitating mood swings, from extreme
highs (mania) to extreme lows (depression). Bipolar I disorder
is characterized based on the occurrence of at least one manic
episode, with or without the occurrence of a major
3
depressive episode. Clinical data has shown that RISPERDAL
CONSTA significantly delayed the time to relapse compared to
placebo treatment in patients with bipolar disorder.
In April 2008, we announced that our partner,
Johnson & Johnson Pharmaceutical Research &
Development, L.L.C. (J&JPRD), submitted a
supplemental New Drug Application (sNDA) for
RISPERDAL CONSTA to the FDA seeking approval for adjunctive
therapy to lithium or valproate in the maintenance treatment of
bipolar I disorder.
In May 2008, the results of a study sponsored by Janssen were
presented at the American Psychiatric Association
(APA)
161
st
Annual
Meeting in Washington D.C. The
24-month,
open-label, active-controlled, international study compared
treatment with RISPERDAL CONSTA to that of
SEROQUEL
®
(quetiapine) among patients with schizophrenia and other related
disorders. The results demonstrated that in longer-term
maintenance therapy, the average relapse-free time was
significantly longer in patients treated with RISPERDAL CONSTA
(607 days) compared to quetiapine (533 days)
(p<0.0001). Furthermore, over the
24-month
treatment period, relapse occurred in 16.5 percent of
patients treated with RISPERDAL CONSTA and 31.3 percent of
patients treated with quetiapine. Both RISPERDAL CONSTA and
quetiapine had generally comparable safety profiles.
In July 2008, we announced that J&JPRD submitted a sNDA for
RISPERDAL CONSTA to the FDA for approval as monotherapy in the
maintenance treatment of bipolar I disorder to delay the time to
occurrence of mood episodes in adults.
In October 2008, the FDA approved the deltoid muscle of the arm
as a new injection site for RISPERDAL CONSTA. RISPERDAL CONSTA
was previously approved as a gluteal injection only.
In January 2009, we announced that J&JPRD initiated a phase
1, single-dose, open-label study of a four-week long-acting
injectable formulation of risperidone for the treatment of
schizophrenia. The study is designed to assess the
pharmacokinetics, safety and tolerability of a gluteal injection
of this risperidone formulation in approximately
26 patients diagnosed with chronic, stable schizophrenia.
In April 2009, we announced that Janssen received approval from
the Pharmaceuticals and Medical Devices Agency in Japan to
market RISPERDAL CONSTA for the treatment of schizophrenia.
RISPERAL CONSTA is the first long-acting atypical antipsychotic
to be approved in Japan.
In May 2009, the FDA approved RISPERDAL CONSTA for use as both a
monotherapy and adjunctive therapy to lithium or valproate in
the maintenance treatment of bipolar I disorder. Bipolar
disorder is a brain disorder that causes unusual shifts in a
persons mood, energy and ability to function. It is often
characterized by debilitating mood swings from extreme highs
(mania) to extreme lows (depression). Type I bipolar disorder is
characterized based on the occurrence of at least one manic
episode, with or without the occurrence of a major depressive
episode, and affects approximately one percent of the American
adult population in any given year.
In May 2009, the results of studies sponsored by Janssen were
presented at the APA 162nd Annual Meeting in
San Francisco, CA. According to two new studies, the use of
RISPERDAL CONSTA) may improve clinical and functional outcomes
and reduce rates of rehospitalization among patients with
schizophrenia. In an analysis of two prospective, observational
two-year studies conducted in the U.S. and three other
countries, RISPERDAL CONSTA consistently and significantly
improved clinical and functional outcomes for patients with
schizophrenia. Data were collected at baseline and at
three-month intervals up to 24 months, and included the
Clinical Global Impression of Illness Severity (CGI-S), which
measures clinical effectiveness outcomes, the Global Assessment
of Functioning (GAF), and healthcare resource utilization.
Patients were enrolled in the U.S. (N=532), Spain (N=1345),
Australia (N=784) and Belgium (N=408). A separate study also
showed that maintenance therapy with RISPERDAL CONSTA
significantly delayed the time to relapse compared to placebo in
patients with bipolar I disorder.
4
VIVITROL
VIVITROL is an extended-release Medisorb formulation of
naltrexone developed by Alkermes. VIVITROL is the first and only
once-monthly injectable medication for the treatment of alcohol
dependence. Alcohol dependence is a serious and chronic brain
disease characterized by cravings for alcohol, loss of control
over drinking, withdrawal symptoms and an increased tolerance
for alcohol. Adherence to medication is particularly challenging
with this patient population. In clinical trials, when used in
combination with psychosocial support, VIVITROL was shown to
reduce the number of drinking days and heavy drinking days and
to prolong abstinence in patients who abstained from alcohol the
week prior to starting treatment. Each injection of VIVITROL
provides medication for one month and alleviates the need for
patients to make daily medication dosing decisions. VIVITROL was
approved by the FDA in April 2006 and was launched in June 2006.
In August 2008, the Russian regulatory authorities approved
VIVITROL for the treatment of alcohol dependence. Our
collaborator, Cilag GmbH International (Cilag), a
subsidiary of Johnson & Johnson, launched VIVITROL in
Russia in March 2009. The VIVITROL collaboration with Cilag is
described in greater detail in the Collaborative
Arrangements section of Item 1.
We are also developing VIVITROL for the treatment of opioid
dependence, a serious and chronic brain disease characterized by
compulsive, prolonged-self administration of opioid substances
that are not used for a medical purpose. In June 2008, we
initiated a randomized, multi-center registration study of
VIVITROL in Russia for the treatment of opioid dependence. The
study is designed to assess the efficacy and safety of VIVITROL
in more than 250 opioid dependent patients. The clinical data
from this study may form the basis of a sNDA to the FDA for
VIVITROL for the treatment of opioid dependence. In April 2009,
we completed enrollment for this registration study. We expect
data from the study to be available in late calendar 2009.
In November 2008, we and Cephalon, Inc. (Cephalon)
agreed to end the collaboration for the development, supply and
commercialization of certain products, including VIVITROL in the
U.S., effective December 1, 2008 (the Termination
Date), and we assumed the risks and responsibilities for
the marketing and sale of VIVITROL in the U.S. We paid
Cephalon $16.0 million for title to two partially completed
VIVITROL manufacturing lines, and we received $11.0 million
from Cephalon as payment to fund their share of estimated
VIVITROL product losses during the one-year period following the
Termination Date. As of the Termination Date, Cephalon is no
longer responsible for the marketing and sale of VIVITROL in the
U.S., and we are responsible for all VIVITROL profits or losses.
Cephalon has no rights to royalty payments on future sales of
VIVITROL. In order to facilitate the full transfer of all
commercialization of VIVITROL to us, Cephalon, at our option and
on our behalf, has agreed to perform certain transition services
until May 31, 2009 at a full-time equivalent
(FTE) rate agreed to by the parties. The VIVITROL
collaboration with Cephalon is described in greater detail in
the Collaborative Arrangements section of
Item 1.
Exenatide
Once Weekly
We are collaborating with Amylin Pharmaceuticals, Inc.
(Amylin) on the development of exenatide once weekly
for the treatment of type 2 diabetes. Exenatide once weekly is
an injectable formulation of Amylins
BYETTA
®
(exenatide). BYETTA is an injection administered twice daily.
Diabetes is a disease in which the body does not produce or
properly use insulin. Diabetes can result in serious health
complications, including cardiovascular, kidney and nerve
disease. BYETTA was approved by the FDA in April 2005 as
adjunctive therapy to improve blood sugar control in patients
with type 2 diabetes who have not achieved adequate control on
metformin
and/or
a
sulfonylurea, which are commonly used oral diabetes medications.
In December 2006, the FDA approved BYETTA as an add-on therapy
for people with type 2 diabetes unable to achieve adequate
glucose control on thiazolidinediones, a class of diabetes
medications. Amylin has an agreement with Eli Lilly and Company
(Lilly) for the development and commercialization of
exenatide, including exenatide once weekly. Exenatide once
weekly is being developed with the goal of providing patients
with an effective and more patient-friendly treatment option.
In June 2008, we, Amylin and Lilly announced positive results
from a 52-week, open-label clinical study (DURATION-1
study) that showed the durable efficacy of exenatide once
weekly. At 52 weeks, patients taking exenatide once weekly
showed an average A1C improvement of 2 percent and an
average weight loss
5
of 9.5 pounds. The study also showed that patients who switched
from BYETTA injection after 30 weeks to exenatide once
weekly experienced additional improvements in A1C and fasting
plasma glucose. Seventy-four percent of all patients in the
study achieved an endpoint of A1C of 7 percent or less at
52 weeks. Exenatide once weekly was generally well
tolerated, with no major hypoglycemia events regardless of
background therapy and nausea was predominantly mild and
transient.
In March 2009, we, Amylin and Lilly reported positive results
from a 26-week, double-blind superiority study that compared
exenatide once weekly to sitagliptin or pioglitazone
(DURATION-2 study). Data from the study showed that
after completing 26 weeks of treatment, evaluable patients
randomized to exenatide once weekly experienced a statistically
significant reduction in A1C of 1.7 percentage points from
baseline, compared to a reduction of 1.0 percentage point
for sitagliptin and 1.4 percentage points for pioglitazone.
Treatment with exenatide once weekly also produced statistically
significant differences in weight, with weight loss of 6.2
pounds at 26 weeks, compared with a loss of 1.9 pounds for
sitagliptin, and a weight gain of 7.4 pounds for pioglitazone.
There was no major hypoglycemia in any treatment group. The most
frequently reported adverse events among exenatide once weekly
and sitagliptin users were nausea and diarrhea. Upper
respiratory tract infection and peripheral edema were the most
frequently reported events by patients receiving pioglitazone.
In May 2009, Amylin submitted a New Drug Application
(NDA) to the FDA for the treatment of type 2
diabetes. Additional studies designed to demonstrate the
superiority of exenatide once weekly are ongoing.
ALKS
33
ALKS 33 is a novel opioid modulator, identified from the library
of compounds in-licensed from Rensselaer Polytechnic Institute
(RPI). These compounds represent an opportunity for
us to develop important therapeutics for a broad range of
diseases and medical conditions, including addiction, pain and
other nervous system disorders. In July 2008, we announced
positive preclinical results for ALKS 33. The study results
included efficacy data from an ethanol drinking behavior model
in rodents, a well-characterized model for evaluating the
effects of potential therapeutics targeting opioid receptors.
Results showed that single, oral doses of our novel molecules
significantly reduced the ethanol drinking behavior in rodents,
with an average reduction from baseline ranging from
35 percent to 50 percent for the proprietary molecules
compared to 10 percent for the naltrexone control arm.
Details from an evaluation of the
in vivo
pharmacology,
pharmacokinetics and
in vitro
metabolism were also
presented. Data showed that the molecules have improved
metabolic stability compared to the naltrexone control arm when
cultured with human hepatocytes (liver cells), suggesting that
they are not readily metabolized by the liver, a unique
advantage over existing oral therapies for addiction.
Pharmacokinetic results showed that the oral bioavailability of
ALKS 33 was significantly greater than that of the active
control.
In April 2009, we reported positive results from a phase 1
randomized, double-blind, placebo-controlled study for ALKS 33
in healthy volunteers. The study was designed to assess the
pharmacokinetics, safety and tolerability of ALKS 33 following
single oral administration at escalating dose levels. ALKS 33
demonstrated rapid oral absorption, high plasma concentrations
and duration of action that supports once daily dosing. The
study results are consistent with previous findings that ALKS 33
is not metabolized by the liver, a unique advantage over
existing oral therapies for addiction. ALKS 33 was generally
well tolerated during the study. Based on these preliminary
results, we expect to initiate a phase 2 study of ALKS 33 in the
second half of calendar 2009.
ALKS
29
We are developing ALKS 29, an oral combination therapy for the
treatment of alcohol dependence. ALKS 29 is a co-formulation of
ALKS 33, a proprietary opioid modulator, and baclofen, an
FDA-approved muscle relaxant and antispasmodic therapeutic.
Research suggests that baclofen may attenuate the compulsive
component of alcohol dependence. As a co-formulation of ALKS 33
and baclofen, ALKS 29 is designed to address both the compulsive
and impulsive components of alcohol dependence.
6
In April 2009, we reported positive data from a phase 1,
open-label crossover study of a proprietary extended-release
formulation of baclofen. The study was designed to assess the
pharmacokinetics, safety and tolerability of an extended-release
formulation of baclofen compared to the currently marketed
formulation of baclofen. Data from the study showed that our
baclofen-only formulation demonstrated a favorable
pharmacokinetic profile compared to the currently marketed
formulation and was generally well tolerated.
ALKS
27
Using our
AIR
®
pulmonary technology, we are developing an inhaled trospium
product for the treatment of chronic obstructive pulmonary
disease (COPD). COPD is a serious, chronic disease
characterized by a gradual loss of lung function. In February
2009, we initiated a phase 2a study of ALKS 27 designed to
assess the efficacy, safety, tolerability and pharmacokinetics
of ALKS 27 in patients with COPD. In this randomized,
double-blind, cross-over, placebo-controlled study, patients
will receive single administrations of three doses of ALKS 27
and placebo, each separated by a wash out period. The efficacy
of ALKS 27 will be evaluated based on improvements in pulmonary
function in patients with COPD, as measured by FEV1, a commonly
used measure of lung function. In addition, the phase 2a study
will explore the safety, tolerability and effects of ALKS 27 in
combination with formoterol fumarate inhalation powder, a
long-acting beta agonist (LABA) already approved for
the treatment of COPD. All patients will receive the combination
dose following the randomized, double-blind, placebo-controlled
portion of the study. Research indicates that LABAs and
muscarinic receptor antagonists, such as ALKS 27, may have a
synergistic effect on improving symptoms in patients with COPD
by acting on complementary pathways. We expect to report
top-line results from the full study in the second half of
calendar 2009.
ALKS
36
We are developing ALKS 36, a co-formulation of an opioid
analgesic and RDC-1036, a novel oral, peripherally-acting opioid
antagonist, for the treatment of pain. Research indicates that a
high percentage of patients receiving opioids are likely to
experience side effects affecting gastrointestinal motility. A
pain medication that does not inhibit gastrointestinal motility
could provide an advantage over current therapies.
In November 2008, we announced positive preclinical data
demonstrating that RDC-1036 was effective in reversing opioid
effects on gastrointestinal motility. Data also showed that oral
administration of RDC-1036 had greater efficacy at a lower dose
and for an extended period of time compared to an active
comparator, methylnaltrexone. Based on these positive
preclinical results, we expect to initiate a phase 1 study of
RDC-1036 in the second half of calendar 2009.
Collaborative
Arrangements
Our business strategy includes forming collaborations to develop
and commercialize our products and, in so doing, access
technological, financial, marketing, manufacturing and other
resources. We have entered into several collaborative
arrangements, as described below.
Janssen
Under a product development agreement, we collaborated with
Janssen on the development of RISPERDAL CONSTA. Under the
development agreement, Janssen provided funding to us for the
development of RISPERDAL CONSTA, and Janssen is responsible for
securing all necessary regulatory approvals for the product.
RISPERDAL CONSTA has been approved in approximately 85
countries. RISPERDAL CONSTA has been launched in approximately
60 countries, including the U.S. and several major
international markets. We exclusively manufacture RISPERDAL
CONSTA for commercial sale. In addition, we and Janssen entered
into an agreement to work to develop a four week formulation of
risperidone.
Under license agreements, we granted Janssen and an affiliate of
Janssen exclusive worldwide licenses to use and sell RISPERDAL
CONSTA. Under our license agreements with Janssen, we record
royalty revenues equal to 2.5 percent of Janssens net
sales of RISPERDAL CONSTA in the quarter when the product is
sold by Janssen. Janssen can terminate the license agreements
upon 30 days prior written notice to us.
7
Under our manufacturing and supply agreement with Janssen, we
record manufacturing revenues when product is shipped to
Janssen, based on 7.5 percent of Janssens net unit
sales price for RISPERDAL CONSTA for the calendar year.
The manufacturing and supply agreement terminates on expiration
of the license agreements. In addition, either party may
terminate the manufacturing and supply agreement upon a material
breach by the other party which is not resolved within
60 days written notice or upon written notice in the event
of the other partys insolvency or bankruptcy. Janssen may
terminate the agreement upon six months written notice to us. In
the event that Janssen terminates the manufacturing and supply
agreement without terminating the license agreements, the
royalty rate payable to us on Janssens net sales of
RISPERDAL CONSTA would increase from 2.5 percent to
5.0 percent.
Cephalon
In June 2005, we entered into a license and collaboration
agreement and supply agreement with Cephalon, later amended in
October 2006 (together the Agreements) to jointly
develop, manufacture and commercialize extended-release forms of
naltrexone, including VIVITROL (the product or
products), in the U.S. Under the terms of the
Agreements, we provided Cephalon with a co-exclusive license to
use and sell the product in the U.S. and a non-exclusive
license to manufacture the product under certain circumstances,
with the ability to sublicense. We were responsible for
obtaining marketing approval for VIVITROL in the U.S. for
the treatment of alcohol dependence, which we received from the
FDA in April 2006, for completing the first VIVITROL
manufacturing line and manufacturing the product. The companies
shared responsibility for additional development of the
products, and also shared responsibility for developing the
commercial strategy for the products. Cephalon had primary
responsibility for the commercialization, including distribution
and marketing, of the products in the U.S., and we supported
this effort with a team of managers of market development.
Cephalon paid us an aggregate of $274.6 million in
nonrefundable milestone payments related to the Agreements and
we were responsible to fund the first $124.6 million of
cumulative net losses incurred on VIVITROL.
In November 2008, we and Cephalon agreed to end the
collaboration for the development, supply and commercialization
of certain products, including VIVITROL in the U.S., effective
on the Termination Date, and we assumed the risks and
responsibilities for the marketing and sale of VIVITROL in the
U.S. We paid Cephalon $16.0 million for title to two
partially completed VIVITROL manufacturing lines, and we
received $11.0 million from Cephalon as payment to fund
their share of estimated VIVITROL product losses during the
one-year period following the Termination Date. As of the
Termination Date, we were responsible for all VIVITROL profits
or losses and Cephalon has no rights to royalty payments on
future sales of VIVITROL. In order to facilitate the full
transfer of all commercialization of VIVITROL to us, Cephalon,
at our option and on our behalf, has agreed to perform certain
transition services until May 31, 2009 at an FTE rate
agreed to by the parties.
Cilag
In December 2007, we entered into a license and
commercialization agreement with Cilag to commercialize VIVITROL
for the treatment of alcohol dependence and opioid dependence in
Russia and other countries in the Commonwealth of Independent
States (CIS). Under the terms of the agreement,
Cilag has primary responsibility for securing all necessary
regulatory approvals for VIVITROL and Janssen-Cilag, an
affiliate of Cilag, commercializes the product. We are
responsible for the manufacture of VIVITROL and receive
manufacturing and royalty revenues based upon product sales.
In August 2008, Cilag paid us a nonrefundable payment of
$1.0 million upon achieving regulatory approval of VIVITROL
for the treatment of alcohol dependence in Russia. Cilag
previously paid us $5.0 million in nonrefundable payments
and could pay us up to an additional $33.0 million upon the
receipt of regulatory approvals for the product, the occurrence
of certain
agreed-upon
events and the achievement of certain VIVITROL sales levels.
8
Commencing five years after the effective date of the agreement,
Cilag will have the right to terminate the agreement at any time
by providing 90 days written notice to us, subject to
certain continuing rights and obligations between the parties.
Cilag will also have the right to terminate the agreement at any
time upon 90 days written notice to us if a change in the
pricing
and/or
reimbursement of VIVITROL in Russia and other countries of the
CIS has a material adverse effect on the underlying economic
value of commercializing the product such that it is no longer
reasonably profitable to Cilag. In addition, either party may
terminate the agreement upon a material breach by the other
party which is not cured within 90 days written notice of
material breach or, in certain circumstances, a 30 day
extension of that period.
Amylin
In May 2000, we entered into a development and license agreement
with Amylin for the development of exenatide once weekly, which
is under development for the treatment of type 2 diabetes.
Pursuant to the development and license agreement, Amylin has an
exclusive, worldwide license to the Medisorb technology for the
development and commercialization of injectable extended-release
formulations of exendins and other related compounds. Amylin has
entered into a collaboration agreement with Lilly for the
development and commercialization of exenatide, including
exenatide once weekly. We receive funding for research and
development and milestone payments consisting of cash and
warrants for Amylin common stock upon achieving certain
development and commercialization goals and will also receive
royalty payments based on future product sales, if any. We are
responsible for formulation and non-clinical development of any
products that may be developed pursuant to the agreement and for
manufacturing these products for use in clinical trials and, in
certain cases, for commercial sale. Subject to its arrangement
with Lilly, Amylin is responsible for conducting clinical
trials, securing regulatory approvals and marketing any products
resulting from the collaboration on a worldwide basis.
In October 2005, we amended our existing development and license
agreement with Amylin, and reached agreement regarding the
construction of a manufacturing facility for exenatide once
weekly and certain technology transfer related thereto. In
December 2005, Amylin purchased a facility for the manufacture
of exenatide once weekly and began construction in early
calendar year 2006. Amylin is responsible for all costs and
expenses associated with the design, construction and validation
of the facility. The parties agreed that we would transfer our
technology for the manufacture of exenatide once weekly to
Amylin. Amylin agreed to reimburse us for the time, at an
agreed-upon
FTE rate, and materials we incurred with respect to the transfer
of technology. In January 2009, the parties agreed that the
technology transfer was complete. Amylin will be responsible for
the manufacture of exenatide once weekly and will operate the
facility. Amylin will pay us royalties for commercial sales of
this product, if approved, in accordance with the development
and license agreement.
Amylin may terminate the development and license agreement for
any reason upon 90 days written notice to us if such
termination occurs before filing an NDA with the FDA for a
product developed under the development and license agreement or
upon 180 days written notice to us after such event. In
addition, either party may terminate the development and license
agreement upon a material default or breach by the other party
that is not cured within 60 days after receipt of written
notice specifying the default or breach.
Rensselaer
Polytechnic Institute
In September 2006, we and RPI entered into a license agreement
granting us exclusive rights to a family of opioid receptor
compounds discovered at RPI. These compounds represent an
opportunity for us to develop therapeutics for a broad range of
diseases and medical conditions, including addiction, pain and
other central nervous system disorders.
Under the terms of the agreement, RPI granted us an exclusive
worldwide license to certain patents and patent applications
relating to its compounds designed to modulate opioid receptors.
We will be responsible for the continued research and
development of any resulting product candidates. We paid RPI a
nonrefundable upfront payment of $0.5 million and are
obligated to pay annual fees of up to $0.2 million, and
tiered royalty payments of between 1% and 4% of annual net sales
in the event any products developed under the agreement
9
are commercialized. In addition, we are obligated to make
milestone payments in the aggregate of up to $9.1 million
upon certain
agreed-upon
development events. All amounts paid to RPI under this license
agreement have been expensed and are included in research and
development expenses. In July 2008, the parties amended the
agreement to expand the license to include certain additional
patent applications. We paid RPI an additional nonrefundable
payment of $125,000 and slightly increased the annual fees in
consideration of this amendment.
Lilly
In March 2008, we received written notice from Lilly terminating
the development and license agreement, dated April 1, 2001,
between us and Lilly pursuant to which we and Lilly were
collaborating to develop inhaled formulations of insulin and
other potential products for the treatment of diabetes based on
our AIR pulmonary technology. This termination became effective
in June 2008. Termination of our development and license
agreement also resulted in the termination of our supply
agreement with Lilly for AIR Insulin.
In June 2008, we entered into an agreement with Lilly in
connection with the termination of the development and license
agreements and supply agreement for the development of AIR
Insulin (the AIR Insulin Termination Agreement).
Under the AIR Insulin Termination Agreement, we received
$40.0 million in cash as payment for all services we had
performed through the date of the AIR Insulin Termination
Agreement as well as title to all of the assets related to AIR
commercial manufacturing and the intellectual property developed
under the development and license agreement. We previously
recognized $14.5 million of this payment as research and
development (R&D) revenue in the year ended
March 31, 2008 and recognized $25.5 million of this
payment as R&D revenue in the three months ended
June 30, 2008.
Drug
Delivery Technology
Our proprietary technologies address several important
development opportunities, including injectable extended-release
of proteins, peptides and small molecule pharmaceutical
compounds and the pulmonary delivery of small molecules,
proteins and peptides. We have used these technologies as a
platform to establish drug development, clinical development and
regulatory expertise.
Injectable
Extended-Release Technology
Our injectable extended-release technology allows us to
encapsulate small molecule pharmaceuticals, peptides and
proteins, in microspheres made of common medical polymers. The
technology is designed to enable novel formulations of
pharmaceuticals by providing controlled, extended-release of
drugs over time. Drug release from the microsphere is controlled
by diffusion of the drug through the microsphere and by
biodegradation of the polymer. These processes can be modulated
through a number of formulation and fabrication variables,
including drug substance and microsphere particle sizing and
choice of polymers and excipients. RISPERDAL CONSTA, VIVITROL
and exenatide once weekly utilize our injectable
extended-release technology.
Pulmonary
Technology
The AIR technology is our proprietary pulmonary technology that
enables the delivery of both small molecules and macromolecules
to the lungs. Our technology allows us to formulate drugs into
dry powders made up of highly porous particles with low mass
density. These particles can be efficiently delivered to the
deep lung by a small, simple inhaler. The AIR technology is
useful for small molecules, proteins or peptides and allows for
both local delivery to the lungs and systemic delivery via the
lungs.
AIR particles can be aerosolized and inhaled efficiently with
simple inhaler devices because low forces of cohesion allow the
particles to disaggregate easily. We have developed a family of
relatively inexpensive, compact, easy-to-use inhalers. The
capsule-based AIR inhalers are breath activated and made from
injection molded plastic. The powders are designed to disperse
easily from the device over a range of inhalation flow rates,
which may lead to low patient-to-patient variability and high
lung deposition of the inhaled dose. Since
10
no carrier particles are required in AIR formulations, high
doses can be effectively delivered via a single inhalation. ALKS
27 leverages our pulmonary technology.
Manufacturing
and Product Supply
We own and occupy a manufacturing, office and laboratory
facility in Wilmington, Ohio. We either purchase active drug
product from third parties or receive it from our third party
collaborators to formulate product using our technologies. The
manufacture of our product for clinical trials and commercial
use is subject to current good manufacturing practices
(cGMP) and other regulatory agency regulations. We
have been producing commercial product since 1999. For
information about risks relating to the manufacture of our
products and product candidates, see the sections of
Item 1A Risk Factors entitled
We are subject to risks related to the manufacture of our
products, There are risks in the manufacturing and
distribution of our products and product candidates,
The manufacture of our products is subject to government
regulation, and We rely heavily on collaborative
partners.
Commercial
Products
We manufacture RISPERDAL CONSTA and VIVITROL in our Wilmington,
Ohio facility. The facility is periodically inspected by U.S.,
European and Japanese regulatory authorities to ensure that the
facility continues to meet required cGMP standards for continued
commercial manufacturing. See Item 2.
Properties.
Clinical
Products
We have established and are operating clinical facilities with
the capability to produce clinical supplies of our pulmonary and
injectable extended-release products within our corporate
headquarters in Cambridge, Massachusetts and at our Wilmington,
Ohio facility. We have also contracted with third-party
manufacturers to formulate certain products for clinical use. We
require that our contract manufacturers adhere to cGMP, except
for products and product candidates for toxicology and animal
studies, which we require to be manufactured in accordance with
current Good Laboratory Practices (cGLP).
Although some materials for our drug products are currently
available from a single-source or a limited number of qualified
sources, we attempt to acquire an adequate inventory of such
materials, establish alternative sources
and/or
negotiate long-term supply arrangements. We believe we do not
have any significant issues obtaining suppliers, however, we
cannot be certain that we will continue to be able to obtain
long-term supplies of our manufacturing materials.
Marketing
and Sales
Under our collaboration agreements with Janssen, Cilag, Amylin
and Lilly, these companies are responsible for the
commercialization of the products developed thereunder if and
when regulatory approval is obtained. In December 2008, in
connection with the termination of the VIVITROL collaboration
with Cephalon, we assumed the risks and responsibilities for the
marketing and sale of VIVITROL in the U.S.
We have established a sales force to market VIVITROL in the
U.S. consisting of approximately 50 individuals. VIVITROL
is sold directly to pharmaceutical wholesalers, specialty
pharmacies and a specialty distributor. Product sales of
VIVITROL by us and Cephalon during the year ended March 31,
2009, to McKesson Corporation (McKesson), Cardinal
Health (Cardinal), AmerisourceBergen Drug
Corporation (Amerisource) and Caremark L.L.C.
represented approximately 33%, 24%, 21% and 13%, respectively,
of total VIVITROL sales. No other customer accounted for more
than 10% of VIVITROL product sales in fiscal 2009.
Effective April 1, 2009, we entered into an agreement with
Cardinal Health Specialty Pharmaceutical Services
(Cardinal SPS), a division of Cardinal, to provide
warehouse, shipping and administrative services for VIVITROL at
a location outside of Nashville, Tennessee. Our expectation for
fiscal 2010 and beyond is to continue to distribute VIVITROL
through Cardinal SPS.
11
In fiscal 2010, we expect selling and marketing expenses to
increase over fiscal 2009 as a result of being solely
responsible for all costs relating to the marketing and sale of
VIVITROL in the U.S.
Competition
The biotechnology and pharmaceutical industries are subject to
rapid and substantial technological change. We face intense
competition in the development, manufacture, marketing and
commercialization of our products and product candidates from
many and varied sources academic institutions,
government agencies, research institutions, biotechnology and
pharmaceutical companies, including our collaborators, and other
companies with similar technologies. Our success in the
marketplace depends largely on our ability to identify and
successfully commercialize products developed from our research
activities or licensed through our collaboration activities, and
to obtain financial resources necessary to fund our clinical
trials, manufacturing and commercialization activities.
Competition for our marketed products and product candidates may
be based on product efficacy, safety, convenience, reliability,
availability and price, among other factors. The timing of entry
of new pharmaceutical products in the market can be a
significant factor in product success, and the speed with which
we receive approval for products, bring them to market and
produce commercial supplies may impact the competitive position
of our products in the marketplace.
Many of our competitors and potential competitors have
substantially more capital resources, human resources,
manufacturing and marketing experience, research and development
resources and production facilities than we do. Many of these
competitors have significantly more experience than we do in
undertaking preclinical testing and clinical trials of new
pharmaceutical products and in obtaining FDA and other
regulatory approvals. There can be no assurance that
developments by our competitors will not render our products,
product candidates or our technologies obsolete or
noncompetitive, or that our collaborators will not choose to use
competing technologies or methods.
With respect to our injectable technology, we are aware that
there are other companies developing extended-release delivery
systems for pharmaceutical products. RISPERDAL CONSTA may
compete with a number of other injectable products currently
being developed, including two injectable, four-week,
long-acting products: paliperidone palmitate, which is being
developed by Johnson & Johnson; and olanzapine
long-acting injection, which is being developed by Lilly and
received marketing authorization for sale in the European Union
(E.U.) and New Zealand. RISPERDAL CONSTA may also
compete with new oral compounds being developed for the
treatment of schizophrenia.
VIVITROL competes with
CAMPRAL
®
sold by Forest Laboratories, Inc. and
ANTABUSE
®
sold by Odyssey Pharmaceuticals, Inc. as well as currently
marketed drugs also formulated from naltrexone, such as
REVIA
®
by Duramed Pharmaceuticals, Inc.,
NALOREX
®
by Bristol-Myers Squibb Pharmaceuticals Ltd. and
DEPADE
®
by Mallinckrodt, Inc., a subsidiary of Tyco International Ltd.
Other pharmaceutical companies are investigating product
candidates that have shown some promise in treating alcohol
dependence and that, if approved by the FDA, would compete with
VIVITROL.
If approved, exenatide once weekly would compete with
established therapies for market share. Such competitive
products include sulfonylureas, metformin, insulins,
thiazolidinediones, glinides, dipeptidyl peptidase type IV
inhibitors, insulin sensitizers, alpha-glucosidase inhibitors
and sodium-glucose transporter-2 inhibitors. Exenatide once
weekly would also compete with other long acting GLP-1 agonists
currently in development.
Other companies, including our collaborators, are developing new
chemical entities or improved formulations of existing products
which, if developed successfully, could compete against our
products and product candidates.
Patents
and Proprietary Rights
Our success will be dependent, in part, on our ability to obtain
patent protection for our product candidates and those of our
collaborators, to maintain trade secret protection and to
operate without infringing upon the proprietary rights of others.
12
We have a proprietary portfolio of patent rights and exclusive
licenses to patents and patent applications. We have filed
numerous U.S. and foreign patent applications directed to
compositions of matter as well as processes of preparation and
methods of use, including applications relating to each of our
delivery technologies. We own approximately 139 issued
U.S. patents. The earliest date upon which a
U.S. patent issued to us will expire, that is currently
material to our business, is 2013. In the future, we plan to
file additional U.S. and foreign patent applications
directed to new or improved products and processes. We intend to
file additional patent applications when appropriate and defend
our patent position aggressively.
We have exclusive rights through licensing agreements with third
parties to approximately 40 issued U.S. patents, a number
of U.S. patent applications and corresponding foreign
patents and patent applications in many countries, subject in
certain instances to the rights of the U.S. government to
use the technology covered by such patents and patent
applications. Under certain licensing agreements, we currently
pay annual license fees
and/or
minimum annual royalties. During the year ended March 31,
2009, these fees totaled approximately $0.9 million. In
addition, under these licensing agreements, we are obligated to
pay royalties on future sales of products, if any, covered by
the licensed patents.
We know of several U.S. patents issued to other parties
that may relate to our products and product candidates. The
manufacture, use, offer for sale, sale or import of some of our
product candidates might be found to infringe on the claims of
these patents. A party might file an infringement action against
us. Our cost of defending such an action is likely to be high
and we might not receive a favorable ruling.
We also know of patent applications filed by other parties in
the U.S. and various foreign countries that may relate to
some of our product candidates if issued in their present form.
The patent laws of the U.S. and foreign countries are
distinct and decisions as to patenting, validity of patents and
infringement of patents may be resolved differently in different
countries. If patents are issued to any of these applicants, we
or our collaborators may not be able to manufacture, use, offer
for sale or sell some of our product candidates without first
getting a license from the patent holder. The patent holder may
not grant us a license on reasonable terms or it may refuse to
grant us a license at all. This could delay or prevent us from
developing, manufacturing or selling those of our product
candidates that would require the license.
We try to protect our proprietary position by filing
U.S. and foreign patent applications related to our
proprietary technology, inventions and improvements that are
important to the development of our business. Because the patent
position of biotechnology and pharmaceutical companies involves
complex legal and factual questions, enforceability of patents
cannot be predicted with certainty. The ultimate degree of
patent protection that will be afforded to biotechnology
products and processes, including ours, in the U.S. and in
other important markets remains uncertain and is dependent upon
the scope of protection decided upon by the patent offices,
courts and lawmakers in these countries. Patents, if issued, may
be challenged, invalidated or circumvented. Thus, any patents
that we own or license from others may not provide any
protection against competitors. Our pending patent applications,
those we may file in the future, or those we may license from
third parties, may not result in patents being issued. If
issued, they may not provide us with proprietary protection or
competitive advantages against competitors with similar
technology. Furthermore, others may independently develop
similar technologies or duplicate any technology that we have
developed outside the scope of our patents. The laws of certain
foreign countries do not protect our intellectual property
rights to the same extent as do the laws of the U.S.
We also rely on trade secrets, know-how and technology, which
are not protected by patents, to maintain our competitive
position. We try to protect this information by entering into
confidentiality agreements with parties that have access to it,
such as our corporate partners, collaborators, employees and
consultants. Any of these parties may breach the agreements and
disclose our confidential information or our competitors might
learn of the information in some other way. If any trade secret,
know-how or other technology not protected by a patent were to
be disclosed to, or independently developed by, a competitor,
our business, results of operations and financial condition
could be materially adversely affected.
13
Government
Regulation
Before new pharmaceutical products may be sold in the
U.S. and other countries, clinical trials of the products
must be conducted and the results submitted to appropriate
regulatory agencies for approval. The regulatory approval
process requires a demonstration of product safety and efficacy
and the ability to effectively manufacture such product.
Generally, such demonstration of safety and efficacy includes
preclinical testing and clinical trials of such product
candidates. The testing, manufacture and marketing of
pharmaceutical products in the U.S. requires the approval
of the FDA. The FDA has established mandatory procedures and
safety standards which apply to the preclinical testing and
clinical trials, manufacture and marketing of these products.
Similar standards are established by
non-U.S. regulatory
bodies for marketing approval of such products. Pharmaceutical
marketing and manufacturing activities are also regulated by
state, local and other authorities. The regulatory approval
process in the U.S. is described in brief below.
As an initial step in the FDA regulatory approval process,
preclinical studies are typically conducted in animal models to
assess the drugs efficacy, identify potential safety
problems and evaluate potential for harm to humans. The results
of these studies must be submitted to the FDA as part of an
investigational new drug application (IND), which
must be reviewed by the FDA within 30 days of submission
and before proposed clinical (human) testing can begin. If the
FDA is not convinced of the product candidates safety, it
has the authority to place the program on hold at any time
during the investigational stage and request additional animal
data or changes to the study design. Studies supporting approval
of products in the U.S. are typically accomplished under an
IND.
Typically, clinical testing involves a three-phase process:
phase 1 trials are conducted with a small number of healthy
subjects and are designed to determine the early side effect
profile and, perhaps, the pattern of drug distribution and
metabolism; phase 2 trials are conducted on patients with a
specific disease in order to determine appropriate dosages,
expand evidence of the safety profile and, perhaps, provide
preliminary evidence of product efficacy; and phase 3 trials are
large-scale, comparative studies conducted on patients with a
target disease in order to generate enough data to provide
statistical evidence of efficacy and safety required by national
regulatory agencies. The results of the preclinical testing and
clinical trials of a pharmaceutical product, as well as the
information on the manufacturing of the product and proposed
labeling, are then submitted to the FDA in the form of a NDA or,
for a biological product, a biologics license application
(BLA) for approval to commence commercial sales.
Preparing such applications involves considerable data
collection, verification, analysis and expense. In responding to
an NDA or BLA, the FDA may grant marketing approval, request
additional information or deny the application if it determines
that the application does not satisfy its regulatory approval
criteria. Submission of the application(s) for marketing
authorization does not guarantee approval. At the same time, an
FDA request for additional information does not mean the product
will not be approved or that the FDAs review of the
application will be significantly delayed. On occasion,
regulatory authorities may require larger or additional studies,
leading to unanticipated delay or expense. Even after initial
FDA approval has been obtained, further clinical trials may be
required to provide additional data on safety and efficacy. It
is also possible that the labeling may be more limited than what
was originally projected. Each marketing authorization
application is unique and should be considered as such.
The receipt of regulatory approval often takes a number of
years, involving the expenditure of substantial resources and
depends on a number of factors, including the severity of the
disease in question, the availability of alternative treatments
and the risks and benefits demonstrated in clinical trials. Data
obtained from preclinical testing and clinical trials are
subject to varying interpretations, which can delay, limit or
prevent FDA approval. In addition, changes in FDA approval
policies or requirements may occur, or new regulations may be
promulgated, which may result in delay or failure to receive FDA
approval. Similar delays or failures may be encountered in
foreign countries. Delays, increased costs and failures in
obtaining regulatory approvals could have a material adverse
effect on our business, results of operations and financial
condition.
Regulatory authorities track information on side effects and
adverse events reported during clinical studies and after
marketing approval. Non-compliance with FDA safety reporting
requirements may result in FDA regulatory action that may
include civil action or criminal penalties. Side effects or
adverse events that are reported during clinical trials can
delay, impede or prevent marketing approval. Similarly, adverse
events that
14
are reported after marketing approval can result in additional
limitations being placed on the products use and,
potentially, withdrawal or suspension of the product from the
market. Furthermore, recently enacted legislation provides the
FDA with expanded authority over drug products after approval.
This legislation enhances the FDAs authority with respect
to post-marketing safety surveillance including, among other
things, the authority to require additional post-approval
studies or clinical trials and mandate label changes as a result
of safety findings.
If we seek to make certain changes to an approved product, such
as adding a new indication, making certain manufacturing
changes, or changing manufacturers or suppliers of certain
ingredients or components, we will need review and approval of
regulatory authorities, including the FDA, the European
Medicines Agency (EMEA) and Japanese regulatory
authorities before the changes can be implemented.
Good
Manufacturing Processes (cGMP)
Among the conditions for a NDA or BLA approval is the
requirement that the prospective manufacturers quality
control and manufacturing procedures conform with cGMP. Before
approval of an NDA or BLA, the FDA may perform a pre-approval
inspection of a manufacturing facility to determine its
compliance with cGMP and other rules and regulations. In
complying with cGMP, manufacturers must continue to expend time,
money and effort in the area of production and quality control
to ensure full technical compliance. Similarly, NDA or BLA
approval may be delayed or denied due to cGMP non-compliance or
other issues at contract sites or suppliers included in the NDA
or BLA, and the correction of these shortcomings may be beyond
our control. Facilities are also subjected to the requirements
of other government bodies, such as the U.S. Occupational
Safety & Health Administration and the
U.S. Environmental Protection Agency.
If, after receiving clearance from regulatory agencies, a
company makes a material change in manufacturing equipment,
location, or process, additional regulatory review and approval
may be required. We also must adhere to cGMP and
product-specific regulations enforced by the FDA following
product approval. The FDA, the EMEA and other regulatory
agencies also conduct regular, periodic visits to re-inspect
equipment, facilities and processes following the initial
approval of a product. If, as a result of these inspections, it
is determined that our equipment, facilities or processes do not
comply with applicable regulations and conditions of product
approval, regulatory agencies may seek civil, criminal or
administrative sanctions
and/or
remedies against us, including the suspension of our
manufacturing operations.
Advertising
and Promotion
The FDA regulates all advertising and promotion activities for
products under its jurisdiction both prior to and after
approval. A company can make only those claims relating to
safety and efficacy that are approved by the FDA. Physicians may
prescribe legally available drugs for uses that are not
described in the drugs labeling and that differ from those
tested by us and approved by the FDA. Such off-label uses are
common across medical specialties, and often reflect a
physicians belief that the off-label use is the best
treatment for his or her patients. The FDA does not regulate the
behavior of physicians in their choice of treatments, but the
FDA regulations do impose stringent restrictions on
manufacturers communications regarding off-label uses.
Failure to comply with applicable FDA requirements may subject a
company to adverse publicity, enforcement action by the FDA,
corrective advertising, and the full range of civil and criminal
penalties available to the FDA.
Regulation Outside
the U.S.
In the E.U., regulatory requirements and approval processes are
similar in principle to those in the U.S. depending on the
type of drug for which approval is sought. There are currently
three potential tracks for marketing approval in E.U. countries:
mutual recognition; decentralized procedures; and centralized
procedures. These review mechanisms may ultimately lead to
approval in all E.U. countries, but each method grants all
participating countries some decision-making authority in
product approval.
15
Sales
and Marketing Regulations
We are also subject to various federal and state laws pertaining
to health care fraud and abuse, including
anti-kickback laws and false claims laws. Anti-kickback laws
make it illegal for a prescription drug manufacturer to solicit,
offer, receive, or pay any remuneration in exchange for, or to
induce, the referral of business, including the purchase or
prescription of a particular drug. Due to the breadth of the
statutory provisions and the absence of guidance in the form of
regulations and very few court decisions addressing industry
practices, it is possible that our practices might be challenged
under anti-kickback or similar laws. False claims laws prohibit
anyone from knowingly and willingly presenting, or causing to be
presented for payment to third party payors (including Medicare
and Medicaid) claims for reimbursed drugs or services that are
false or fraudulent, claims for items or services not provided
as claimed, or claims for medically unnecessary items or
services. Our activities relating to the sale and marketing of
our products may be subject to scrutiny under these laws.
Violations of fraud and abuse laws may be punishable by criminal
and/or
civil
sanctions, including fines and civil monetary penalties, as well
as the possibility of exclusion from federal health care
programs (including Medicare and Medicaid). If the government
were to allege or convict us of violating these laws, our
business could be harmed. In addition, there is ability for
private individuals to bring similar actions. See the section of
Item 1A Risk Factors entitled
Failure to comply with government regulations regarding
our products could harm our business and Our
business is subject to extensive government regulation and
oversight and changes in laws could adversely affect our
revenues and profitability.
Our activities could be subject to challenge for the reasons
discussed above and due to the broad scope of these laws and the
increasing attention being given to them by law enforcement
authorities. Further, there are an increasing number of state
laws that require manufacturers to make reports to states on
pricing and marketing information. Many of these laws contain
ambiguities as to what is required to comply with the laws.
Given the lack of clarity in laws and their implementation, our
reporting actions could be subject to the penalty provisions of
the pertinent state authorities.
Other
Regulations
Foreign Corrupt Practices Act.
We are also
subject to the U.S. Foreign Corrupt Practices Act which
prohibits corporations and individuals from paying, offering to
pay, or authorizing the payment of anything of value to any
foreign government official, government staff member, political
party, or political candidate in an attempt to obtain or retain
business or to otherwise influence a person working in an
official capacity.
Other Laws.
Our present and future business
has been and will continue to be subject to various other laws
and regulations. Various laws, regulations and recommendations
relating to safe working conditions, laboratory practices, the
experimental use of animals, and the purchase, storage,
movement, import and export and use and disposal of hazardous or
potentially hazardous substances used in connection with our
research work are or may be applicable to our activities. To
date, compliance with laws and regulations relating to the
protection of the environment has not had a material effect on
capital expenditures, earnings or our competitive position.
However, the extent of government regulation which might result
from any legislative or administrative action cannot be
accurately predicted.
Employees
As of May 20, 2009, we had approximately 570 full-time
employees. A significant number of our management and
professional employees have prior experience with
pharmaceutical, biotechnology or medical product companies. We
believe that we have been successful in attracting skilled and
experienced scientific and senior management personnel, however,
competition for such personnel is intense. None of our employees
is covered by a collective bargaining agreement. We consider our
relations with our employees to be good.
Available
Information
We are a Pennsylvania corporation with principal executive
offices located at 88 Sidney Street, Cambridge, Massachusetts
02139. Our telephone number is
(617) 494-0171
and our website address is
16
www.alkermes.com. We make available free of charge through the
Investor Relations section of our website our Annual Reports on
Form 10-K,
Quarterly Reports on
Form 10-Q,
Current Reports on
Form 8-K
and all amendments to those reports as soon as reasonably
practicable after such material is electronically filed with or
furnished to the Securities and Exchange Commission
(SEC). We include our website address in this Annual
Report on
Form 10-K
only as an inactive textual reference and do not intend it to be
an active link to our website. You may read and copy materials
we file with the SEC at the SECs Public Reference Room at
100 F Street, N.E., Washington, D.C. 20549. You
may get information on the operation of the Public Reference
Room by calling the SEC at
1-800-SEC-0330.
The SEC maintains an internet site that contains reports, proxy
and information statements, and other information regarding
issuers that file electronically with the SEC at www.sec.gov.
If any of the following risks actually occur, they could
materially adversely affect our business, financial condition or
operating results. In that case, the trading price of our common
stock could decline.
RISPERDAL
CONSTA, VIVITROL and our product candidates may not generate
significant revenues.
Even if a product candidate receives regulatory approval for
commercial sale, the revenues received or to be received from
the sale of the product may not be significant and will depend
on numerous factors, many of which are outside of our control,
including but not limited to those factors set forth below:
RISPERDAL
CONSTA
We are not involved in the marketing or sales efforts for
RISPERDAL CONSTA. Our revenues depend on manufacturing fees and
royalties we receive from our partner for RISPERDAL CONSTA, each
of which relates to sales of RISPERDAL CONSTA by our partner.
For reasons outside of our control, including those mentioned
below, sales of RISPERDAL CONSTA may not meet our partners
expectations.
VIVITROL
In April 2006, the FDA approved VIVITROL for the treatment of
alcohol dependence in patients able to refrain from drinking
prior to, and not actively drinking at the time of, treatment
initiation. In June 2005, we entered into an agreement with
Cephalon to develop and commercialize VIVITROL for the treatment
of alcohol dependence in the U.S. and its territories.
Under this agreement, Cephalon was primarily responsible for the
marketing and sale of VIVITROL in the U.S., and we supported
their efforts with a team of managers of market development. In
November 2008, we and Cephalon agreed to end the collaboration
for the development, supply and commercialization of certain
products, including VIVITROL in the U.S., effective on the
Termination Date, and we assumed the risks and responsibilities
for the marketing and sale of VIVITROL in the U.S. We have
very little sales and marketing experience. The revenues
received or to be received from the sale of VIVITROL may not be
significant and will depend on numerous factors, many of which
are outside of our control, including but not limited to those
specified below.
In December 2007, we entered into a license and
commercialization agreement with Cilag to commercialize VIVITROL
for the treatment of alcohol dependence and opioid dependence in
Russia and other countries in the CIS. Under the terms of the
agreement, Cilag will have primary responsibility for securing
all necessary regulatory approvals for VIVITROL and
Janssen-Cilag, an affiliate of Cilag, will commercialize the
product. We are responsible for the manufacture of VIVITROL and
receive manufacturing and royalty revenues based upon product
sales. The revenues received or to be received from the sale of
VIVITROL under the agreement with Cilag may not be significant
and will depend on numerous factors, many of which are outside
of our control, including but not limited to those specified
below.
There can be no assurance that the phase 3 clinical trial
results and other clinical and preclinical data will be
sufficient to obtain regulatory approvals for VIVITROL elsewhere
in the world. Even if regulatory approvals are received in
countries other than the U.S., Russia and countries of the CIS,
we will have to
17
market VIVITROL ourselves in these countries or enter into
co-promotion or sales and marketing arrangements with other
companies for VIVITROL sales and marketing activities in these
countries.
We cannot be assured that RISPERDAL CONSTA and VIVITROL will be,
or will continue to be, accepted in the U.S. or in any
foreign markets or that sales of either of these products will
not decline in the future or end. A number of factors may cause
our revenues from RISPERDAL CONSTA and VIVITROL (and any of our
product candidates that we develop, if and when approved) to
grow at a slower than expected rate, or even to decrease or end,
including:
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perception of physicians and other members of the health care
community of their safety and efficacy relative to that of
competing products;
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their cost-effectiveness;
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patient and physician satisfaction with these products;
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the ability to manufacture commercial products successfully and
on a timely basis;
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the cost and availability of raw materials;
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the size of the markets for these products;
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reimbursement policies of government and third-party payors;
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unfavorable publicity concerning these products or similar drugs;
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the introduction, availability and acceptance of competing
treatments, including those of our collaborators;
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the reaction of companies that market competitive products;
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adverse event information relating to these products;
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changes to product labels to add significant warnings or
restrictions on use;
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the continued accessibility of third parties to vial, label and
distribute these products on acceptable terms;
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the unfavorable outcome of patent litigation related to any of
these products;
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regulatory developments related to the manufacture or continued
use of these products, including the issuance of a risk
evaluation and mitigation strategy (REMS) by the FDA;
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the extent and effectiveness of the sales and marketing and
distribution support these products receive;
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our collaborators decisions as to the timing of product
launches, pricing and discounting; and
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any other material adverse developments with respect to the
commercialization of these products.
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Our revenues will fluctuate from quarter to quarter based on a
number of factors, including the acceptance of RISPERDAL CONSTA
and VIVITROL in the marketplace, our partners orders, the
timing of shipments, our ability to manufacture successfully,
our yield and our production schedule. The costs to manufacture
RISPERDAL CONSTA and VIVITROL may be higher than anticipated if
certain volume levels are not achieved. In addition, we may not
be able to supply the products in a timely manner. If RISPERDAL
CONSTA and VIVITROL do not produce significant revenues or if we
are unable to supply our partners requirements, our
business, results of operations and financial condition would be
materially adversely affected.
We are
substantially dependent on revenues from our principal
product.
Our current and future revenues depend substantially upon
continued sales of RISPERDAL CONSTA by our partner, Janssen. Any
significant negative developments relating to this product, such
as safety or efficacy issues, the introduction or greater
acceptance of competing products or adverse regulatory or
legislative
18
developments, would have a material adverse effect on our
results of operations. Although we have developed and continue
to develop additional products for commercial introduction, we
expect to be substantially dependent on sales from this product
for the foreseeable future. A decline in sales from this product
would adversely affect our business.
We are
subject to risks related to the manufacture of our
products.
We currently manufacture RISPERDAL CONSTA, VIVITROL, polymer for
exenatide once weekly and some of our product candidates. The
manufacture of drugs for clinical trials and for commercial sale
is subject to regulation by the FDA under cGMP regulations and
by other regulators under other laws and regulations. We may not
be able to successfully manufacture our products under cGMP
regulations or other laws and regulations in sufficient
quantities for commercial sale, or in a timely or economical
manner.
The manufacture of pharmaceutical products is a highly complex
process in which a variety of difficulties may arise from time
to time, including but not limited to product loss due to
material equipment failure, or vendor or operator error.
Problems with manufacturing processes could result in product
defects or manufacturing failures, which could require us to
delay shipment of products or recall products previously
shipped, or could impair our ability to expand into new markets
or supply products in existing markets. Any such problem would
be exacerbated by unexpected demand for our products. We may not
be able to resolve any such problems in a timely fashion, if at
all. We are presently the sole manufacturer of RISPERDAL CONSTA,
VIVITROL and polymer for exenatide once weekly. Also, our
manufacturing facility in Ohio is the sole source of supply for
all of our injectable product candidates and products, including
RISPERDAL CONSTA, VIVITROL and polymer for exenatide once
weekly. If we are not able to add additional capacity or if
anything were to interfere with our continuing manufacturing
operations, it would materially adversely affect our business,
results of operations and financial condition.
If we cannot produce sufficient commercial quantities of our
products to meet demand, we would need to rely on third-party
manufacturers, of which there are currently very few, if any,
capable of manufacturing our products as contract suppliers. We
cannot be certain that we could reach agreement on reasonable
terms, if at all, with those manufacturers. Even if we were to
reach agreement, the transition of the manufacturing process to
a third party to enable commercial supplies could take a
significant amount of time and may not be successful.
If those product candidates which we will manufacture
ourselves progress to mid-to-late-stage development, we
may incur significant expenses in the expansion
and/or
construction of manufacturing facilities and increases in
personnel in order to manufacture product candidates. The
development of a commercial-scale manufacturing process is
complex and expensive. We cannot be certain that we have the
necessary funds or that we will be able to develop this
manufacturing infrastructure in a timely or economical manner or
at all. For product candidates that we will not manufacture
ourselves, we will rely on third party manufacturers. We have
very little experience managing third party manufacturers.
Currently, several of our product candidates are manufactured in
small quantities for use in clinical trials by third party
manufacturers. We cannot be assured that we will be able to have
manufactured each of our product candidates at a commercial
scale in a timely or economical manner or at all. If any of
these product candidates are approved by the FDA or other drug
regulatory authorities for commercial sale, we will need to
manufacture them or have them manufactured in larger quantities.
If we are unable to successfully obtain commercial scale
manufacturing capacity for such product candidates, the
regulatory approval or commercial launch of such product
candidates may be delayed, there may be a shortage in supply of
such product candidates or our margins may become uneconomical.
Our manufacturing facilities require specialized personnel and
are expensive to operate and maintain. Any delay in the
regulatory approval or market launch of product candidates, or
suspension of the sale of our products, to be manufactured in
these facilities will require us to continue to operate these
expensive facilities and retain specialized personnel, which may
cause operating losses.
19
If we fail to develop manufacturing capacity and experience, or
fail to manufacture or have manufactured our products
economically on a commercial scale or in commercial volumes, or
in accordance with cGMP regulations, our development programs
and our ability to commercialize any approved products will be
materially adversely affected. This may result in delays in
receiving FDA or foreign regulatory approval for one or more of
our product candidates or delays in the commercial production of
a product that has already been approved. Any such delays could
materially adversely affect our business, results of operations
and financial condition.
VIVITROL
may not be successfully marketed and sold by Alkermes and may
not generate significant revenues.
In November 2008, we ended our collaboration with Cephalon
related to VIVITROL. As part of the termination, we assumed all
risks and responsibilities associated with the marketing and
sale of VIVITROL. The revenues from the sale of VIVITROL have
not been and may not become significant and will depend on
numerous factors including but not limited to those specified
below.
We have little experience with the commercialization of
pharmaceutical products, including the marketing and sale of
prescription drugs. We must build an infrastructure to support
the sales and marketing of VIVITROL, including integrating
former members of the Cephalon sales force with our existing
field force to build our own sales force, building a
distribution and expanded commercial infrastructure and
providing various support services for the sales force. Our
ability to realize significant revenues from the marketing and
sales activities associated with VIVITROL depends on our ability
to retain qualified sales personnel for the sale and marketing
of VIVITROL. We must also be able to attract new qualified sales
personnel as needed to support potential sales growth and
competition for qualified sales personnel is intense. Any
failure to attract and retain qualified sales personnel now and
in the future, could impair our ability to maintain sales levels
and/or
support potential future sales growth.
We are responsible for the entire supply chain and distribution
network for VIVITROL. We have limited experience in managing a
complex, cGMP supply chain and pharmaceutical product
distribution network. The manufacture of products and product
components, packaging, storage and distribution of our products
require successful coordination among ourselves and multiple
third party providers. Issues with third parties who are part of
our supply chain, including but not limited to suppliers, third
party logistics providers, distributors, wholesalers and
specialty pharmacies may have a material adverse effect on our
business, results of operations and financial condition. Our
inability to coordinate these efforts, the lack of capacity
available from third parties or any other problems with third
party operators could cause a delay in shipment of saleable
products, a recall of products previously shipped or an
impairment of our ability to supply products at all. These
setbacks could increase our costs, cause us to lose revenue or
market share and damage our reputation.
Sales
of our products are dependent, in part, on the availability of
reimbursement from third-party payors such as federal and state
government agencies under programs such as Medicare and
Medicaid, and private insurance plans and a reduction in payment
rate or reimbursement could result in decreased use or sales of
our products.
In both domestic and foreign markets, sales of our products are
dependent, in part, on the availability of reimbursement from
third party payors such as state and federal governments, under
programs such as Medicare and Medicaid in the U.S. and
private insurance plans. In certain foreign markets, the pricing
and profitability of our products, such as RISPERDAL CONSTA,
generally are subject to government controls. In the U.S., there
have been, there are, and we expect there will continue to be, a
number of state and federal proposals that could limit the
amount that state or federal governments will pay to reimburse
the cost of pharmaceutical products. In addition, we believe
that private insurers, such as managed care organizations, may
adopt their own reimbursement reductions unilaterally, or in
response to any such federal legislation. Reduction in
reimbursement for our products could have a material adverse
effect on our results of operations and financial condition.
20
Also, we believe the increasing emphasis on management of the
utilization and cost of healthcare in the U.S. has and will
continue to put pressure on the price and usage of our products,
which may materially adversely impact product sales. We cannot
predict the availability or amount of reimbursement for VIVITROL
and current reimbursement policies may change at any time. We
may not be able to sell VIVITROL profitably if reimbursement is
unavailable or coverage is limited in scope or amount. If
reimbursement for VIVITROL changes adversely, health care
providers may limit how much or under what circumstances they
will prescribe or administer VIVITROL, which could reduce use of
VIVITROL or cause us to reduce the price of our product.
Additionally, we have assumed all of the risks and
responsibilities associated with the additional development of
VIVITROL, including regulatory approval and costs. We are
currently conducting a randomized, multi-center registration
study of VIVITROL in Russia for the treatment of opioid
dependence. Clinical data from this study may form the basis of
a sNDA to the FDA for VIVITROL for the treatment of opioid
dependence. However, there is no assurance that the data from
this study or any clinical or preclinical data will be
sufficient to gain regulatory approval of VIVITROL for opioid
dependence in the U.S. or other countries. Approval of
VIVITROL for alcohol dependence in countries outside of the
U.S., except for Russia and other countries in the CIS, and
approval of VIVITROL for other indications in the U.S. and
countries outside of the U.S. will depend on our sponsoring
such efforts ourselves, including conducting additional clinical
studies, which can be very costly, or entering into
co-development, co-promotion or sales and marketing agreements
with collaborators.
Further, when a new therapeutic product is approved, the
availability of governmental
and/or
private reimbursement for that product is uncertain, as is the
amount for which that product will be reimbursed. We cannot
predict the availability or amount of reimbursement for our
approved products or product candidates, including those at any
stage of development, and current reimbursement policies for
marketed products may change at any time.
If federal or state legislation is adopted substantially
changing the way health insurance is provided to individuals in
the U.S., if reimbursement for our products changes adversely or
if we fail to obtain adequate reimbursement for our current or
future products, healthcare providers may limit how much or
under what circumstances they will prescribe or administer them,
or patients may be unwilling to pay any required co-payments,
which could reduce the use of our products or cause us to reduce
the price of our products, either or both of which could have a
material adverse effect on our business, results of operations
and financial condition.
Our
customer base who purchase VIVITROL directly from us is highly
concentrated.
Our principal customers for VIVITROL are wholesale drug
distributors. These customers comprise a significant part of the
distribution network for pharmaceutical products in the
U.S. Three large wholesale distributors, Cardinal, McKesson
and Amerisource, control a significant share of this network.
Fluctuations in the buying patterns of these customers, which
may result from seasonality, wholesaler buying decisions or
other factors outside of our control, could significantly affect
the level of our net sales on a period-to-period basis. The
impact on net sales could have a material impact on our
financial condition, cash flows and results of operations.
In an effort to combat the fluctuations in the buying patterns
and the potential harm to our financial condition, we have
entered into wholesaler distribution service agreements,
(DSAs), with our three largest wholesale drug
distributors. Under the DSAs, we will pay the wholesalers a fee.
We believe it is beneficial to enter into DSAs to establish
specified levels of product inventory to be maintained by our
wholesalers and to obtain more precise information as to the
level of our product inventory available throughout the product
distribution channel. We cannot be certain that the DSAs will be
effective in limiting speculative purchasing activity, that
there will not be a future drawdown of inventory as a result of
declining minimum inventory requirements, or otherwise, or that
the inventory level data provided through our DSAs are accurate.
If speculative purchasing does occur, if the wholesalers
significantly decrease their inventory levels, or if
21
inventory level data provided through DSAs is inaccurate, our
business, financial condition, cash flows and results of
operations may be adversely affected.
There
are risks in the manufacturing and distribution of our products
and product candidates.
We are responsible for the entire supply chain for VIVITROL, up
to sale of final product and including the sourcing of raw
materials and active pharmaceutical agents from third parties.
We have limited experience in managing a complex, cGMP supply
chain and issues with our supply sources may have a material
adverse effect on our business, results of operations and
financial condition. The manufacture of products and product
components, including the procurement of bulk drug product,
packaging, storage and distribution of our products require
successful coordination among ourselves and multiple third party
providers. Our inability to coordinate these efforts, the lack
of capacity available at the third party contractor or any other
problems with the operations of these third party contractors
could require us to delay shipment of saleable products; recall
products previously shipped or could impair our ability to
supply products at all. This could increase our costs, cause us
to lose revenue or market share and damage our reputation. Any
third party we use to manufacture bulk drug product, package,
store or distribute our products to be sold in the
U.S. must be licensed by the FDA. As a result, alternative
third party providers may not be readily available on a timely
basis.
None of our drug delivery technologies can be commercialized as
a stand-alone product but must be combined with a drug. To
develop any new proprietary product candidate using one of these
technologies, we must obtain the drug substance from another
party. We cannot be assured that we will be able to obtain any
such drug substance on reasonable terms, if at all.
Due to the unique nature of the production of our products,
there are several single source providers of our raw materials.
We endeavor to qualify new vendors and to develop contingency
plans so that production is not impacted by issues associated
with single source providers. Nonetheless, our business could be
materially impacted by issues associated with single source
providers.
We rely on third parties for the timely supply of specified raw
materials, equipment, contract manufacturing, formulation or
packaging services, product distribution services, customer
service activities and product returns processing. Although we
actively manage these third party relationships to ensure
continuity and quality, some events beyond our control could
result in the complete or partial failure of these goods and
services. Any such failure could materially adversely affect our
business, results of operations and financial condition.
The
manufacture of our products is subject to government
regulation.
We and our third party providers are generally required to
maintain compliance with cGMP and are subject to inspections by
the FDA or comparable agencies in other jurisdictions to confirm
such compliance. Any changes of suppliers or modifications of
methods of manufacturing require amending our application to the
FDA and ultimate amendment acceptance by the FDA prior to
release of product to the marketplace. Our inability or the
inability of our third party service providers to demonstrate
ongoing cGMP compliance could require us to withdraw or recall
product and interrupt commercial supply of our products. Any
delay, interruption or other issues that arise in the
manufacture, formulation, packaging, or storage of our products
as a result of a failure of our facilities or the facilities or
operations of third parties to pass any regulatory agency
inspection could significantly impair our ability to develop and
commercialize our products. This could increase our costs, cause
us to lose revenue or market share and damage our reputation.
The FDA, European and Japanese regulatory authorities have
inspected and approved our manufacturing facility for RISPERDAL
CONSTA, and the FDA has inspected and approved the same
manufacturing facility for VIVITROL. We cannot guarantee that
the FDA or any foreign regulatory agencies will approve any
other facility we may operate or, once approved, that any of our
facilities will remain in compliance with cGMP regulations. If
we fail to gain or maintain FDA and foreign regulatory
compliance, our business, results of operations and financial
condition could be materially adversely affected.
22
Our
business involves environmental risks.
Our business involves the controlled use of hazardous materials
and chemicals. Although we believe that our safety procedures
for handling and disposing of such materials comply with state
and federal standards, there will always be the risk of
accidental contamination or injury. If we were to become liable
for an accident, or if we were to suffer an extended facility
shutdown, we could incur significant costs, damages and
penalties that could materially harm our business, results of
operations and financial condition.
We
rely heavily on collaborative partners.
Our arrangements with collaborative partners are critical to our
success in bringing our products and product candidates to the
market and promoting such marketed products profitably. We rely
on these parties in various respects, including to conduct
preclinical testing and clinical trials, to provide funding for
product candidate development programs, raw materials, product
forecasts, and sales and marketing services, to create and
manage the distribution model for our commercial products, to
commercialize our products, or to participate actively in or to
manage the regulatory approval process. Most of our
collaborative partners can terminate their agreements with us
for no reason and on limited notice. We cannot guarantee that
any of these relationships will continue. Failure to make or
maintain these arrangements or a delay in a collaborative
partners performance or factors that may affect our
partners sales may materially adversely affect our
business, results of operations and financial condition.
We cannot control our collaborative partners performance
or the resources they devote to our programs. Consequently,
programs may be delayed or terminated or we may have to use
funds, personnel, laboratories and other resources that we have
not budgeted. A program delay or termination or unbudgeted use
of our resources may materially adversely affect our business,
results of operations and financial condition.
Disputes may arise between us and a collaborative partner and
may involve the issue of which of us owns the technology that is
developed during a collaboration or other issues arising out of
the collaborative agreements. Such a dispute could delay the
program on which the collaborative partner or we are working. It
could also result in expensive arbitration or litigation, which
may not be resolved in our favor.
A collaborative partner may choose to use its own or other
technology to develop a way to deliver its drug and withdraw its
support of our product candidate, or compete with our jointly
developed product.
Our collaborative partners could merge with or be acquired by
another company or experience financial or other setbacks
unrelated to our collaboration that could, nevertheless,
materially adversely affect our business, results of operations
and financial condition.
We
have very little sales and marketing experience and limited
sales capabilities, which may make commercializing our products
difficult.
We currently have very little marketing experience and limited
sales capabilities. Therefore, in order to commercialize our
product candidates, we must either develop our own marketing and
distribution sales capabilities or collaborate with a third
party to perform these functions. We may, in some instances,
rely significantly on sales, marketing and distribution
arrangements with our collaborative partners and other third
parties. For example, we rely completely on Janssen to market,
sell and distribute RISPERDAL CONSTA, and will rely upon Lilly
and Amylin to market and distribute exenatide once weekly. In
these instances, our future revenues will be materially
dependent upon the success of the efforts of these third parties.
In November 2008, we and Cephalon agreed to end the
collaboration for the development, supply and commercialization
of certain products, including VIVITROL in the U.S., effective
on the Termination Date, and we assumed the risks and
responsibilities for the marketing and sale of VIVITROL in the
U.S. As of the Termination Date, Cephalon is no longer
responsible for the marketing and sale of VIVITROL in the U.S.,
and we are responsible for all VIVITROL profits or losses. In
order to facilitate the full transfer of all commercialization
of VIVITROL to us, Cephalon, at our option, is performing
certain transition services on our behalf until May 31,
2009 at an FTE rate agreed to by the parties. We have limited
experience in the commercialization of pharmaceutical products.
We may not be able to attract and retain qualified personnel to
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serve in our sales and marketing organization, to develop an
effective distribution network or to otherwise effectively
support our commercialization activities. The cost of
establishing and maintaining a sales and marketing organization
may exceed its cost effectiveness. If we fail to develop sales
and marketing capabilities, if sales efforts are not effective
or if costs of developing sales and marketing capabilities
exceed their cost effectiveness, our business, results of
operations and financial condition would be materially adversely
affected.
Our
delivery technologies or product development efforts may not
produce safe, efficacious or commercially viable
products.
Many of our product candidates require significant additional
research and development, as well as regulatory approval. To be
profitable, we must develop, manufacture and market our
products, either alone or by collaborating with others. It can
take several years for a product candidate to be approved and we
may not be successful in bringing additional product candidates
to the market. A product candidate may appear promising at an
early stage of development or after clinical trials and never
reach the market, or it may reach the market and not sell, for a
variety of reasons. The product candidate may:
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be shown to be ineffective or to cause harmful side effects
during preclinical testing or clinical trials;
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fail to receive regulatory approval on a timely basis or at all;
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be difficult to manufacture on a large scale;
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be uneconomical; or
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infringe on proprietary rights of another party.
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For factors that may affect the market acceptance of our
products approved for sale, see risk factor We face
competition in the biotechnology and pharmaceutical industries,
and others. If our delivery technologies or product
development efforts fail to result in the successful development
and commercialization of product candidates, if our
collaborative partners decide not to pursue our product
candidates or if new products do not perform as anticipated, our
business, results of operations and financial condition will be
materially adversely affected.
Clinical
trials for our product candidates are expensive and their
outcome is uncertain.
Conducting clinical trials is a lengthy, time-consuming and
expensive process. Before obtaining regulatory approvals for the
commercial sale of any products, we or our partners must
demonstrate through preclinical testing and clinical trials that
our product candidates are safe and effective for use in humans.
We have incurred, and we will continue to incur, substantial
expense for, and devote a significant amount of time to,
preclinical testing and clinical trials.
Historically, the results from preclinical testing and early
clinical trials often have not predicted results of later
clinical trials. A number of new drugs have shown promising
results in clinical trials, but subsequently failed to establish
sufficient safety and efficacy data to obtain necessary
regulatory approvals. Clinical trials conducted by us, by our
collaborative partners or by third parties on our behalf may not
demonstrate sufficient safety and efficacy to obtain the
requisite regulatory approvals for our product candidates.
Regulatory authorities may not permit us to undertake any
additional clinical trials for our product candidates, and it
may be difficult to design efficacy studies for product
candidates in new indications.
Clinical trials of some of our product candidates involve both a
technology and a drug. This makes testing more complex because
the outcome of the trials depends on the performance of
technology in combination with a drug.
We have other product candidates in preclinical development.
Preclinical and clinical development efforts performed by us may
not be successfully completed. Completion of clinical trials may
take several years or more. The length of time can vary
substantially with the type, complexity, novelty and intended
use of the
24
product candidate. The commencement and rate of completion of
clinical trials may be delayed by many factors, including:
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the potential delay by a collaborative partner in beginning the
clinical trial;
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the inability to recruit clinical trial participants at the
expected rate;
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the failure of clinical trials to demonstrate a product
candidates safety or efficacy;
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the inability to follow patients adequately after treatment;
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unforeseen safety issues;
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the inability to manufacture sufficient quantities of materials
used for clinical trials; and
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unforeseen governmental or regulatory delays.
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If a product candidate fails to demonstrate safety and efficacy
in clinical trials, this failure may delay development of other
product candidates and hinder our ability to conduct related
preclinical testing and clinical trials. As a result of these
failures, we may then be unable to find additional collaborative
partners or to obtain additional financing. Our business,
results of operations and financial condition may be materially
adversely affected by any delays in, or termination of, our
clinical trials.
We
depend on third parties in the conduct of our clinical trials
for our product candidates and any failure of those parties to
fulfill their obligations could adversely affect our development
and commercialization plans.
We depend on independent clinical investigators, contract
research organizations and other third party service providers
and our collaborators in the conduct of our clinical trials for
our product candidates. We rely heavily on these parties for
successful execution of our clinical trials but do not control
many aspects of their activities. For example, the investigators
are not our employees. However, we are responsible for ensuring
that each of our clinical trials is conducted in accordance with
the general investigational plan and protocols for the trial.
Third parties may not complete activities on schedule or may not
conduct our clinical trials in accordance with regulatory
requirements or our stated protocols. The failure of these third
parties to carry out their obligations could delay or prevent
the development, approval and commercialization of our product
candidates.
We may
not become profitable on a sustained basis.
At March 31, 2009, our accumulated deficit was
$326.1 million, which is primarily the result of net losses
incurred from 1987, the year we were founded, to date, partially
offset by net income over the past four fiscal years. There can
be no assurance we will achieve sustained profitability.
A major component of our revenue is dependent on our
partners and our ability to sell, and our ability to
manufacture economically, our marketed products RISPERDAL CONSTA
and VIVITROL. In addition, if VIVITROL sales are not sufficient,
we could have significant losses in the future due to ongoing
expenses to develop and commercialize VIVITROL.
Our ability to achieve sustained profitability in the future
depends, in part, on our ability to:
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obtain and maintain regulatory approval for our products and
product candidates, and for our partnered products, including
exenatide once weekly, both in the U.S. and in foreign
countries;
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efficiently manufacture our commercial products;
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support the marketing and sale of RISPERDAL CONSTA by our
partner Janssen;
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successfully commercialize VIVITROL in the U.S.;
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support the marketing and sale of VIVITROL in Russia by our
partner Cilag;
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enter into agreements to develop and commercialize our products
and product candidates;
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develop, have manufactured or expand our capacity to manufacture
and market our products and product candidates;
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obtain adequate reimbursement coverage for our products from
insurance companies, government programs and other third party
payors;
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obtain additional research and development funding from
collaborative partners or funding for our proprietary product
candidates; and
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achieve certain product development milestones.
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In addition, the amount we spend will impact our profitability.
Our spending will depend, in part, on:
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the progress of our research and development programs for
proprietary and collaborative product candidates, including
clinical trials;
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the time and expense that will be required to pursue FDA
and/or
foreign regulatory approvals for our product candidates and
whether such approvals are obtained;
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the time and expense required to prosecute, enforce
and/or
challenge patent and other intellectual property rights;
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the cost of building, operating and maintaining manufacturing
and research facilities;
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the cost of third party manufacture;
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the number of product candidates we pursue, particularly
proprietary product candidates;
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how competing technological and market developments affect our
product candidates;
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the cost of possible acquisitions of technologies, compounds,
product rights or companies;
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the cost of obtaining licenses to use technology owned by others
for proprietary products and otherwise;
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the costs of potential litigation; and
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the costs associated with recruiting and compensating a highly
skilled workforce in an environment where competition for such
employees may be intense.
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We may not achieve any or all of these goals and, thus, we
cannot provide assurances that we will ever be profitable on a
sustained basis or achieve significant revenues. Even if we do
achieve some or all of these goals, we may not achieve
significant or sustained commercial success.
We may
require additional funds to complete our programs and such
funding may not be available on commercially favorable terms and
may cause dilution to our existing shareholders.
We may require additional funds to complete any of our programs,
and we may seek funds through various sources, including debt
and equity offerings, corporate collaborations, bank borrowings,
arrangements relating to assets, sale of royalty streams we
receive on our products or other financing methods or
structures. The source, timing and availability of any
financings will depend on market conditions, interest rates and
other factors. If we are unable to raise additional funds on
terms that are favorable to us, we may have to cut back
significantly on one or more of our programs or give up some of
our rights to our technologies, product candidates or licensed
products. If we issue additional equity securities or securities
convertible into equity securities to raise funds, our
shareholders will suffer dilution of their investment and it may
adversely affect the market price of our common stock.
The
FDA or foreign regulatory agencies may not approve our product
candidates.
Approval from the FDA is required to manufacture and market
pharmaceutical products in the U.S. Regulatory agencies in
foreign countries have similar requirements. The process that
pharmaceutical products must undergo to obtain this approval is
extensive and includes preclinical testing and clinical trials
to demonstrate
26
safety and efficacy and a review of the manufacturing process to
ensure compliance with cGMP regulations. The FDA or foreign
regulatory agencies may choose not to communicate with or update
us during clinical testing and regulatory review periods. The
ultimate decision by the FDA or foreign regulatory agencies
regarding drug approval may not be consistent with prior
communications. See risk factor RISPERDAL CONSTA, VIVITROL
and our product candidates may not generate significant
revenues.
This process can last many years, be very costly and still be
unsuccessful. FDA or foreign regulatory approval can be delayed,
limited or not granted at all for many reasons, including:
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a product candidate may not be safe or effective;
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data from preclinical testing and clinical trials may be
interpreted by the FDA or foreign regulatory agencies in
different ways than we or our partners interpret it;
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the FDA or foreign regulatory agencies might not approve our or
our partners manufacturing processes or facilities;
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the FDA or foreign regulatory agencies may change their approval
policies or adopt new regulations;
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a product candidate may not be approved for all the indications
we or our partners request; and
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the FDA or foreign regulatory agencies may not agree with our or
our partners regulatory approval strategies or components
of our or our partners filings, such as clinical trial
designs.
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For some product candidates utilizing our drug delivery
technologies, the drug used may not have been approved at all or
may not have been approved for every indication for which it is
being tested. Any delay in the approval process for any of our
product candidates will result in increased costs that could
materially adversely affect our business, results of operations
and financial condition.
Regulatory approval of a product candidate generally is limited
to specific therapeutic uses for which the product has
demonstrated safety and efficacy in clinical testing. Approval
of a product candidate could also be contingent on
post-marketing studies. In addition, any marketed drug and its
manufacturer continue to be subject to strict regulation after
approval. Any unforeseen problems with an approved drug or any
violation of regulations could result in restrictions on the
drug, including its withdrawal from the market.
Our
business is subject to extensive governmental regulation and
oversight and changes in laws could adversely affect our
revenues and profitability.
Our business is subject to extensive government regulation and
oversight. As a result, we may become subject to governmental
actions which could materially adversely affect our business,
results of operations and financial condition, including:
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new laws, regulations or judicial decisions, or new
interpretations of existing laws, regulations or decisions,
related to patent protection and enforcement, health care
availability, method of delivery and payment for health care
products and services or our business operations generally;
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changes in the FDA and foreign regulatory approval processes
that may delay or prevent the approval of new products and
result in lost market opportunity;
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new laws, regulations and judicial decisions affecting pricing
or marketing; and
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changes in the tax laws relating to our operations.
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In addition, the Food and Drug Administration Amendments Act of
2007 included new authorization for the FDA to require
post-market safety monitoring, along with a clinical trials
registry, and expanded authority for FDA to impose civil
monetary penalties on companies that fail to meet certain
commitments.
Failure
to comply with government regulations regarding our products
could harm our business.
Our activities, including the sale and marketing of our
products, are subject to extensive government regulation and
oversight, including regulation under the federal Food, Drug and
Cosmetic Act and other
27
federal and state statutes. We are also subject to the
provisions of the Federal Anti-Kickback Statute and several
similar state laws, which prohibit payments intended to induce
physicians or others either to purchase or arrange for or
recommend the purchase of healthcare products or services. While
the federal law applies only to products or services for which
payment may be made by a federal healthcare program, state laws
may apply regardless of whether federal funds may be involved.
These laws constrain the sales, marketing and other promotional
activities of manufacturers of drugs and biologicals, such as
us, by limiting the kinds of financial arrangements, including
sales programs, with hospitals, physicians, and other potential
purchasers of drugs and biologicals. Other federal and state
laws generally prohibit individuals or entities from knowingly
presenting, or causing to be presented, claims for payment from
Medicare, Medicaid, or other third party payors that are false
or fraudulent, or are for items or services that were not
provided as claimed. Anti-kickback and false claims laws
prescribe civil and criminal penalties for noncompliance that
can be substantial, including the possibility of exclusion from
federal healthcare programs (including Medicare and Medicaid).
Pharmaceutical and biotechnology companies have been the target
of lawsuits and investigations alleging violations of government
regulation, including claims asserting antitrust violations,
violations of the Federal False Claim Act, the Anti-Kickback
Statute, the Prescription Drug Marketing Act and other
violations in connection with off-label promotion of products
and Medicare
and/or
Medicaid reimbursement or related to environmental matters and
claims under state laws, including state anti-kickback and fraud
laws.
While we continually strive to comply with these complex
requirements, interpretations of the applicability of these laws
to marketing practices are ever evolving. If any such actions
are instituted against us or our collaboration partners and we
are not successful in defending ourselves or asserting our
rights, those actions could have a significant and material
impact on our business, including the imposition of significant
fines or other sanctions. Even an unsuccessful challenge could
cause adverse publicity and be costly to respond to, and thus
could have a material adverse effect on our business, results of
operations and financial condition.
If and
when approved, the commercial use of our products may cause
unintended side effects or adverse reactions or incidence of
misuse may occur.
We cannot predict whether the commercial use of products (or
product candidates in development, if and when they are approved
for commercial use) will produce undesirable or unintended side
effects that have not been evident in the use of, or in clinical
trials conducted for, such products (and product candidates) to
date. Additionally, incidents of product misuse may occur. These
events, among others, could result in product recalls, product
liability actions or withdrawals or additional regulatory
controls, all of which could have a material adverse effect on
our business, results of operations and financial condition.
Patent
protection for our products is important and
uncertain.
The following factors are important to our success:
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receiving and maintaining patent protection for our products and
product candidates, including those which are the subject of
collaborations with our collaborative partners;
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maintaining our trade secrets;
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not infringing the proprietary rights of others; and
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preventing others from infringing our proprietary rights.
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Patent protection only provides rights of exclusivity for the
term of the patent. We will be able to protect our proprietary
rights from unauthorized use by third parties only to the extent
that our proprietary rights are covered by valid and enforceable
patents or are effectively maintained as trade secrets.
We know of several U.S. patents issued to third parties
that may relate to our product candidates. We also know of
patent applications filed by other parties in the U.S. and
various foreign countries that may relate to some of our product
candidates if such patents are issued in their present form. If
patents are issued that cover our product candidates, we may not
be able to manufacture, use, offer for sale, import or sell some
of them without first getting a license from the patent holder.
The patent holder may not grant us a license on
28
reasonable terms or it may refuse to grant us a license at all.
This could delay or prevent us from developing, manufacturing or
selling those of our product candidates that would require the
license. A patent holder might also file an infringement action
against us claiming that the manufacture, use, offer for sale,
import or sale of our product candidates infringed one or more
of its patents. Our cost of defending such an action is likely
to be high and we might not receive a favorable ruling.
We try to protect our proprietary position by filing
U.S. and foreign patent applications related to our
proprietary technology, inventions and improvements that are
important to the development of our business. Our pending patent
applications, together with those we may file in the future, or
those we may license from third parties, may not result in
patents being issued. Even if issued, such patents may not
provide us with sufficient proprietary protection or competitive
advantages against competitors with similar technology. Because
the patent position of pharmaceutical and biotechnology
companies involves complex legal and factual questions,
enforceability of patents cannot be predicted with certainty.
The ultimate degree of patent protection that will be afforded
to biotechnology products and processes, including ours, in the
U.S. and in other important markets remains uncertain and
is dependent upon the scope of protection decided upon by the
patent offices, courts and lawmakers in these countries,
including, within the U.S., possible new patent legislation or
regulations. Patents, if issued, may be challenged, invalidated
or circumvented. The laws of certain foreign countries may not
protect our intellectual property rights to the same extent as
do the laws of the U.S. Thus, any patents that we own or
license from others may not provide any protection against
competitors. Furthermore, others may independently develop
similar technologies outside the scope of our patent coverage.
We also rely on trade secrets, know-how and technology, which
are not protected by patents, to maintain our competitive
position. We try to protect this information by entering into
confidentiality agreements with parties that have access to it,
such as our collaborative partners, licensees, employees and
consultants. Any of these parties may breach the agreements and
disclose our confidential information or our competitors might
learn of the information in some other way. If any trade secret,
know-how or other technology not protected by a patent were to
be disclosed to, or independently developed by, a competitor,
our business, results of operations and financial condition
could be materially adversely affected.
As more products are commercialized using our technologies, or
as any product achieves greater commercial success, our patents
become more likely to be subject to challenge by potential
competitors.
Uncertainty
over intellectual property in the biotechnology industry has
been the source of litigation, which is inherently costly and
unpredictable.
We are aware that others, including various universities and
companies working in the biotechnology field, have filed patent
applications and have been granted patents in the U.S. and
in other countries claiming subject matter potentially useful to
our business. Some of those patents and patent applications
claim only specific products or methods of making such products,
while others claim more general processes or techniques useful
or now used in the biotechnology industry. There is considerable
uncertainty within the biotechnology industry about the
validity, scope and enforceability of many issued patents in the
U.S. and elsewhere in the world, and, to date, there is no
consistent policy regarding the breadth of claims allowed in
biotechnology patents. We cannot currently determine the
ultimate scope and validity of patents which may be granted to
third parties in the future or which patents might be asserted
to be infringed by the manufacture, use and sale of our products.
There has been, and we expect that there may continue to be,
significant litigation in the industry regarding patents and
other intellectual property rights. Litigation and
administrative proceedings concerning patents and other
intellectual property rights may be protracted, expensive and
distracting to management. Competitors may sue us as a way of
delaying the introduction of our products. Any litigation,
including any interference proceedings to determine priority of
inventions, oppositions to patents in foreign countries or
litigation against our partners may be costly and time consuming
and could harm our business. We expect that litigation may be
necessary in some instances to determine the validity and scope
of certain of our proprietary rights. Litigation may be
necessary in other instances to determine the validity, scope
and/or
noninfringement
29
of certain patent rights claimed by third parties to be
pertinent to the manufacture, use or sale of our products.
Ultimately, the outcome of such litigation could adversely
affect the validity and scope of our patent or other proprietary
rights, or, conversely, hinder our ability to manufacture and
market our products.
We may
be exposed to product liability claims and
recalls.
We may be exposed to product liability claims arising from the
testing, manufacture and commercial sale of RISPERDAL CONSTA and
VIVITROL, or the use of our product candidates in clinical
trials or commercially, once approved. These claims may be
brought by consumers, clinical trial participants, our
collaborative partners or third parties selling the products. We
currently carry product liability insurance coverage in such
amounts as we believe are sufficient for our business. However,
we cannot provide any assurance that this coverage will be
sufficient to satisfy any liabilities that may arise. As our
development activities progress and we continue to have
commercial sales, this coverage may be inadequate, we may be
unable to obtain adequate coverage at an acceptable cost or we
may be unable to get adequate coverage at all or our insurer may
disclaim coverage as to a future claim. This could prevent or
limit our commercialization of our product candidates or
commercial sales of our products. Even if we are able to
maintain insurance that we believe is adequate, our results of
operations and financial condition may be materially adversely
affected by a product liability claim. Uncertainties resulting
from the initiation and continuation of products liability
litigation or other proceedings could have a material adverse
effect on our ability to compete in the marketplace. Products
liability litigation and other related proceedings may also
absorb significant management time.
Additionally, product recalls may be issued at our discretion or
at the direction of the FDA, other government agencies or other
companies having regulatory control for pharmaceutical product
sales. We cannot assure you that product recalls will not occur
in the future or that, if such recalls occur, such recalls will
not adversely affect our business, results of operations and
financial condition or reputation.
We may
not be successful in the development of products for our own
account.
In addition to our development work with collaborative partners,
we are developing proprietary product candidates for our own
account by applying our technologies to off-patent drugs as well
as developing our own proprietary molecules. Because we will be
funding the development of such programs, there is a risk that
we may not be able to continue to fund all such programs to
completion or to provide the support necessary to perform the
clinical trials, obtain regulatory approvals or market any
approved products on a worldwide basis. We expect the
development of products for our own account to consume
substantial resources. If we are able to develop commercial
products on our own, the risks associated with these programs
may be greater than those associated with our programs with
collaborative partners.
If we
are not able to develop new products, our business may
suffer.
We compete with other biotechnology and pharmaceutical companies
with financial resources and capabilities substantially greater
than our resources and capabilities, in the development of new
products. We cannot be certain we will be able to:
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develop or successfully commercialize new products on a timely
basis or at all; or
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develop new products in a cost effective manner.
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Further, other companies, including our collaborators, may
develop products or may acquire technology for the development
of products that are the same as or similar to our platform
technologies or to the product candidates we have in
development. Because there is rapid technological change in the
industry and because other companies have more resources than we
do, other companies may:
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develop their products more rapidly than we can;
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complete any applicable regulatory approval process sooner than
we can; or
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offer their newly developed products at prices lower than our
prices.
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Any of the foregoing may negatively impact our sales of newly
developed products. Technological developments or the FDAs
approval of new therapeutic indications for existing products
may make our existing products, or those product candidates we
are developing, obsolete or may make them more difficult to
market successfully, any of which could have a material adverse
effect on our business, results of operations and financial
condition.
Foreign
currency exchange rates may affect revenue.
We conduct a large portion of our business in international
markets. We derive a majority of our RISPERDAL CONSTA revenues
from sales in foreign countries and these sales are denominated
in foreign currencies. Such revenues fluctuate when translated
to U.S. dollars as a result of changes in foreign currency
exchange rates. We currently do not hedge this exposure. An
increase in the U.S. dollar relative to other currencies in
which we have revenues will cause our foreign revenues to be
lower than with a stable exchange rate. A large increase in the
value of the U.S. dollar relative to such foreign
currencies could have a material adverse affect on our revenues,
results of operations and financial condition.
We
face competition in the biotechnology and pharmaceutical
industries, and others.
We can provide no assurance that we will be able to compete
successfully in developing our products and product candidates.
We face intense competition in the development, manufacture,
marketing and commercialization of our products and product
candidates from many and varied sources from
academic institutions, government agencies, research
institutions and biotechnology and pharmaceutical companies,
including other companies with similar technologies. Some of
these competitors are also our collaborative partners. These
competitors are working to develop and market other systems,
products, vaccines and other methods of preventing or reducing
disease, and new small-molecule and other classes of drugs that
can be used with or without a drug delivery system.
There are other companies developing extended-release and
pulmonary technologies. In many cases, there are products on the
market or in development that may be in direct competition with
our products or product candidates. In addition, we know of new
chemical entities that are being developed that, if successful,
could compete against our product candidates. These chemical
entities are being designed to work differently than our product
candidates and may turn out to be safer or to be more effective
than our product candidates. Among the many experimental
therapies being tested around the world, there may be some that
we do not now know of that may compete with our technologies or
product candidates. Our collaborative partners could choose a
competing technology to use with their drugs instead of one of
our technologies and could develop products that compete with
our products.
With respect to our injectable technology, we are aware that
there are other companies developing extended-release delivery
systems for pharmaceutical products. RISPERDAL CONSTA may
compete with a number of other injectable products being
developed, including paliperidone palmitate, an injectable,
four-week, long-acting product being developed by
Johnson & Johnson, and a number of new oral compounds
for the treatment of schizophrenia, such as sertindole, which is
being developed by Lundbeck, and iloperidone, which is being
developed by Vanda.
VIVITROL competes with CAMPRAL by Forest Laboratories, Inc. and
ANTABUSE by Odyssey Pharmaceuticals, Inc. as well as currently
marketed drugs also formulated from naltrexone, such as REVIA by
Duramed Pharmaceuticals, Inc., NALOREX by Bristol-Myers Squibb
Co. and DEPADE by Mallinckrodt. Other pharmaceutical companies
are investigating product candidates that have shown some
promise in treating alcohol dependence and that, if approved by
the FDA, would compete with VIVITROL.
With respect to our AIR technology, we are aware that there are
other companies marketing or developing pulmonary delivery
systems for pharmaceutical products.
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Many of our competitors have much greater capital resources,
manufacturing, research and development resources and production
facilities than we do. Many of them also have much more
experience than we do in preclinical testing and clinical trials
of new drugs and in obtaining FDA and foreign regulatory
approvals.
Major technological changes can happen quickly in the
biotechnology and pharmaceutical industries, and the development
of technologically improved or different products or
technologies may make our product candidates or platform
technologies obsolete or noncompetitive.
Our product candidates, if successfully developed and approved
for commercial sale, will compete with a number of drugs and
therapies currently manufactured and marketed by major
pharmaceutical and other biotechnology companies. Our product
candidates may also compete with new products currently under
development by others or with products which may cost less than
our product candidates. Physicians, patients, third party payors
and the medical community may not accept or utilize any of our
product candidates that may be approved. If our product
candidates, if and when approved, do not achieve significant
market acceptance, our business, results of operations and
financial condition may be materially adversely affected. For
more information on other factors that would impact the market
acceptance of our product candidates, if and when approved, see
the risk factor RISPERDAL CONSTA, VIVITROL and our product
candidates may not generate significant revenues.
RISPERDAL
CONSTA revenues may not be sufficient to repay RC Royalty Sub,
LLCs obligations for the non-recourse RISPERDAL CONSTA
secured 7% notes (the
7% Notes).
Pursuant to the terms of a purchase and sales agreement between
Alkermes and our wholly-owned subsidiary, RC Royalty Sub, LLC
(Royalty Sub), Royalty Sub is obligated to repay
certain obligations to holders of the 7% Notes. There can
be no assurance that Royalty Sub will have sufficient funds to
satisfy these obligations. If revenues from RISPERDAL CONSTA are
not sufficient to repay Royalty Subs obligations on the
7% notes at maturity, then the note holders may have the
right to take control of Royalty Sub and all of its assets. If
Janssen terminates the manufacturing and supply agreement and
the license agreements with us, whether or not due to a lack of
revenues, and revenues on RISPERDAL CONSTA are not sufficient to
repay Royalty Subs obligations on the 7% Notes, the
note holders may be entitled to certain of our rights to
RISPERDAL CONSTA.
We may
not be able to retain our key personnel.
Our success depends largely upon the continued service of our
management and scientific staff and our ability to attract
retain and motivate highly skilled technical, scientific,
management, regulatory compliance and marketing personnel. The
loss of key personnel or our inability to hire and retain
personnel who have technical, scientific or regulatory
compliance backgrounds could materially adversely affect our
research and development efforts and our business.
Future
transactions may harm our business or the market price of our
stock.
We regularly review potential transactions related to
technologies, products or product rights and businesses
complementary to our business. These transactions could include:
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mergers;
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acquisitions;
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strategic alliances;
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licensing agreements; and
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co-promotion agreements.
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We may choose to enter into one or more of these transactions at
any time, which may cause substantial fluctuations in the market
price of our stock. Moreover, depending upon the nature of any
transaction, we may
32
experience a charge to earnings, which could also materially
adversely affect our results of operations and could harm the
market price of our stock.
If we
issue additional common stock, shareholders will suffer dilution
of their investment and the stock price may
decline.
As discussed above under the risk factor We may require
additional funds to complete our programs and such funding may
not be available on commercially favorable terms and may cause
dilution to our existing shareholders, we may issue
additional equity securities or securities convertible into
equity securities to raise funds, thus reducing the ownership
share of the current holders of our common stock, which may
adversely affect the market price of the common stock. As of
March 31, 2009, we were obligated to issue
18,987,529 shares of common stock upon the vesting and
exercise of stock options and vesting of stock awards. In
addition, any of our shareholders could sell all or a large
number of their shares, which could adversely affect the market
price of our common stock.
The
current credit and financial market conditions may exacerbate
certain risks affecting our business.
Sales of our products are dependent, in large part, on
reimbursement from government health administration authorities,
private health insurers, distribution partners and other
organizations. As a result of the current credit and financial
market conditions, these organizations may be unable to satisfy
their reimbursement obligations or may delay payment. In
addition, federal and state health authorities may reduce
Medicare and Medicaid reimbursements, and private insurers may
increase their scrutiny of claims. A reduction in the
availability or extent of reimbursement could negatively affect
our product sales and revenue. Customers may also reduce
spending during times of economic uncertainty.
In addition, we rely on third parties for several important
aspects of our business. For example, we depend upon
collaborators for both manufacturing and royalty revenue and the
clinical development of collaboration products, we use third
party contract research organizations for many of our clinical
trials, and we rely upon several single source providers of raw
materials and contract manufacturers for the manufacture of our
products and product candidates. Due to the recent tightening of
global credit and the continued deterioration in the financial
markets, there may be a disruption or delay in the performance
of our third party contractors, suppliers or collaborators. If
such third parties are unable to satisfy their commitments to
us, our business would be adversely affected.
Our
investment portfolio may become impaired by further
deterioration of the capital markets.
As a result of current adverse financial market conditions,
investments in some financial instruments, such as auction rate
securities and asset backed debt securities, may pose risks
arising from liquidity and credit concerns. We have limited
holdings of these investments in our portfolio, however, the
current disruptions in the credit and financial markets have
negatively affected investments in many industries, including
those in which we invest. The current global economic crisis has
had, and may continue to have, a negative impact on the market
values of the investments in our investment portfolio. We cannot
predict future market conditions or market liquidity and there
can be no assurance that the markets for these securities will
not deteriorate further or that the institutions that these
investments are with will be able to meet their debt obligations
at the time we may need to liquidate such investments or until
such time as the investments mature. Although we currently have
no plans to access the equity or debt markets to meet capital or
liquidity needs, constriction and volatility in these markets
may restrict future flexibility to do so if unforeseen capital
or liquidity needs were to arise.
Our
common stock price is highly volatile.
The realization of any of the risks described in these risk
factors or other unforeseen risks could have a dramatic and
adverse effect on the market price of our common stock.
Additionally, market prices for securities of biotechnology and
pharmaceutical companies, including ours, have historically been
very volatile. The market for these securities has from time to
time experienced significant price and volume fluctuations for
33
reasons that were unrelated to the operating performance of any
one company. In particular, and in addition to circumstances
described elsewhere under these risk factors, the following risk
factors can adversely affect the market price of our common
stock:
|
|
|
|
|
non-approval, set-backs or delays in the development or
manufacture of our product candidates and success of our
research and development programs;
|
|
|
|
public concern as to the safety of drugs developed by us or
others;
|
|
|
|
announcements of issuances of common stock or acquisitions by us;
|
|
|
|
the announcement and timing of new product introductions by us
or others;
|
|
|
|
material public announcements;
|
|
|
|
events related to our products or those of our competitors,
including the withdrawal or suspension of products from the
market;
|
|
|
|
availability and level of third party reimbursement;
|
|
|
|
political developments or proposed legislation in the
pharmaceutical or healthcare industry;
|
|
|
|
economic or other external factors, disaster or crisis;
|
|
|
|
developments of our corporate partners;
|
|
|
|
termination or delay of development program(s) by our corporate
partners;
|
|
|
|
announcements of technological innovations or new therapeutic
products or methods by us or others;
|
|
|
|
changes in government regulations or policies or patent
decisions;
|
|
|
|
changes in patent legislation or adverse changes to patent law;
|
|
|
|
changes in key members of management;
|
|
|
|
failure to meet our financial expectations or changes in
opinions of analysts who follow our stock; or
|
|
|
|
general market conditions.
|
We may
undertake additional strategic acquisitions in the future, and
difficulties integrating such acquisitions could damage our
ability to sustain profitability.
Although we have limited experience in acquiring businesses, we
may acquire additional businesses that complement or augment our
existing business. If we acquire businesses with promising drug
candidates or technologies, we may not be able to realize the
benefit of acquiring such businesses if we are unable to move
one or more drug candidates through preclinical
and/or
clinical development to regulatory approval and
commercialization. Integrating any newly acquired businesses or
technologies could be expensive and time-consuming, resulting in
the diversion of resources from our current business. We may not
be able to integrate any acquired business successfully. We
cannot assure you that, following an acquisition, we will
achieve revenues, specific net income or loss levels that
justify the acquisition or that the acquisition will result in
increased earnings, or reduced losses, for the combined company
in any future period. Moreover, we may need to raise additional
funds through public or private debt or equity financing to
acquire any businesses, which would result in dilution for
shareholders or the incurrence of indebtedness. We may not be
able to operate acquired businesses profitably or otherwise
implement our growth strategy successfully.
Anti-takeover
provisions may not benefit shareholders.
We are a Pennsylvania corporation and Pennsylvania law contains
strong anti-takeover provisions. In February 2003, our board of
directors adopted a shareholder rights plan. The shareholder
rights plan is designed to cause substantial dilution to a
person who attempts to acquire us on terms not approved by our
board of directors. The shareholder rights plan and Pennsylvania
law could make it more difficult for a person
34
or group to, or discourage a person or group from attempting to,
acquire control of us, even if the change in control would be
beneficial to shareholders. Our articles of incorporation and
bylaws also contain certain provisions that could have a similar
effect. The articles provide that our board of directors may
issue, without shareholder approval, preferred stock having such
voting rights, preferences and special rights as the board of
directors may determine. The issuance of such preferred stock
could make it more difficult for a third party to acquire us.
Our
business could be negatively affected as a result of the actions
of activist shareholders.
Proxy contests have been waged against many companies in the
biopharmaceutical industry over the last few years. If faced
with a proxy contest, we may not be able to respond successfully
to the contest, which would be disruptive to our business. Even
if we are successful, our business could be adversely affected
by a proxy contest involving us or our collaborators because:
|
|
|
|
|
responding to proxy contests and other actions by activist
shareholders can be costly and time-consuming, disrupting
operations and diverting the attention of management and
employees;
|
|
|
|
perceived uncertainties as to future direction may result in the
loss of potential acquisitions, collaborations or in-licensing
opportunities, and may make it more difficult to attract and
retain qualified personnel and business partners; and
|
|
|
|
if individuals are elected to a board of directors with a
specific agenda, it may adversely affect our ability to
effectively and timely implement our strategic plan and create
additional value for our stockholders.
|
These actions could cause our stock price to experience periods
of volatility.
Litigation
and/or arbitration may result in financial losses or harm our
reputation and may divert management resources.
We may be the subject of certain claims, including those
asserting violations of securities laws and derivative actions.
In addition, the administration of drugs in humans, whether in
clinical studies or commercially, carries the inherent risk of
product liability claims whether or not the drugs are actually
the cause of an injury.
We cannot predict with certainty the eventual outcome of any
future litigation, arbitration or third party inquiry. We may
not be successful in defending ourselves or asserting our rights
in new lawsuits, investigations or claims that may be brought
against us, and, as a result, our business could be materially
harmed. These lawsuits, arbitrations, investigations or claims
may result in large judgments or settlements against us, any of
which could have a negative effect on our financial performance
and business. Additionally, lawsuits, arbitrations and
investigations can be expensive to defend, whether or not the
lawsuit, arbitration or investigation has merit and the defense
of these actions may divert the attention of our management and
other resources that would otherwise be engaged in running our
business.
We may
incur financial and operational risk in connection with the move
of our headquarters from Cambridge, Massachusetts to Waltham,
Massachusetts.
In April 2009, we announced plans to move our corporate
headquarters to Waltham, Massachusetts from Cambridge,
Massachusetts. In connection with the move, we have signed a
lease agreement and are building out a 100,000 square foot
facility in Waltham. We anticipate that the move will be
completed in early calendar year 2010 and expect the relocation
to result in annual cash savings in fiscal year 2011 and beyond
of approximately $8 million, however, expected savings from
relocating a facility can be highly variable and uncertain. In
addition, we subleased substantially all of our current
headquarters for the balance of that lease term. This sublease
transaction substantially offsets our ongoing expenses
associated with our current headquarters, however, to the extent
the build-out of the Waltham facility is delayed, the terms of
the sublease may be adversely affected, which may result in
increased costs and risks. In addition, relocation of our
35
corporate headquarters could adversely affect employee retention
and focus, and it may be difficult to manage operations during
the overlapping period that the Waltham and Cambridge facilities
are both open.
The risk factors discussed within Item 1A and other similar
matters could divert our managements attention from other
business concerns. Such matters could also result in harm to our
reputation and significant monetary liability for us, and
require that we take other actions not presently contemplated,
any or all of which could have a material adverse effect on our
business, results of operations and financial condition.
|
|
Item 1B.
|
Unresolved
Staff Comments
|
None.
We lease space in Cambridge, Massachusetts under two leases, the
original terms of which are effective through calendar year
2012. These leases contain provisions permitting us to extend
their terms for up to two ten-year periods. Our corporate
headquarters, administration areas and laboratories are located
in this space. We have established and are operating clinical
facilities, with the capability to produce clinical supplies of
our pulmonary and injectable extended-release products, at this
location. In April 2009, we announced that we will move our
corporate headquarters from Cambridge, Massachusetts to Waltham,
Massachusetts in early calendar 2010.
We own a
15-acre
manufacturing, office and laboratory site in Wilmington, Ohio.
The site produces RISPERDAL CONSTA and VIVITROL. We are
currently operating two RISPERDAL CONSTA lines and one VIVITROL
line at commercial scale. An additional line for RISPERDAL
CONSTA which was funded by and is owned by Janssen was recently
completed. Janssen has granted us an option, exercisable upon
30 days advance written notice, to purchase the additional
RISPERDAL CONSTA manufacturing line at its then-current net book
value. In December 2008, we purchased two partially completed
VIVITROL manufacturing lines from Cephalon in connection with
the termination of the VIVITROL collaboration.
We lease a commercial manufacturing facility in Chelsea,
Massachusetts designed for clinical and commercial manufacturing
of inhaled products based on our AIR pulmonary technology that
we are not currently utilizing. The lease term is for fifteen
years, expiring in 2015, with an option to extend the term for
up to two five-year periods. We exited this facility in fiscal
2008 and have no plans to extend the lease beyond its expiration
date.
We believe that our current and planned facilities are adequate
for our current and near-term preclinical, clinical and
commercial manufacturing requirements.
|
|
Item 3.
|
Legal
Proceedings
|
From time to time, we may be subject to other legal proceedings
and claims in the ordinary course of business. We are not aware
of any such proceedings or claims that we believe will have,
individually or in the aggregate, a material adverse effect on
our business, results of operations and financial condition.
|
|
Item 4.
|
Submission
of Matters to a Vote of Security Holders
|
No matters were submitted to a vote of our security holders,
through the solicitation of proxies or otherwise, during the
last quarter of the fiscal year ended March 31, 2009.
36
PART II
|
|
Item 5.
|
Market
for Registrants Common Equity, Related Stockholder Matters
and Issuer Purchases of Equity Securities
|
Our common stock is traded on the NASDAQ Stock Market under the
symbol ALKS. We have 382,632 shares of our non-voting
common stock issued and outstanding. There is no established
public trading market for our non-voting common stock. Set forth
below for the indicated periods are the high and low sales
prices for our common stock:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2009
|
|
|
Fiscal 2008
|
|
|
|
High
|
|
|
Low
|
|
|
High
|
|
|
Low
|
|
|
1st Quarter
|
|
$
|
13.94
|
|
|
$
|
10.81
|
|
|
$
|
17.85
|
|
|
$
|
14.38
|
|
2nd Quarter
|
|
|
17.05
|
|
|
|
11.79
|
|
|
|
18.51
|
|
|
|
14.00
|
|
3rd Quarter
|
|
|
13.54
|
|
|
|
5.55
|
|
|
|
18.78
|
|
|
|
12.30
|
|
4th Quarter
|
|
|
13.16
|
|
|
|
8.26
|
|
|
|
16.00
|
|
|
|
10.32
|
|
The last reported sale price of our common stock as reported on
the NASDAQ Stock Market on May 20, 2009 was $8.81
There were 340 shareholders of record for our common stock
and one shareholder of record for our non-voting common stock on
May 20, 2009.
No dividends have been paid on the common stock or non-voting
common stock to date, and we do not expect to pay cash dividends
thereon in the foreseeable future. We anticipate that we will
retain all earnings, if any, to support our operations and our
proprietary drug development programs. Any future determination
as to the payment of dividends will be at the sole discretion of
our board of directors and will depend on our financial
condition, results of operations, capital requirements and other
factors our board of directors deems relevant.
|
|
(d)
|
Securities
authorized for issuance under equity compensation
plans
|
See Part III, Item 12 for information regarding
securities authorized for issuance under our equity compensation
plans.
|
|
(e)
|
Repurchase
of equity securities
|
A summary of our stock repurchase activity for the fourth
quarter of the fiscal year ended March 31, 2009 is as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
Approximate Dollar
|
|
|
|
|
|
|
|
|
|
Number of Shares
|
|
|
Value of Shares
|
|
|
|
Total Number
|
|
|
Average
|
|
|
Purchased as
|
|
|
That May Yet
|
|
|
|
of Shares
|
|
|
Price Paid
|
|
|
Part of a Publicly
|
|
|
be Purchased
|
|
Period
|
|
Purchased(a)
|
|
|
per Share
|
|
|
Announced Program(a)
|
|
|
Under the Program
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
|
|
January 1 through January 31
|
|
|
4,747
|
|
|
|
9.99
|
|
|
|
4,747
|
|
|
$
|
103.7
|
|
February 1 through February 28
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
103.7
|
|
March 1 through March 31
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
103.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
4,747
|
|
|
$
|
9.99
|
|
|
|
4,747
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
|
In November 2007, our board of directors authorized a program to
repurchase up to $175.0 million of our common stock to be
repurchased at the discretion of management from time to time in
the open market or
|
37
|
|
|
|
|
through privately negotiated transactions. The repurchase
program has no set expiration date and may be suspended or
discontinued at any time. We publicly announced the share
repurchase program in our press release dated November 21,
2007. In June 2008, the board of directors authorized the
expansion of this repurchase program by an additional
$40.0 million, bringing the total authorization under this
program to $215.0 million. We purchased
1,569,202 shares at a cost of approximately
$18.0 million under this program during the year ended
March 31, 2009 by means of open market purchases. As of
March 31, 2009, we have purchased a total of
8,537,938 shares under this program at a cost of
approximately $111.3 million.
|
In addition to the stock repurchases above, during the year
ended March 31, 2009, we acquired, by means of net share
settlements, 51,891 shares of Alkermes common stock, at an
average price of $11.39 per share, related to the vesting of
employee stock awards to satisfy withholding tax obligations. In
addition, during the year ended March 31, 2009, we acquired
9,176 shares of Alkermes common stock, at an average price
of $12.66 per share, tendered by employees as payment of the
exercise price of stock options granted under our equity
compensation plans.
38
Performance
Graph
The following graph compares the yearly percentage change in the
cumulative total shareholder return on our common stock for the
last five fiscal years, with the cumulative total return on the
Nasdaq Stock Market Index and the Nasdaq Biotechnology Index.
The comparison assumes $100 was invested on March 31, 2004
in our common stock and in each of the foregoing indices and
further assumes reinvestment of any dividends. We did not
declare or pay any dividends on our common stock during the
comparison period.
Comparison
of Cumulative Total Returns
Comparison
of Cumulative Total Returns
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004
|
|
|
|
2005
|
|
|
|
2006
|
|
|
|
2007
|
|
|
|
2008
|
|
|
|
2009
|
|
Alkermes, Inc.
|
|
|
|
100
|
|
|
|
|
65
|
|
|
|
|
138
|
|
|
|
|
97
|
|
|
|
|
74
|
|
|
|
|
76
|
|
NASDAQ Stock Market Index
|
|
|
|
100
|
|
|
|
|
101
|
|
|
|
|
119
|
|
|
|
|
123
|
|
|
|
|
115
|
|
|
|
|
62
|
|
NASDAQ Biotechnology Index
|
|
|
|
100
|
|
|
|
|
84
|
|
|
|
|
108
|
|
|
|
|
100
|
|
|
|
|
100
|
|
|
|
|
88
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
39
|
|
Item 6.
|
Selected
Financial Data
|
The following financial data should be read in conjunction with
our consolidated financial statements and related notes
appearing elsewhere in this
Form 10-K,
beginning on
page F-1.
Alkermes,
Inc. and Subsidiaries
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended March 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(In thousands, except per share data)
|
|
|
Consolidated Statements of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
REVENUES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Manufacturing revenues
|
|
$
|
116,844
|
|
|
$
|
101,700
|
|
|
$
|
105,416
|
|
|
$
|
64,901
|
|
|
$
|
40,488
|
|
Royalty revenues
|
|
|
33,247
|
|
|
|
29,457
|
|
|
|
23,151
|
|
|
|
16,532
|
|
|
|
9,636
|
|
Product sales, net
|
|
|
4,467
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development revenue under collaborative arrangements
|
|
|
42,087
|
|
|
|
89,510
|
|
|
|
74,483
|
|
|
|
45,883
|
|
|
|
26,002
|
|
Net collaborative profit(1)
|
|
|
130,194
|
|
|
|
20,050
|
|
|
|
36,915
|
|
|
|
39,285
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
326,839
|
|
|
|
240,717
|
|
|
|
239,965
|
|
|
|
166,601
|
|
|
|
76,126
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EXPENSES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of goods manufactured and sold(2)
|
|
|
43,396
|
|
|
|
40,677
|
|
|
|
45,209
|
|
|
|
23,489
|
|
|
|
16,834
|
|
Research and development(2)
|
|
|
89,478
|
|
|
|
125,268
|
|
|
|
117,315
|
|
|
|
89,068
|
|
|
|
91,641
|
|
Selling, general and administrative(2)
|
|
|
59,008
|
|
|
|
59,508
|
|
|
|
66,399
|
|
|
|
40,383
|
|
|
|
29,499
|
|
Impairment of long-lived assets
|
|
|
|
|
|
|
11,630
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructuring(3)
|
|
|
|
|
|
|
6,423
|
|
|
|
|
|
|
|
|
|
|
|
11,527
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
191,882
|
|
|
|
243,506
|
|
|
|
228,923
|
|
|
|
152,940
|
|
|
|
149,501
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING INCOME (LOSS)
|
|
|
134,957
|
|
|
|
(2,789
|
)
|
|
|
11,042
|
|
|
|
13,661
|
|
|
|
(73,375
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER (EXPENSE) INCOME:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain on sale of investment in Reliant Pharmaceuticals, Inc.
|
|
|
|
|
|
|
174,631
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
11,400
|
|
|
|
17,834
|
|
|
|
17,707
|
|
|
|
11,569
|
|
|
|
3,005
|
|
Interest expense
|
|
|
(13,756
|
)
|
|
|
(16,370
|
)
|
|
|
(17,725
|
)
|
|
|
(20,661
|
)
|
|
|
(7,394
|
)
|
Derivative (loss) income related to convertible subordinated
notes(4)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,084
|
)
|
|
|
4,385
|
|
Other (expense) income, net(5)
|
|
|
(1,589
|
)
|
|
|
(476
|
)
|
|
|
(481
|
)
|
|
|
333
|
|
|
|
(1,789
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other (expense) income
|
|
|
(3,945
|
)
|
|
|
175,619
|
|
|
|
(499
|
)
|
|
|
(9,843
|
)
|
|
|
(1,793
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME (LOSS) BEFORE INCOME TAXES
|
|
|
131,012
|
|
|
|
172,830
|
|
|
|
10,543
|
|
|
|
3,818
|
|
|
|
(75,168
|
)
|
INCOME TAXES
|
|
|
507
|
|
|
|
5,851
|
|
|
|
1,098
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCOME (LOSS)
|
|
$
|
130,505
|
|
|
$
|
166,979
|
|
|
$
|
9,445
|
|
|
$
|
3,818
|
|
|
$
|
(75,168
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EARNINGS (LOSS) PER COMMON SHARE:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BASIC
|
|
$
|
1.37
|
|
|
$
|
1.66
|
|
|
$
|
0.10
|
|
|
$
|
0.04
|
|
|
$
|
(0.83
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DILUTED
|
|
$
|
1.36
|
|
|
$
|
1.62
|
|
|
$
|
0.09
|
|
|
$
|
0.04
|
|
|
$
|
(0.83
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BASIC
|
|
|
95,161
|
|
|
|
100,742
|
|
|
|
99,242
|
|
|
|
91,022
|
|
|
|
90,094
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DILUTED
|
|
|
96,252
|
|
|
|
102,923
|
|
|
|
103,351
|
|
|
|
97,377
|
|
|
|
90,094
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
40
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended March 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(In thousands, except per share data)
|
|
|
Consolidated Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash, cash equivalents and investments
|
|
$
|
404,482
|
|
|
$
|
460,361
|
|
|
$
|
357,466
|
|
|
$
|
303,112
|
|
|
$
|
202,567
|
|
Total assets
|
|
|
566,486
|
|
|
|
656,311
|
|
|
|
568,621
|
|
|
|
477,163
|
|
|
|
338,874
|
|
Long-term debt(6)
|
|
|
75,888
|
|
|
|
160,371
|
|
|
|
156,898
|
|
|
|
279,518
|
|
|
|
276,485
|
|
Unearned milestone revenue current and long-term
|
|
|
|
|
|
|
117,657
|
|
|
|
128,750
|
|
|
|
99,536
|
|
|
|
|
|
Redeemable convertible preferred stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15,000
|
|
|
|
30,000
|
|
Shareholders equity
|
|
|
434,888
|
|
|
|
305,314
|
|
|
|
203,461
|
|
|
|
33,216
|
|
|
|
4,112
|
|
|
|
|
(1)
|
|
Includes $120.7 million recognized as revenue upon the
termination of the VIVITROL collaboration with Cephalon during
the year ended March 31, 2009.
|
|
(2)
|
|
Includes share-based compensation expense as a result of the
adoption of the Financial Accounting Standards Boards
(FASB) Statement of Financial Accounting Standard
(SFAS) No. 123(R),
Share-Based
Payment
on April 1, 2006 (see Note 12 in the
notes to the consolidated financial statements included in this
Annual Report on
Form 10-K).
|
|
(3)
|
|
Represents charges in connection with our March 2008 and June
2004 restructurings of operations. The March 2008 and June 2004
restructuring programs were substantially completed during
fiscal 2009 and fiscal 2005, respectively. Certain closure costs
related to the leased facilities exited in connection with the
March 2008 restructuring of operations will continue to be paid
through December 2015.
|
|
(4)
|
|
Represents noncash (loss) income in connection with derivative
liabilities associated with the two-year interest make-whole
payment provision of our 6.52% convertible senior subordinated
notes and the three-year interest make-whole (Three-Year
Interest Make-Whole) payment provision of our 2.5%
convertible subordinated notes (2.5% Subordinated
Notes). The derivative liability is recorded at fair value
in the consolidated balance sheets.
|
|
(5)
|
|
Primarily represents (expense) income recognized on the changes
in the fair value of warrants of public companies held by us in
connection with collaboration and licensing arrangements, which
are recorded as derivatives under Other assets in
the consolidated balance sheets. The recorded value of such
warrants can fluctuate significantly based on fluctuations in
the market value of the underlying securities of the issuer of
the warrants. Also includes charges for
other-than-temporary
impairments attributed to certain strategic investments in the
common stock of our collaborative partners.
|
|
(6)
|
|
Includes the 7% Notes which were issued by Royalty Sub and
are non-recourse to Alkermes.
|
41
|
|
Item 7.
|
Managements
Discussion and Analysis of Financial Condition and Results of
Operations
|
Forward-Looking
Statements
Any statements herein or otherwise made in writing or orally by
us with regard to our expectations as to financial results and
other aspects of our business may constitute forward-looking
statements within the meaning of the Private Securities
Litigation Reform Act of 1995, including, but not limited to,
statements concerning future operating results, the achievement
of certain business and operating goals, manufacturing revenues,
product sales and royalty revenues, plans for clinical trials,
regulatory approvals and manufacture and commercialization of
products and product candidates, spending relating to research
and development, manufacturing, and selling and marketing
activities, financial goals and projections of capital
expenditures, recognition of revenues, and future financings.
These statements relate to our future plans, objectives,
expectations and intentions and may be identified by words like
believe, expect, designed,
may, will, should,
seek, or anticipate, and similar
expressions.
Although we believe that our expectations are based on
reasonable assumptions within the bounds of our knowledge of our
business and operations, the forward-looking statements
contained in this document are neither promises nor guarantees,
and our business is subject to significant risk and
uncertainties and there can be no assurance that our actual
results will not differ materially from our expectations. These
forward looking statements include, but are not limited to,
statements concerning: the achievement of certain business and
operating milestones and future operating results and
profitability; continued growth of RISPERDAL CONSTA sales; the
commercialization of VIVITROL in the U.S. by us and in
Russia and the CIS by Cilag; recognition of milestone payments
from Cilag related to the future sales of VIVITROL; the
successful continuation of development activities for our
programs, including exenatide once weekly, a four-week
formulation of RISPERDAL CONSTA, VIVITROL for opiate dependence,
ALKS 27, ALKS 29, ALKS 33 and ALKS 36; the expectation and
timeline for regulatory approval of the NDA submission for
exenatide once weekly; the successful manufacture of our
products and product candidates, including RISPERDAL CONSTA and
VIVITROL, by us at a commercial scale, and the successful
manufacture of exenatide once weekly by Amylin; and our building
a successful commercial infrastructure for VIVITROL. Factors
which could cause actual results to differ materially from our
expectations set forth in our forward-looking statements
include, among others: (i) manufacturing and royalty
revenues from RISPERDAL CONSTA may not continue to grow,
particularly because we rely on our partner, Janssen, to
forecast and market this product; (ii) we may be unable to
manufacture RISPERDAL CONSTA and VIVITROL in sufficient
quantities and with sufficient yields to meet our partners
requirements or to add additional production capacity for
RISPERDAL CONSTA and VIVITROL, or unexpected events could
interrupt manufacturing operations at our RISPERDAL CONSTA and
VIVITROL manufacturing facility, which is the sole source of
supply for these products; (iii) we may be unable to
develop the commercial capabilities,
and/or
infrastructure, necessary to successfully commercialize
VIVITROL; (iv) Cilag may be unable to receive approval for
VIVITROL for the treatment of opioid dependence in Russia and
for the treatment of alcohol and opioid dependence in the other
countries in the CIS; (v) Cilag may be unable to
successfully commercialize VIVITROL; (vi) third party
payors may not cover or reimburse our products; (vii) if
approved, Lilly and Amylin may be unable to successfully
commercialize exenatide once weekly; (viii) we may be
unable to
scale-up
and
manufacture our product candidates commercially or economically;
(ix) we may not be able to source raw materials for our
production processes from third parties; (x) Amylin may not
be able to successfully operate the manufacturing facility for
exenatide once weekly and the FDA may not find the product
produced in the Amylin facility comparable to the product used
in the pivotal clinical study which was produced in our
facility; (xi) our product candidates, if approved for
marketing, may not be launched successfully in one or all
indications for which marketing is approved and, if launched,
may not produce significant revenues; (xii) we rely on our
partners to determine the regulatory and marketing strategies
for RISPERDAL CONSTA, including the four-week formulation of
RISPERDAL CONSTA currently being developed by us, and our other
partnered, non-proprietary programs; (xiii) RISPERDAL
CONSTA, VIVITROL and our product candidates in commercial use
may have unintended side effects, adverse reactions or incidents
of misuse and the FDA or other health authorities could require
post approval studies or require removal of our products from
the market; (xiv) our collaborators could elect to
terminate or delay programs at any time and disputes with
collaborators or failure to negotiate acceptable new
42
collaborative arrangements for our technologies could occur;
(xv) clinical trials may take more time or consume more
resources than initially envisioned; (xvi) results of
earlier clinical trials may not necessarily be predictive of the
safety and efficacy results in larger clinical trials;
(xvii) our product candidates could be ineffective or
unsafe during preclinical studies and clinical trials, and we
and our collaborators may not be permitted by regulatory
authorities to undertake new or additional clinical trials for
product candidates incorporating our technologies, or clinical
trials could be delayed or terminated; (xviii) after the
completion of clinical trials for our product candidates,
including exenatide once weekly, or after the submission for
marketing approval of such product candidates, the FDA or other
health authorities could refuse to accept such filings, could
request additional preclinical or clinical studies be conducted
or request a safety monitoring program, any of which could
result in significant delays or the failure of such products to
receive marketing approval; (xix) even if our product
candidates appear promising at an early stage of development,
product candidates could fail to receive necessary regulatory
approvals, be difficult to manufacture on a large scale, be
uneconomical, fail to achieve market acceptance, be precluded
from commercialization by proprietary rights of third parties or
experience substantial competition in the marketplace;
(xx) technological change in the biotechnology or
pharmaceutical industries could render our products
and/or
product candidates obsolete or non-competitive;
(xxi) difficulties or set-backs in obtaining and enforcing
our patents and difficulties with the patent rights of others
could occur; (xxii) we may incur losses in the future;
(xxiii) we may need to raise substantial additional funding
to continue research and development programs and clinical
trials and other operations and could incur difficulties or
setbacks in raising such funds, which may be further impacted by
current economic conditions and the lack of available credit
sources; (xxiv) we may not be able to liquidate or
otherwise recoup our investments in corporate debt securities,
asset backed debt securities and auction rate securities.
The forward-looking statements made in this document are made
only as of the date hereof and we do not intend to update any of
these factors or to publicly announce the results of any
revisions to any of our forward-looking statements other than as
required under the federal securities laws.
Executive
Summary
Net income for the year ended March 31, 2009 was
$130.5 million, or $1.37 per common share basic
and $1.36 per common share diluted, as compared to
net income of $167.0 million, or $1.66 per common
share basic and $1.62 per common share
diluted, for the year ended March 31, 2008 and
$9.4 million, or $0.10 per common share basic
and $0.09 per common share diluted, for the year
ended March 31, 2007.
Net income for the year ended March 31, 2009 reflects
continued growth in unit sales of RISPERDAL CONSTA and the
recognition of $120.7 million of previously deferred and
unearned milestone revenue related to the termination of the
VIVITROL collaboration with Cephalon. As of the Termination
Date, we assumed the risks and responsibilities for the
marketing and sale of VIVITROL in the U.S. and we were
responsible for all VIVITROL profits or losses, except for
$11.0 million Cephalon paid us to fund its share of
estimated VIVITROL product losses during the one-year period
following the Termination Date.
During the year ended March 31, 2009, we purchased
$93.0 million in principal amount of our 7% Notes for
$89.4 million and repurchased 1,569,202 shares of our
common stock for $18.0 million.
Results
of Operations
Manufacturing
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change
|
|
|
|
Years Ended March 31,
|
|
|
Favorable/(Unfavorable)
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2009-2008
|
|
|
2008-2007
|
|
|
|
(In millions)
|
|
|
Manufacturing revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Risperdal Consta
|
|
$
|
112.4
|
|
|
$
|
95.2
|
|
|
$
|
88.6
|
|
|
$
|
17.2
|
|
|
$
|
6.6
|
|
Vivitrol
|
|
|
4.4
|
|
|
|
6.5
|
|
|
|
16.8
|
|
|
|
(2.1
|
)
|
|
|
(10.3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Manufacturing revenues
|
|
$
|
116.8
|
|
|
$
|
101.7
|
|
|
$
|
105.4
|
|
|
$
|
15.1
|
|
|
$
|
(3.7
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
43
The increase in RISPERDAL CONSTA manufacturing revenues for the
year ended March 31, 2009, as compared to the year ended
March 31, 2008, was due to a 19% increase in the number of
units shipped to Janssen due to increased customer demand. The
number of RISPERDAL CONSTA units shipped for sale in foreign
countries comprised 76%, 80% and 73% of the total units shipped
during the years ended March 31, 2009, 2008 and 2007,
respectively. See Part II, Item 7A. Quantitative
and Qualitative Disclosures about Market Risk for
information on foreign currency exchange rate risk related to
RISPERDAL CONSTA revenues.
The increase in RISPERDAL CONSTA manufacturing revenues for the
year ended March 31, 2008, as compared to the year ended
March 31, 2007, was due to an 11% increase in the per unit
net sales price, partially offset by a 3% decrease in the number
of units shipped to Janssen. The increase in the per unit net
sales price was primarily due to the weakening of the
U.S. dollar in relation to the foreign countries in which
the product was sold and the decrease in the number of units
shipped was due to Janssen managing its product inventory due in
part to increased efficiencies and reliability in our RISPERDAL
CONSTA manufacturing process.
Under our manufacturing and supply agreement with Janssen, we
earn manufacturing revenues when product is shipped to Janssen,
based on a percentage of Janssens estimated unit net sales
price. Revenues include a quarterly adjustment from
Janssens estimated unit net sales price to Janssens
actual unit net sales price for product shipped. In the years
ended March 31, 2009, 2008 and 2007, our RISPERDAL CONSTA
manufacturing revenues were based on an average of 7.5% of
Janssens unit net sales price of RISPERDAL CONSTA. We
anticipate that we will earn manufacturing revenues at 7.5% of
Janssens unit net sales price of RISPERDAL CONSTA for
product shipped in the fiscal year ending March 31, 2010
and beyond.
VIVITROL manufacturing revenues consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended March 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
(In millions)
|
|
|
VIVITROL manufacturing revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
VIVITROL sold to Cephalon(1)
|
|
$
|
3.8
|
|
|
$
|
6.5
|
|
|
$
|
16.8
|
|
VIVITROL sold to Cilag for resale in Russia
|
|
|
0.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
VIVITROL manufacturing revenues
|
|
$
|
4.4
|
|
|
$
|
6.5
|
|
|
$
|
16.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Prior to the termination of the VIVITROL collaboration with
Cephalon, Cephalon was responsible for the marketing and sale of
VIVITROL in the U.S. and we were responsible for the
manufacturing, for which we billed Cephalon at cost upon
shipment of product. VIVITROL manufacturing revenues includes a
10% markup on cost of goods manufactured which is described in
greater detail below.
|
VIVITROL manufacturing revenues on product sold to Cephalon for
the years ended March 31, 2009, 2008 and 2007 included
$0.3 million, $0.6 million and $1.5 million,
respectively, of milestone revenue related to manufacturing
profit earned on VIVITROL, which equaled a 10% markup on
VIVITROL cost of goods manufactured and drew down from unearned
milestone revenue. VIVITROL manufacturing revenues on product
sold to Cephalon for the years ended March 31, 2008 and
2007 included $2.2 million and $3.7 million,
respectively, of billings for idle capacity costs. VIVITROL was
approved for sale in Russia for the treatment of alcohol
dependence in August 2008 and was launched by Cilag in March
2009.
As a result of the termination of the collaboration with
Cephalon, we assumed title to certain VIVITROL inventory which
we had previously sold to Cephalon, and in December 2008 we
reduced VIVITROL manufacturing revenues earned on product sold
to Cephalon by $0.7 million and manufacturing profit by
$0.1 million to reverse the previous sale of this product
inventory to Cephalon.
The decrease in VIVITROL manufacturing revenues for the year
ended March 31, 2008, as compared to March 31, 2007,
was due to the management of manufacturing volumes to avoid
excess inventory. During the year ended March 31, 2007, we
shipped large quantities of VIVITROL to Cephalon to build
sufficient inventory to support the commercial launch of
VIVITROL.
44
Royalty
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change
|
|
|
|
Years Ended March 31,
|
|
|
Favorable/(Unfavorable)
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2009-2008
|
|
|
2008-2007
|
|
|
|
(In millions)
|
|
|
Royalty revenues
|
|
$
|
33.2
|
|
|
$
|
29.5
|
|
|
$
|
23.2
|
|
|
$
|
3.7
|
|
|
$
|
6.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Substantially all of our royalty revenues for the years ended
March 31, 2009, 2008 and 2007 were related to sales of
RISPERDAL CONSTA. Under our license agreements with Janssen, we
record royalty revenues equal to 2.5% of Janssens net
sales of RISPERDAL CONSTA in the period that the product is sold
by Janssen. Royalty revenues for the years ended March 31,
2009, 2008 and 2007 were based on RISPERDAL CONSTA sales of
$1,324.9 million, $1,176.5 million and
$924.2 million, respectively. Units sold in foreign
countries by Janssen in the year ended March 31, 2009, 2008
and 2007 accounted for 77%, 77% and 76% of the total units sold,
respectively. The increase in royalty revenues in the year ended
March 31, 2009, as compared to the year ended
March 31, 2008, was due to a 16% increase in the number of
units sold by Janssen, partially offset by a 4% decrease in the
selling price of the product in foreign countries primarily due
to an overall strengthening of the U.S. dollar in relation
to the foreign currencies of the countries in which the product
was sold. The increase in royalty revenues in the year ended
March 31, 2008, as compared to the year ended
March 31, 2007, was due to a 15% increase in the number of
units sold by Janssen and a 12% increase in the average selling
price of the product primarily due to an overall weakening of
the U.S. dollar in relation to the foreign currencies of
the countries in which the product was sold. See Part II,
Item 7A. Quantitative and Qualitative Disclosures
about Market Risk for information on foreign currency
exchange rate risk related to RISPERDAL CONSTA revenues.
Product
Sales, net
Upon termination of the VIVITROL collaboration with Cephalon, we
assumed the risks and responsibilities for the marketing and
sale of VIVITROL in the U.S., effective on the Termination Date.
The following table presents the adjustments deducted from gross
VIVITROL product sales to arrive at VIVITROL product sales, net,
during the period from December 1, 2008 through
March 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
Year Ended March 31,
|
|
|
|
2009
|
|
|
% of Sales
|
|
|
|
(In millions)
|
|
|
Product sales, gross
|
|
$
|
6.3
|
|
|
|
100.0
|
%
|
Adjustments to product sales, gross:
|
|
|
|
|
|
|
|
|
Product returns(1)
|
|
|
(1.3
|
)
|
|
|
(20.6
|
)%
|
Medicaid rebates
|
|
|
(0.2
|
)
|
|
|
(3.2
|
)%
|
Prompt-pay discounts
|
|
|
(0.1
|
)
|
|
|
(1.6
|
)%
|
Other
|
|
|
(0.2
|
)
|
|
|
(3.2
|
)%
|
|
|
|
|
|
|
|
|
|
Total adjustments
|
|
|
(1.8
|
)
|
|
|
(28.6
|
)%
|
|
|
|
|
|
|
|
|
|
Product sales, net
|
|
$
|
4.5
|
|
|
|
71.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Following the introduction of a return policy for VIVITROL, our
estimate for product returns reflects the deferral of the
recognition of revenue on shipments of VIVITROL to our customers
until the product has left the distribution channel as we do not
yet have the sales history to reasonably estimate returns
related to these shipments. We estimate product shipments out of
the distribution channel through data provided by external
sources, including information on inventory levels provided by
our customers as well as prescription information.
|
45
During the year ended March 31, 2009, gross sales of
VIVITROL consisted of $12.6 million of sales by Cephalon
prior to the termination of the VIVITROL collaboration and
$6.3 million of sales made by us after the Termination
Date. Gross sales of VIVITROL by Cephalon during the years ended
March 31, 2008 and 2007 were $18.0 million and
$6.5 million, respectively.
Research
and Development Revenue Under Collaborative
Arrangements
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change
|
|
|
|
Years Ended March 31,
|
|
|
Favorable/(Unfavorable)
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2009-2008
|
|
|
2008-2007
|
|
|
|
(In millions)
|
|
|
Research and development programs:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AIR Insulin
|
|
$
|
26.8
|
|
|
$
|
49.5
|
|
|
$
|
40.1
|
|
|
$
|
(22.7
|
)
|
|
$
|
9.4
|
|
Exenatide once weekly
|
|
|
9.5
|
|
|
|
32.9
|
|
|
|
19.3
|
|
|
|
(23.4
|
)
|
|
|
13.6
|
|
Four-week RISPERDAL CONSTA
|
|
|
4.6
|
|
|
|
|
|
|
|
|
|
|
|
4.6
|
|
|
|
|
|
AIR PTH
|
|
|
|
|
|
|
5.1
|
|
|
|
6.5
|
|
|
|
(5.1
|
)
|
|
|
(1.4
|
)
|
VIVITROL
|
|
|
|
|
|
|
1.2
|
|
|
|
4.6
|
|
|
|
(1.2
|
)
|
|
|
(3.4
|
)
|
Other
|
|
|
1.2
|
|
|
|
0.8
|
|
|
|
4.0
|
|
|
|
0.4
|
|
|
|
(3.2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development revenue under collaborative arrangements
|
|
$
|
42.1
|
|
|
$
|
89.5
|
|
|
$
|
74.5
|
|
|
$
|
(47.4
|
)
|
|
$
|
15.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The decrease in revenue from the AIR Insulin program in the year
ended March 31, 2009, as compared to the year ended
March 31, 2008, was due to the termination of the AIR
Insulin development program in March 2008. Under the AIR Insulin
Termination Agreement, we recognized $25.5 million of
R&D revenue in the three months ended June 30, 2008.
We do not expect to record any material amounts of revenue from
the AIR Insulin development program in the future. The decrease
in the revenues earned under the exenatide once weekly
development program in the year ended March 31, 2009, as
compared to the year ended March 31, 2008, was due to
reduced activity as the program neared the submission of the NDA
to the FDA, which occurred in May 2009. In January 2009, we
announced that J&JPRD initiated a phase 1, single-dose,
open-label study of a four-week formulation of RISPERDAL CONSTA
for the treatment of schizophrenia. RISPERDAL CONSTA is
currently marketed as a two-week formulation.
The increase in the revenues earned under the AIR Insulin and
exenatide once weekly development programs in the year ended
March 31, 2008, as compared to the year ended
March 31, 2007, were due to increased activity as the
programs progressed through their clinical trials. Included in
the exenatide once weekly development program revenue for the
year ended March 31, 2008 was a $5.0 million payment
we received from Amylin in December 2007 related to the
achievement of a phase 3 milestone. Upon achievement of the
phase 3 milestone, we recalculated the amounts due under
the proportional performance model, and based on the
proportional performance to date adjusted revenues to the lesser
of the amount due under the contract or the amount based on the
proportional performance to date. Based on the amount of effort
that had been expended when the phase 3 milestone was
achieved and the payments we expect to receive under the
program, we were able to recognize the full amount as revenue in
the period received.
The AIR parathyroid hormone (PTH) program was
terminated in August 2007. We do not expect to record any
material amounts of revenue from the AIR PTH development program
in the future. During the years ended March 31, 2008 and
2007, we recorded VIVITROL research and development revenue
related to the work we performed on the construction and
validation of two additional VIVITROL manufacturing lines at our
Ohio manufacturing facilities, which were constructed under the
VIVITROL collaboration with Cephalon. We stopped construction on
the lines during the year ended March 31, 2008.
46
Net
Collaborative Profit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change
|
|
|
|
Years Ended March 31,
|
|
|
Favorable/(Unfavorable)
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2009-2008
|
|
|
2008-2007
|
|
|
|
(In millions)
|
|
|
Net collaborative profit:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Milestone revenue cost recovery
|
|
$
|
|
|
|
$
|
5.3
|
|
|
$
|
78.8
|
|
|
$
|
(5.3
|
)
|
|
$
|
(73.5
|
)
|
Milestone revenue license
|
|
|
3.5
|
|
|
|
5.2
|
|
|
|
5.1
|
|
|
|
(1.7
|
)
|
|
|
0.1
|
|
Recognition of deferred and unearned milestone revenue due to
termination of VIVITROL collaboration
|
|
|
120.7
|
|
|
|
|
|
|
|
|
|
|
|
120.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total milestone revenue
|
|
|
124.2
|
|
|
|
10.5
|
|
|
|
83.9
|
|
|
|
113.7
|
|
|
|
(73.4
|
)
|
Net payments from (to) Cephalon
|
|
|
|
|
|
|
9.6
|
|
|
|
(47.0
|
)
|
|
|
(9.6
|
)
|
|
|
56.6
|
|
VIVITROL losses funded by Cephalon, post termination
|
|
|
6.0
|
|
|
|
|
|
|
|
|
|
|
|
6.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net collaborative profit
|
|
$
|
130.2
|
|
|
$
|
20.1
|
|
|
$
|
36.9
|
|
|
$
|
110.1
|
|
|
$
|
(16.8
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prior to the termination of the VIVITROL collaboration, Cephalon
had paid us an aggregate of $274.6 million in nonrefundable
milestone payments and we were responsible to fund the first
$124.6 million of cumulative net losses incurred on
VIVITROL (the cumulative net loss cap). VIVITROL
reached the cumulative net loss cap in April 2007, at which time
Cephalon became responsible to fund all net losses incurred on
VIVITROL through December 31, 2007. Beginning
January 1, 2008, all net losses incurred on VIVITROL within
the collaboration were divided between us and Cephalon in
approximately equal shares. For the year ended March 31,
2009, we recognized no milestone revenue cost
recovery, as VIVITROL had reached the cumulative loss cap prior
to this reporting period. Milestone revenue license,
related to the license provided to Cephalon to commercialize
VIVITROL, was being recognized on a straight-line basis over a
10 year amortization schedule.
Upon the termination of the VIVITROL collaboration with
Cephalon, we recognized $120.7 million of net collaborative
profit which consisted of $113.9 million of unearned
milestone revenue that existed at the Termination Date and
$6.8 million of deferred revenue. At the Termination Date,
we had $22.8 million of deferred revenue related to the
original sale of the two partially completed VIVITROL
manufacturing lines to Cephalon. We paid Cephalon
$16.0 million to acquire the title to these manufacturing
lines and accounted for the payment as a reduction to deferred
revenue. The remaining $6.8 million of deferred revenue and
the $113.9 million of unearned milestone revenue were
recognized as revenue in the three months ended
December 31, 2008, as we had no remaining performance
obligations to Cephalon and the amounts were nonrefundable. Net
payments from (to) Cephalon were received based upon the sharing
of VIVITROL costs and losses incurred during the reporting
periods.
Upon termination of the VIVITROL collaboration, we received
$11.0 million from Cephalon to fund their share of
estimated VIVITROL losses during the one-year period following
the Termination Date. We recorded the $11.0 million as
deferred revenue and are recognizing it as revenue though the
application of a proportional performance model based on net
VIVITROL losses. We do not expect to recognize any further net
collaborative profit after the $11.0 million payment has
been fully recognized as revenue, which we expect to occur in
fiscal year 2010.
47
Cost
of Goods Manufactured and Sold
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change
|
|
|
|
Years Ended March 31,
|
|
|
Favorable/(Unfavorable)
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2009-2008
|
|
|
2008-2007
|
|
|
|
(In millions)
|
|
|
Cost of goods manufactured and sold:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Risperdal Consta
|
|
$
|
31.3
|
|
|
$
|
34.8
|
|
|
$
|
29.9
|
|
|
$
|
3.5
|
|
|
$
|
(4.9
|
)
|
Vivitrol
|
|
|
11.8
|
|
|
|
5.9
|
|
|
|
15.3
|
|
|
|
(5.9
|
)
|
|
|
9.4
|
|
Other
|
|
|
0.3
|
|
|
|
|
|
|
|
|
|
|
|
(0.3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of goods manufactured and sold
|
|
$
|
43.4
|
|
|
$
|
40.7
|
|
|
$
|
45.2
|
|
|
$
|
(2.7
|
)
|
|
$
|
4.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The decrease in cost of goods manufactured for RISPERDAL CONSTA
in the year ended March 31, 2009, as compared to the year
ended March 31, 2008, was due to a 24% decrease in the unit
cost of RISPERDAL CONSTA, primarily due to increased operating
efficiencies, partially offset by a 19% increase in the number
of units of RISPERDAL CONSTA shipped to Janssen to meet customer
demand. The increase in cost of goods manufactured for RISPERDAL
CONSTA in the year ended March 31, 2008, as compared to the
year ended March 31, 2007, was due to a 19% increase in
unit cost of RISPERDAL CONSTA, partially offset by a 3% decrease
in the number of units of RISPERDAL CONSTA shipped to Janssen.
Shipments of RISPERDAL CONSTA were slightly lower in the year
ended March 31, 2008, as compared to the year ended
March 31, 2007, as Janssen managed its levels of product
inventory, due in part to increased efficiencies and reliability
in our RISPERDAL CONSTA manufacturing processes.
Cost of goods manufactured and sold for VIVITROL in the year
ended March 31, 2009 consisted of $8.4 million of cost
of goods manufactured for Cephalon incurred prior to the
Termination Date, less $0.7 million of product previously
sold to Cephalon that was reversed in connection with the
termination of the VIVITROL collaboration. In addition, we had
cost of goods sold of $3.6 million relating to product sold
by us in the U.S. after the Termination Date and
$0.5 million of cost of goods manufactured for Cilag for
resale in Russia. VIVITROL cost of goods manufactured for the
year ended March 31, 2008 consisted of $3.2 million of
product shipments to Cephalon and $2.7 million of idle
capacity costs, which consisted of current year manufacturing
costs allocated to cost of goods manufactured which were related
to underutilized VIVITROL manufacturing capacity. VIVITROL cost
of goods manufactured for the year ended March 31, 2007
consisted of $11.6 million of product shipments to Cephalon
and $3.7 million of idle capacity costs. We began shipping
VIVITROL to Cephalon for the first time during the quarter ended
June 30, 2006, and during the remainder of the fiscal year
ended March 31, 2007 we shipped quantities sufficient to
build inventory to support the commercial launch of the product.
Research
and Development Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change
|
|
|
|
Years Ended March 31,
|
|
|
Favorable/(Unfavorable)
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2009-2008
|
|
|
2008-2007
|
|
|
|
(In millions)
|
|
|
Research and development
|
|
$
|
89.5
|
|
|
$
|
125.3
|
|
|
$
|
117.3
|
|
|
$
|
35.8
|
|
|
$
|
(8.0
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The decrease in research and development expenses for the year
ended March 31, 2009, as compared to the year ended
March 31, 2008, was primarily due to the termination of the
AIR Insulin development program in March 2008, the termination
of the AIR PTH development program in August 2007 and reductions
in costs incurred on the exenatide once weekly development
program as the program neared the submission of the NDA to the
FDA, which occurred in May 2009. In connection with the
termination of the AIR Insulin development program, we closed
our AIR commercial manufacturing facility located in Chelsea,
Massachusetts and reduced our workforce by approximately
150 employees (the 2008 Restructuring). In
addition to the labor, non-cash compensation, occupancy and
depreciation expense savings realized from the 2008
Restructuring, there were reductions in laboratory expenses
including clinical raw materials, professional service and
third-party packaging fees related to the AIR Insulin and AIR
PTH programs. These expense
48
reductions were partially offset by increased clinical study
costs related to the ALKS 33 and four-week RISPERDAL CONSTA
development programs, which began phase 1 clinical trials in
December 2008 and January 2009, respectively, and the ALKS 36
program, which we expect to initiate a phase 1 clinical trial in
the second half of calendar 2009 and the VIVITROL opioid
dependence development program, in which a multi-center
registration study was initiated in June 2008.
The increase in research and development expenses for the year
ended March 31, 2008, as compared to the year ended
March 31, 2007, was primarily due to increased costs on the
exenatide once weekly and AIR Insulin development programs,
partially offset by decreased external costs related to the
completion of legacy clinical trials for VIVITROL and decreased
share-based compensation expense.
A significant portion of our research and development expenses
(including laboratory supplies, travel, dues and subscriptions,
recruiting costs, temporary help costs, consulting costs and
allocable costs such as occupancy and depreciation) are not
tracked by project as they benefit multiple projects or our
technologies in general. Expenses incurred to purchase specific
services from third parties to support our collaborative
research and development activities are tracked by project and
are reimbursed to us by our partners. We generally bill our
partners under collaborative arrangements using a negotiated FTE
or hourly rate. This rate has been established by us based on
our annual budget of employee compensation, employee benefits
and the billable non-project-specific costs mentioned above and
is generally increased annually based on increases in the
consumer price index. Each collaborative partner is billed using
a negotiated FTE or hourly rate for the hours worked by our
employees on a particular project, plus direct external costs,
if any. We account for our research and development expenses on
a departmental and functional basis in accordance with our
budget and management practices.
Selling,
General and Administrative Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change
|
|
|
|
Years Ended March 31,
|
|
|
Favorable/(Unfavorable)
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2009-2008
|
|
|
2008-2007
|
|
|
|
(In millions)
|
|
|
Selling, general and administrative
|
|
$
|
59.0
|
|
|
$
|
59.5
|
|
|
$
|
66.4
|
|
|
$
|
0.5
|
|
|
$
|
6.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The decrease in selling, general and administrative costs for
the year ended March 31, 2009, as compared to the year
ended March 31, 2008, was primarily due to a decrease in
share-based compensation expense, professional fees, taxes and
depreciation, partially offset by the increased sales and
marketing costs related to VIVITROL as we became responsible for
the marketing and sale of VIVITROL on December 1, 2008. On
the Termination Date, we became responsible for the
commercialization of VIVITROL in the U.S. and hired
approximately 50 individuals that comprise the VIVITROL sales
force. The decrease in selling, general and administrative
expenses for the year ended March 31, 2008, as compared to
the year ended March 31, 2007, was primarily due to
decreased share-based compensation expense.
Impairment
and Restructuring Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended March 31,
|
|
|
Favorable/(Unfavorable)
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2009-2008
|
|
|
2008-2007
|
|
|
|
(In millions)
|
|
|
Impairment of long-lived assets
|
|
$
|
|
|
|
$
|
11.6
|
|
|
$
|
|
|
|
$
|
11.6
|
|
|
$
|
(11.6
|
)
|
Restructuring
|
|
|
|
|
|
|
6.4
|
|
|
|
|
|
|
|
6.4
|
|
|
|
(6.4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total impairment and restructuring expenses
|
|
$
|
|
|
|
$
|
18.0
|
|
|
$
|
|
|
|
$
|
18.0
|
|
|
$
|
(18.0
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In March 2008, our collaborative partner Lilly announced the
decision to terminate the AIR Insulin development program. In
connection with the program termination, in March 2008 our board
of directors approved the 2008 Restructuring and as a result we
recorded a restructuring charge of $6.9 million, consisting
primarily of lease and severance related costs. As of
March 31, 2009, the only costs remaining from the 2008
Restructuring relate to lease costs on the exited facility,
which will be paid out through fiscal 2016.
49
In connection with the termination of the AIR Insulin
development program, we performed an impairment analysis on the
assets that supported the production of AIR Insulin, which
consisted of machinery and equipment and leasehold improvements
at the AIR commercial manufacturing facility. We determined that
the carrying value of the assets exceeded their fair value and
recorded an impairment charge of $11.6 million during the
three months ended March 31, 2008. Fair value was based on
internally and externally established estimates and the selling
prices of similar assets.
Other
(Expense) Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change
|
|
|
|
Years Ended March 31,
|
|
|
Favorable/(Unfavorable)
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2009-2008
|
|
|
2008-2007
|
|
|
|
(In millions)
|
|
|
Gain on sale of investment in Reliant Pharmaceuticals, Inc.
|
|
$
|
|
|
|
$
|
174.6
|
|
|
$
|
|
|
|
$
|
(174.6
|
)
|
|
$
|
174.6
|
|
Interest income
|
|
|
11.4
|
|
|
|
17.8
|
|
|
|
17.7
|
|
|
|
(6.4
|
)
|
|
|
0.1
|
|
Interest expense
|
|
|
(13.7
|
)
|
|
|
(16.4
|
)
|
|
|
(17.7
|
)
|
|
|
2.7
|
|
|
|
1.3
|
|
Other expense, net
|
|
|
(1.6
|
)
|
|
|
(0.4
|
)
|
|
|
(0.5
|
)
|
|
|
(1.2
|
)
|
|
|
0.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other (expense) income
|
|
$
|
(3.9
|
)
|
|
$
|
175.6
|
|
|
$
|
(0.5
|
)
|
|
$
|
(179.5
|
)
|
|
$
|
176.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We recorded a gain on sale of investment in Reliant
Pharmaceuticals, Inc. (Reliant) of
$174.6 million in the year ended March 31, 2008. In
November 2007, Reliant was acquired by GlaxoSmithKline
(GSK) and under the terms of the acquisition we
received $166.9 million upon the closing of the transaction
in exchange for our investment in Series C convertible,
redeemable preferred stock of Reliant. In March 2009, we
received an additional $7.7 million of funds, which had
been held in escrow subject to the terms of an agreement between
GSK and Reliant. We purchased the Series C convertible,
redeemable preferred stock of Reliant for $100.0 million in
December 2001, and our investment in Reliant had been written
down to zero, prior to the time of the sale.
The decrease in interest income for the year ended
March 31, 2009, as compared to the year ended
March 31, 2008, was due to lower interest rates earned
during the year ended March 31, 2009 as compared to
March 31, 2008, partially offset by a higher average
balance of cash and investments. Interest income for the year
ended March 31, 2008 was comparable to the year ended
March 31, 2007. We expect our interest earnings to decrease
as compared to prior periods due to a general reduction in
interest rates on our cash and investments.
The decrease in interest expense for the year ended
March 31, 2009, as compared to the year ended
March 31, 2008, was the result of our repurchase of an
aggregate total of $93.0 million principal amount of the
7% Notes in five separately negotiated transactions during
the year ended March 31, 2009. Included in interest expense
for the year ended March 31, 2009 is a loss on the
extinguishment of the 7% Notes of $2.5 million,
consisting of $0.9 million of transaction fees and a
$1.6 million difference between the carrying value and the
purchase price of the 7% Notes. As a result of the
purchases, we save approximately $16.5 million in interest
expense, which includes $12.9 million in cash payments for
interest and $3.6 million of original discount accretion
over the remaining life of the 7% Notes. The 7% Notes,
which have a remaining principal amount of $77.0 million are
scheduled to be paid in full on January 1, 2012. The
decrease in interest expense for the year ended March 31,
2008, as compared to the year ended March 31, 2007, was
primarily due to the conversion of our 2.5% Subordinated
Notes in June 2006. Interest expense for the year ended
March 31, 2007 includes a one-time interest charge of
$0.6 million for a payment we made in June 2006 in
connection with the conversion of our 2.5% Subordinated
Notes to satisfy the Three-Year Interest Make-Whole Provision in
the note indenture.
In the years ended March 31, 2009, 2008 and 2007, we
recorded
other-than-temporary
impairments on common stock holdings of our collaborators of
$1.2 million, $1.6 million and none, respectively, in
other expense, net. In the year ended March 31, 2008, the
impairment charge was offset by income earned on the change in
the fair value of our investments in warrants of our
collaborators.
50
Provision
for Income Taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change
|
|
|
|
Years Ended March 31,
|
|
|
Favorable/(Unfavorable)
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2009-2008
|
|
|
2008-2007
|
|
|
|
(In millions)
|
|
|
Provision for income taxes
|
|
$
|
0.5
|
|
|
$
|
5.9
|
|
|
$
|
1.1
|
|
|
$
|
5.4
|
|
|
$
|
(4.8
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The provision for income taxes for the years ended
March 31, 2009, 2008 and 2007 related to the
U.S. alternative minimum tax (AMT). Utilization
of tax loss carryforwards is limited in the calculation of AMT.
As a result, a federal tax charge was recorded in the years
ended March 31, 2009, 2008 and 2007. The current AMT
liability is available as a credit against future tax
obligations upon the full utilization or expiration of our net
operating loss carryforward. Included in the provision for
income taxes for the year ended March 31, 2009 is a
$0.3 million estimated benefit as a result of the recently
enacted
Housing and Economic Recovery Act of 2008
, which
allows for certain taxpayers to forego bonus depreciation in
lieu of a refundable cash credit based on certain qualified
asset purchases and $0.3 million estimated benefit as a
result of the
American Recovery and Reinvestment Act of
2009
. The
American Recovery and Reinvestment Act of 2009
allows certain taxpayers to refund a portion of the
Companys historic research or minimum tax credit
carryovers in lieu of claiming the bonus depreciation deduction
under section 168(k) for eligible qualified property placed
in service after March 31, 2008.
At March 31, 2009, we had approximately $222.4 million
of federal net operating loss (NOL) carryforwards,
$130.6 million of state operating loss carryforwards, and
$19.8 million of foreign NOL and foreign capital loss
carryforwards, which expire on various dates through the year
2026 or can be carried forward indefinitely. These loss
carryforwards are available to reduce future federal and foreign
taxable income, if any, and are subject to review and possible
adjustment by the applicable taxing authorities. The available
loss carryforwards that may be utilized in any future period may
be subject to limitation based upon historical changes in the
ownership of our stock. We have a full valuation allowance of
$111.8 million, which was recorded based upon the
uncertainty surrounding future utilization of our deferred tax
assets.
Liquidity
and Capital Resources
We have funded our operations primarily with funds generated by
our business operations and through public offerings and private
placements of debt and equity securities, bank loans, term
loans, equipment financing arrangements and payments received
under research and development agreements and other agreements
with collaborators. We expect to incur significant additional
research and development and other costs as we expand the
development of our proprietary product candidates, including
costs related to preclinical studies and clinical trials. Our
costs, including research and development costs for our product
candidates, manufacturing, and sales, marketing and promotional
expenses for any current or future products marketed by us or
our collaborators, if any, may exceed revenues in the future,
which may result in losses from operations. We believe that our
current cash and cash equivalents and short and long-term
investments, combined with anticipated interest income and
anticipated revenues will generate sufficient cash flows to meet
our anticipated liquidity and capital requirements for the
foreseeable future.
Our financial condition is summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
March 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(In millions)
|
|
|
Cash and cash equivalents
|
|
$
|
86.9
|
|
|
$
|
101.2
|
|
Investments short-term
|
|
|
236.8
|
|
|
|
240.1
|
|
Investments long-term
|
|
|
80.8
|
|
|
|
119.1
|
|
|
|
|
|
|
|
|
|
|
Total cash, cash equivalents and investments
|
|
$
|
404.5
|
|
|
$
|
460.4
|
|
|
|
|
|
|
|
|
|
|
Working capital
|
|
$
|
307.1
|
|
|
$
|
371.1
|
|
Outstanding borrowings current and long-term
|
|
$
|
75.9
|
|
|
$
|
160.4
|
|
51
Cash
and Cash Equivalents
Our cash flows for the years ended March 31, 2009, 2008 and
2007 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended March 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
(In millions)
|
|
|
Cash and cash equivalents, beginning of period
|
|
$
|
101.2
|
|
|
$
|
80.5
|
|
|
$
|
33.6
|
|
Cash provided by operating activities
|
|
|
34.6
|
|
|
|
42.4
|
|
|
|
83.5
|
|
Cash provided by (used in) investing activities
|
|
|
45.4
|
|
|
|
61.9
|
|
|
|
(30.0
|
)
|
Cash used in financing activities
|
|
|
(94.3
|
)
|
|
|
(83.6
|
)
|
|
|
(6.6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of period
|
|
$
|
86.9
|
|
|
$
|
101.2
|
|
|
$
|
80.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
Activities
Cash provided by operating activities in the year ended
March 31, 2009 decreased as compared to the year ended
March 31, 2008, primarily due to the purchase of our
7% Notes during the year ended March 31, 2009. During
the year ended March 31, 2009, we purchased
$93.0 million principal amount of our 7% Notes for
$89.4 million. As the 7% Notes were originally issued
at a discount, upon purchase of principal we allocated
$6.0 million of the payment amount to the original issue
discount, which is considered an operating activity. The
remaining $83.4 million spent to purchase the 7% Notes
was allocated to the original principal and is reflected as a
financing activity. Cash provided by operating activities in the
year ended March 31, 2009 included $25.5 million we
recognized as revenue in the first quarter of fiscal 2009
related to the AIR Insulin Termination Agreement. Cash provided
by operating activities in the year ended March 31, 2008
consists primarily of the net income earned during the year, net
of adjustments for non-cash charges, which includes share-based
compensation, depreciation, impairment charges related to the
2008 Restructuring and the gain on the sale of the investment in
Reliant. The decrease in cash provided by operating activities
in the year ended March 31, 2008, as compared to the year
ended March 31, 2007, was primarily due to a decrease in
cash flows from unearned milestone revenue. In the year ended
March 31, 2007, we received nonrefundable payment of
$110.0 million from Cephalon upon FDA approval of VIVITROL
and $4.6 million from Cephalon under our Amendments. In the
year ended March 31, 2008, we did not receive any such
payments under our Agreements and Amendments with Cephalon.
Investing
Activities
The decrease in cash provided by investing activities during the
year ended March 31, 2009, as compared to the year ended
March 31, 2008, was primarily due to the
$166.9 million we received in exchange for our investment
in Series C convertible, redeemable preferred stock of
Reliant during the year ended March 31, 2008. The
Series C convertible, redeemable preferred stock had an
original cost of $100.0 million but had been written down
to zero prior to the time of the sale. During the year ended
March 31, 2009, we collected an additional
$7.7 million related to the Reliant transaction, which was
released from escrow due to the terms of an agreement between
GSK and Reliant. During the year ended March 31, 2009, we
had net sales of investments of $35.4 million, received
$7.7 million related to the sale of capital equipment to
Amylin and spent $5.5 million on capital equipment, whereas
during the year ended March 31, 2008, we had net purchases
of investments of $83.0 million and spent
$21.9 million on capital equipment. The increase in cash
provided by investing activities during the year ended
March 31, 2008, as compared to the year ended
March 31, 2007 was due to the $166.9 million we
received from the Reliant transaction during the year ended
March 31, 2008, partially offset by an increase in net
investment purchases of $76.8 million and a decrease in
capital spend.
Financing
Activities
The increase in cash used in financing activities during the
year ended March 31, 2009, as compared to the year ended
March 31, 2008, was primarily due to the $83.4 million
we recorded as a financing activity related to the purchase of
our 7% Notes, partially offset by reductions in the
purchase of treasury stock.
52
During the year ended March 31, 2008, we purchased treasury
stock at a cost of $93.4 million, which consisted of
$33.4 million of purchases made on the open market and
$60.0 million purchased through a structured stock
repurchase arrangement with a large financial institution in
order to lower the average cost to acquire these shares. The
increase in cash used in financing activities in the year ended
March 31, 2008, as compared to the year ended
March 31, 2007, was primarily due to an increase in the
purchase of treasury stock.
Investments
We invest in short-term and long-term investments consisting of
U.S. government and agency debt securities, corporate debt
securities and other debt securities including student loan
backed auction rate securities and asset backed debt securities.
We also hold strategic investments which include the common
stock of companies we do or did have a collaborative arrangement
with. Our investment objectives are, first, to assure liquidity
and conservation of capital and, second, to obtain investment
income. At March 31, 2009, our short-term investments
consist of available-for-sale investments with gross unrealized
gains of $2.6 million and gross unrealized losses of less
than $0.1 million. At March 31, 2009, our long-term
investments consist of $4.7 million of held-to-maturity
investments that are restricted and held as collateral under
certain letters of credit related to certain of our lease
agreements and $76.2 million of available-for-sale
investments. The long-term available-for-sale investments have
gross unrealized losses of $9.0 million, and we classify
these investments as long-term as we believe these losses are
temporary but recovery of the losses will extend beyond one
year. We have the intent and ability to hold these investments
to recovery, which may be at maturity. At March 31, 2009,
the fair value of our corporate debt securities, student loan
backed auction rate securities and asset backed debt securities
are measured using significant unobservable inputs
(Level 3 investments) and comprise 18% of our
total cash and investment portfolio.
At March 31, 2009, we performed an analysis of our
investments with unrealized losses for impairment. We determined
that, with the exception of certain of our strategic
investments, our investments with unrealized losses are
temporarily impaired. During the year ended March 31, 2009,
we recorded $1.2 million in other-than-temporary
impairments attributed to our strategic investments.
Other-than-temporary impairments are realized and recorded in
our consolidated statements of income as a component of other
income (expense), whereas temporary impairments, or unrealized
losses, are recorded in accumulated other comprehensive loss, a
component of shareholders equity.
During the three months ended March 31, 2009, certain of
our investments in corporate debt securities with an original
cost of $66.0 million had little or no trades. These
securities consist primarily of investment grade subordinated,
medium term, callable
step-up
floating rate notes (FRN) issued by several large
European and U.S. banks. At March 31, 2009, the
FRNs had composite ratings by Moodys,
Standard & Poors (S&P) and
Fitch of between AA and A-. These FRNs did not trade
either because they were nearing their scheduled call dates or
due to increasing credit spreads on the debt of the issuers. We
estimate the fair value of the FRNs to be
$59.7 million at March 31, 2009. Similar securities we
have held have been called at par by issuers prior to maturity.
Since the FRNs were not actively trading in the credit
markets and fair value could not be derived from quoted prices,
we used a discounted cash flow model to determine the estimated
fair value of the securities at March 31, 2009. The
assumptions used in the discounted cash flow model included
estimates for interest rates, expected holding periods and risk
adjusted discount rates, which we believe to be the most
critical assumptions utilized within the analysis. Our valuation
analysis considered, among other items, assumptions that market
participants would use in their estimates of fair value, such as
the creditworthiness and credit spreads of the issuer and when
callability features may be exercised by the issuer. These
securities were also compared, where possible, to other
observable market data with similar characteristics to the
securities held by us.
In making the determination that the decline in fair value of
the FRNs was temporary, we considered various factors,
including but not limited to: the length of time each security
was in an unrealized loss position, the extent to which fair
value was less than cost, financial condition and near term
prospects of the issuers and our intent and ability to hold each
security for a period of time sufficient to allow for any
53
anticipated recovery in fair value. The estimated fair value of
the FRNs could change significantly based on future
financial market conditions. We will continue to monitor the
securities and the financial markets, and if there is continued
deterioration the fair value of these securities could decline
further resulting in an other-than-temporary impairment charge.
Our two investments in auction rate securities each had an
original cost of $5.0 million and invest in taxable student
loan revenue bonds issued by the Colorado Student Obligation
Bond Authority (Colorado) and Brazos Higher
Education Service Corporation (Brazos) which service
student loans under the Federal Family Education Loan Program.
The bonds are collateralized by student loans purchased by the
authorities which are guaranteed by state sponsored agencies and
reinsured by the U.S. Department of Education. Liquidity
for these securities is typically provided by an auction process
that resets the applicable interest rate at pre-determined
intervals. The Colorado securities are Aaa rated by Moodys
and the Brazos securities were downgraded during the three
months ended March 31, 2009 to Baa3 by Moodys due to
the increase in funding costs due to the continuing and
prolonged dislocation of the auction rate securities market. Due
to repeated failed auctions since January 2008, we no longer
consider these securities to be liquid and classified them as
long-term investments in our consolidated balance sheets. The
securities continue to pay interest at predetermined interest
rates during the periods in which the auctions have failed.
We estimate the fair value of the auction rate securities to be
$8.1 million. Since the security auctions have failed and
fair value cannot be derived from quoted prices, we used a
discounted cash flow model to determine the estimated fair value
of the securities at March 31, 2009. The assumptions used
in the discounted cash flow model includes estimates for
interest rates, timing of cash flows, expected holding periods
and risk adjusted discount rates, which include a provision for
default risk, which we believe to be the most critical
assumptions utilized within the analysis. Our valuation analysis
considers, among other items, assumptions that market
participants would use in their estimates of fair value, such as
the collateral underlying the security, the creditworthiness of
the issuer and any associated guarantees, the timing of expected
future cash flows, and the expectation of the next time the
security will have a successful auction or when callability
features may be exercised by the issuer. These securities were
also compared, where possible, to other observable market data
with similar characteristics to the securities held by us.
In making the determination that the decline in fair value of
the auction rate securities was temporary, we considered various
factors, including but not limited to: the length of time each
security was in an unrealized loss position, the extent to which
fair value was less than cost, financial condition and near term
prospects of the issuers and our intent and ability to hold each
security for a period of time sufficient to allow for any
anticipated recovery in fair value. The estimated fair value of
the auction rate securities could change significantly based on
future financial market conditions. We will continue to monitor
the securities and the financial markets and if there is
continued deterioration, the fair value of these securities
could decline further resulting in an other-than-temporary
impairment charge.
Our investments in asset backed debt securities have a cost of
$6.9 million and consist of medium term floating rate notes
(MTN) of Aleutian Investments, LLC
(Aleutian) and Meridian Funding Company, LLC
(Meridian), which are qualified special purpose
entities (QSPE) of Ambac Financial Group, Inc.
(Ambac) and MBIA, Inc. (MBIA),
respectively. Ambac and MBIA are guarantors of financial
obligations and are referred to as monoline financial guarantee
insurance companies. The QSPEs, which purchase pools of
assets or securities and fund the purchase through the issuance
of MTNs, have been established to provide a vehicle to
access the capital markets for asset backed debt securities and
corporate borrowers. The MTNs include a sinking fund
redemption feature which match-fund the terms of redemptions to
the maturity dates of the underlying pools of assets or
securities in order to mitigate potential liquidity risk to the
QSPEs. At March 31, 2009, $5.5 million of our
initial investment in the Meridian MTNs had been redeemed
by MBIA through scheduled sinking fund redemptions at par value,
and the first sinking fund redemption on the Aleutian MTN is
scheduled for June 2009.
The liquidity and fair value of these securities has been
negatively impacted by the uncertainty in the credit markets,
and the exposure of these securities to the financial condition
of monoline financial guarantee insurance companies, including
Ambac and MBIA. In April 2009, Moodys downgraded Ambac to
Ba3 from
54
Baa1, and in November 2008, Standard & Poors
(S&P) downgraded Ambac to A from AA. In
February 2009, Moodys downgraded MBIA to B3 from Baa1, and
S&P downgraded MBIA to BBB+ from AA. The downgrades were
all attributed to Ambacs and MBIAs inability to
maintain adequate capital levels. We may not be able to
liquidate our investment in these securities before the
scheduled redemptions or until trading in the securities resumes
in the credit markets, which may not occur.
We estimate the fair value of the asset backed securities to be
$6.1 million. Because the MTNs are not actively
trading in the credit markets and fair value cannot be derived
from quoted prices, we used a discounted cash flow model to
determine the estimated fair value of the securities at
March 31, 2009. Our valuation analyses consider, among
other items, assumptions that market participants would use in
their estimates of fair value such as the collateral underlying
the security, the creditworthiness of the issuer and the
associated guarantees by Ambac and MBIA, the timing of expected
future cash flows, including whether the callability features of
these investments may be exercised by the issuer. We believe
there are several significant assumptions that are utilized in
our valuation analysis, the most critical of which is the
discount rate, which includes a provision for default and
liquidity risk.
At March 31, 2009, we determined that the securities had
been temporarily impaired due to the length of time each
security was in an unrealized loss position, the extent to which
fair value was less than cost, the financial condition and near
term prospects of the issuers, current redemptions made by one
of the issuers and our intent and ability to hold each security
for a period of time sufficient to allow for any anticipated
recovery in fair value or until scheduled redemption. We do not
expect the estimated fair value of these securities to decrease
significantly in the future unless credit market conditions
continue to deteriorate significantly or the credit ratings of
the issuers are further downgraded.
The other-than-temporary impairment charges taken during the
year ended March 31, 2009 on our strategic investments and
the illiquid nature of the auction rate and asset backed
securities do not have a material impact on our liquidity or our
financial flexibility or stability. Based on our ability to
access our cash and our expected operating cash flows and other
sources of cash, we do not anticipate the lack of liquidity on
the auction rate and asset backed securities will affect our
ability to execute our current business plan.
Borrowings
At March 31, 2009, our borrowings consisted of
$75.9 million of the 7% Notes. We have been making
interest payments on the 7% Notes and made our first
quarterly principal payment of $6.4 million on
April 1, 2009. During the year ended March 31, 2009,
we purchased, in five separately negotiated transactions, an
aggregate total of $93.0 million principal amount of the
7% Notes for $89.4 million. We recorded a loss on the
extinguishment of the notes of $2.5 million, consisting of
$0.9 million of transaction fees and a $1.6 million
difference between the carrying value and the purchase price of
the 7% Notes. As a result of the purchases, we save
approximately $16.5 million in interest expense, which
includes $12.9 million in cash payments for interest and
$3.6 million of original discount accretion over the
remaining life of the 7% Notes. The 7% Notes, which have a
remaining principal amount of $77.0 million are scheduled to be
paid in full on January 1, 2012.
Capital
Requirements
We may continue to pursue opportunities to obtain additional
financing in the future. Such financing may be sought through
various sources, including debt and equity offerings, corporate
collaborations, bank borrowings, arrangements relating to assets
or other financing methods or structures. The source, timing and
availability of any financings will depend on market conditions,
interest rates and other factors. Our future capital
requirements will also depend on many factors, including
continued scientific progress in our research and development
programs (including our proprietary product candidates), the
size of these programs, progress with preclinical testing and
clinical trials, the time and costs involved in obtaining
regulatory approvals, the costs involved in filing, prosecuting
and enforcing patent claims, competing technological and market
developments, the establishment of additional collaborative
arrangements, the cost of manufacturing facilities and of
commercialization activities and arrangements and the cost of
product in-licensing and any possible
55
acquisitions and, for any future proprietary products, the
sales, marketing and promotion expenses associated with
marketing such products. We may from time to time seek to retire
or purchase our outstanding debt through cash purchases
and/or
exchanges for equity securities, in open market purchases,
privately negotiated transactions or otherwise. Such repurchases
or exchanges, if any, will depend on prevailing market
conditions, our liquidity requirements, contractual restrictions
and other factors. The amounts involved may be material.
We may need to raise substantial additional funds for
longer-term product development, including development of our
proprietary product candidates, regulatory approvals and
manufacturing and sales and marketing activities that we might
undertake in the future. There can be no assurance that
additional funds will be available on favorable terms, if at
all. If adequate funds are not available, we may be required to
curtail significantly one or more of our research and
development programs
and/or
obtain funds through arrangements with collaborative partners or
others that may require us to relinquish rights to certain of
our technologies, product candidates or future products.
We expect to spend approximately $13.0 million during the
year ended March 31, 2010 for capital expenditures.
Contractual
Obligations
The following table summarizes our obligations to make future
payments under current contracts at March 31, 2009:
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|
|
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|
|
|
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|
|
|
|
|
|
|
|
|
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Less Than
|
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One to
|
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|
Three to Five
|
|
|
More Than
|
|
|
|
|
|
|
One Year
|
|
|
Three Years
|
|
|
Years
|
|
|
Five Years
|
|
|
|
|
|
|
(Fiscal
|
|
|
(Fiscal 2011-
|
|
|
(Fiscal 2013-
|
|
|
(After Fiscal
|
|
Contractual Cash Obligations
|
|
Total
|
|
|
2010)
|
|
|
2012)
|
|
|
2014)
|
|
|
2015)
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|
|
|
|
|
|
(In thousands)
|
|
|
7% Notes principal(1)
|
|
$
|
77,000
|
|
|
$
|
25,667
|
|
|
$
|
51,333
|
|
|
$
|
|
|
|
$
|
|
|
7% Notes interest(1)
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|
|
8,759
|
|
|
|
4,716
|
|
|
|
4,043
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|
|
|
|
|
|
|
|
|
Operating lease obligations
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|
|
35,918
|
|
|
|
10,233
|
|
|
|
20,577
|
|
|
|
3,844
|
|
|
|
1,264
|
|
Purchase obligations
|
|
|
29,109
|
|
|
|
29,109
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|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expansion programs
|
|
|
854
|
|
|
|
854
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
|
|
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|
|
|
|
|
|
|
|
|
|
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Total contractual cash obligations
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$
|
151,640
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|
|
$
|
70,579
|
|
|
$
|
75,953
|
|
|
$
|
3,844
|
|
|
$
|
1,264
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
(1)
|
|
The 7% Notes were issued by RC Royalty Sub LLC, a
wholly-owned subsidiary of Alkermes, Inc. The 7% Notes are
non-recourse to Alkermes, Inc. (see Note 9 to the
consolidated financial statements included in this
Form 10-K).
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We enter into license agreements with third parties that may
require us to make royalty, milestone or other payments that are
contingent upon the occurrence of certain future events linked
to the successful development and commercialization of
pharmaceutical products. Certain of the payments may be
contingent upon the successful achievement of an important event
in the development life cycle of these pharmaceutical products,
which may or may not occur. If required by the agreements, we
may make royalty payments based upon a percentage of the sales
of a pharmaceutical product if regulatory approval to market
this product is obtained and the product is commercialized.
Because of the contingent nature of these payments, we have not
attempted to predict the amount or period in which such payments
would possibly be made and thus they are not included in the
table of contractual obligations.
This table also excludes any liabilities pertaining to uncertain
tax positions as we cannot make a reliable estimate of the
period of cash settlement with the respective taxing
authorities. In connection with the adoption of FASB
Interpretation No. 48,
Accounting for Uncertainty
in Income Taxes an Interpretation of FASB Statement
No. 109
(FIN No. 48), we
have approximately $0.2 million of long term liabilities
associated with uncertain tax positions at March 31, 2009.
In September 2006, we and RPI entered into a license agreement
granting us exclusive rights to a family of opioid receptor
compounds discovered at RPI. Under the terms of the agreement,
RPI granted us an
56
exclusive worldwide license to certain patents and patent
applications relating to its compounds designed to modulate
opioid receptors. We will be responsible for the continued
research and development of any resulting product candidates. We
paid RPI a nonrefundable upfront payment of $0.5 million
and are obligated to pay annual fees of up to $0.2 million,
and tiered royalty payments of between 1% and 4% of annual net
sales in the event any products developed under the agreement
are commercialized. In addition, we are obligated to make
milestone payments in the aggregate of up to $9.1 million
upon certain
agreed-upon
development events. All amounts paid to RPI under this license
agreement have been expensed and are included in research and
development expenses.
In April 2009, we entered into a lease agreement in connection
with the move of our corporate headquarters from Cambridge,
Massachusetts to Waltham, Massachusetts which is scheduled to
occur in early calendar 2010. The initial lease term, which
begins upon our move into the new facility, is for 10 years
with provisions for us to extend the lease term up to an
additional 10 years. The Companys rent expense
related to this new space will be approximately
$2.7 million a year during the initial lease term, and this
lease obligation is not included in the contractual obligations
table above.
Off-Balance
Sheet Arrangements
At March 31, 2009, we were not a party to any off-balance
sheet arrangements that have, or are reasonably likely to have,
a current or future effect on our financial condition, changes
in financial condition, revenue or expenses, results of
operations, liquidity, capital expenditures or capital resources.
Critical
Accounting Estimates
Our consolidated financial statements are prepared in accordance
with generally accepted accounting principles in the United
States (GAAP), which require management to make
estimates, judgments and assumptions that affect the amounts
reported in the consolidated financial statements and
accompanying notes. We believe that our most critical accounting
estimates are in the areas of revenue recognition, investments,
share-based compensation and income taxes.
Manufacturing
revenues, Product sales and Royalty revenues
For the year ended March 31, 2009, our manufacturing
revenues consist of sales from two products, RISPERDAL CONSTA
and VIVITROL. RISPERDAL CONSTA is sold exclusively to Janssen
under a license agreement in which we granted Janssen an
exclusive worldwide license to use and sell RISPERDAL CONSTA. We
record manufacturing revenues from sales of RISPERDAL CONSTA
when the product is shipped to Janssen at a price based on 7.5%
of Janssens net unit sales price for RISPERDAL CONSTA for
the calendar year. As the sales price is based on information
supplied to us by Janssen, this may require estimates to be
made. Differences between the actual revenue and estimated
revenues are reconciled and adjusted for in the period in which
they become known. Historically, adjustments have not been
material based on actual amounts paid by Janssen. We also
receive a royalty equal to 2.5% of net sales of RISPERDAL CONSTA
in the period the product is sold by Janssen.
Prior to December 1, 2008, we manufactured and sold
VIVITROL exclusively to Cephalon for sale of the product in the
U.S. under the Agreements and Amendments. We recorded
manufacturing revenues upon shipment of the product to Cephalon
at cost plus a manufacturing profit of 10%. We also have an
agreement in which we granted Cilag a license to commercialize
and sell VIVITROL in Russia and the CIS. We record manufacturing
revenues under this agreement upon shipment of the product to
Cilag at an agreed upon price. We also earn a royalty equal to a
minimum of 15% of net sales of VIVITROL in Russia and the CIS in
the period the product is sold by Cilag.
On December 1, 2008, we became responsible for the
commercialization and sale of VIVITROL in the U.S. We
recognize revenue from product sales from the sale of VIVITROL
when persuasive evidence of an arrangement exists, title to the
product and associated risk of loss has passed to the customer,
which is considered to have occurred when the product has been
received by the customer, the sales price is fixed or
determinable and collectibility is reasonably assured. We sell
VIVITROL primarily to wholesalers, specialty distributors and
specialty pharmacies. We record VIVITROL product sales net of
the following categories of
57
allowances: product returns; payment term discounts; Medicaid
discounts; and other discounts. Calculating each of these items
involves estimates and judgments and requires us to use
information from external sources. Based on Cephalons
history of VIVITROL sales in the U.S., known market events and
trends, third party data, customer buying patterns and
up-to-date knowledge of contractual and statutory requirements,
we believe we are able to make reasonable estimates of sales
discounts.
1)
Product Returns
In accordance with
SFAS No. 48,
Revenue Recognition When Right
of Return Exists
(SFAS No. 48),
we cannot recognize revenue on product shipments until we can
reasonably estimate returns related to these shipments. We defer
the recognition of revenue on shipments of VIVITROL to our
customers until the product has left the distribution channel.
We estimate product shipments out of the distribution channel
through data provided by external sources, including information
on inventory levels provided by our customers in the
distribution channel, as well as prescription information. In
order to match the cost of goods related to products shipped to
customers with the associated revenue, we defer the recognition
of the cost of goods to the period in which the associated
revenue is recognized.
2)
Payment Term Discounts
We offer our
direct purchase customers a 2% prompt-pay cash discount as an
incentive to remit payment within the first 30 days after
the date of the invoice. Prompt-pay discount calculations are
based on the gross amount of each invoice. We account for these
discounts by reducing sales by the 2% discount amount when
product is shipped into the distribution channel, and apply
earned cash discounts at the time of payment. We adjust the
accrual to reflect actual experience as necessary.
3)
Medicaid Rebates
We record accruals
for rebates to be provided through the Medicaid Drug Rebate
Program as a reduction of sales when the product is shipped into
the distribution channel. We rebate individual states for all
eligible units purchased under the Medicaid program based on a
rebate per unit calculation, which is based on our Average
Manufacturer Price (AMP). We estimate the expected
rebate per unit used and adjust our rebate accruals based on
expected changes in rebate pricing. We also examine the
historical rebate trends and the trend of sales that become
eligible for Medicaid programs and any expected changes to these
trends.
4)
Other
We offer special programs and
discounts to support the commercialization and sale of VIVITROL.
During the year ended March 31, 2009, we utilized a
discount program which included free product sample vouchers and
reimbursement of insurance co-pays for certain patients for a
limited period. We also have agreements with certain wholesalers
and other customers that provide them an opportunity to earn
discounts in exchange for the performance of certain services
(fee-for-service discounts). We have agreements with
certain group purchasing organizations (GPO) in
which its members or others can purchase product from our
wholesalers or other customers at a specified price, which may
be below our customers purchase price. In these instances,
our customer requests a credit from us, which is referred to as
a chargeback. We record accruals for fee-for-service discounts
and chargebacks as a reduction of sales when the product is sold.
The following table summarizes activity in each of the above
product sales allowances categories for the period of
December 1, 2008 through March 31, 2009:
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Product
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|
Prompt-Pay
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Medicaid
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|
Returns
|
|
|
Discounts
|
|
|
Rebates
|
|
|
Other
|
|
|
Total
|
|
|
|
(In millions)
|
|
|
Balance, December 1, 2008
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
Current provision:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current year
|
|
|
1.4
|
|
|
|
0.1
|
|
|
|
0.2
|
|
|
|
0.2
|
|
|
|
1.9
|
|
Actual:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current year
|
|
|
(0.1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(0.1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, March 31, 2009
|
|
$
|
1.3
|
|
|
$
|
0.1
|
|
|
$
|
0.2
|
|
|
$
|
0.2
|
|
|
$
|
1.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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58
Research
and development revenue under collaborative
arrangements
Our research and development revenue consists of nonrefundable
research and development funding under collaborative
arrangements with various collaborative partners. We are
generally compensated for formulation, preclinical and clinical
testing related to the collaborative research programs using a
negotiated FTE or hourly rate for hours worked by our employees,
plus direct external research costs, if any. This rate is
established by us based on our annual budget of employee
compensation, employee benefits and billable
non-project-specific costs and is generally increased annually
based on increases in the consumer price index. We recognize
research and development revenue under collaborative
arrangements over the term of the applicable agreements through
the application of a proportional performance model where
revenue is recognized in an amount equal to the lesser of the
amount due under the agreements or an amount based on the
proportional performance to date. We recognize nonrefundable
payments and fees for the licensing of technology or
intellectual property rights over the related performance period
or when there is no remaining performance required.
Nonrefundable payments and fees are recorded as deferred revenue
upon receipt and may require deferral of revenue recognition to
future periods.
At times, we enter into arrangements with customers or
collaborators that have multiple elements. To recognize a
delivered item in a multiple element arrangement, delivered
items must have value to the customer on a stand-alone basis,
there must be objective and reliable evidence of fair value of
the undelivered items and that delivery or performance is
probable and within our control for any delivered items that
have a right of return.
Net
collaborative profit
Under the terms of the Agreements with Cephalon related to
VIVITROL, we received total nonrefundable payments of
$274.6 million, and for the purposes of revenue recognition
we separated the deliverables under the Agreements into three
units of accounting: (i) net losses on the products;
(ii) manufacturing of the products; and (iii) the
product license. The nonrefundable payments allocated to each of
the accounting units was based initially on the fair value of
each unit as determined at the date the payments were received.
The fair values of the accounting units were reviewed
periodically and adjusted, as appropriate. These payments were
recorded in the consolidated balance sheets as
Unearned
milestone revenue current portion
and
Unearned milestone revenue long-term
portion
prior to being earned. The classification
between the current and long-term portions was based on our best
estimate of whether the milestone revenue was recognized during
or after the
12-month
period following the reporting period, respectively. When
earned, the revenue was recorded as net collaborative
profit in the consolidated statements of income and
comprehensive income.
Under the terms of the Agreements and Amendments, we were
responsible for the first $124.6 million of
net VIVITROL losses through December 31, 2007 (the
cumulative net loss cap). Net VIVITROL losses
excluded development costs incurred by us to obtain FDA approval
of VIVITROL and costs incurred by us to complete the first
VIVITROL manufacturing line, both of which were our sole
responsibility. Cephalon was responsible to pay all
net VIVITROL losses in excess of the cumulative net loss
cap through December 31, 2007. After December 31,
2007, all net VIVITROL losses were divided between us and
Cephalon in approximately equal shares.
Cephalon recorded net sales from VIVITROL in the U.S. We
and Cephalon reconciled the costs incurred by each party to
develop, commercialize and manufacture VIVITROL against revenues
earned to determine net losses in each reporting period. To the
extent that the cash earned or expended by either of the parties
exceeded or was less than its proportional share of net loss for
a period, the parties settled by delivering cash such that the
net cash earned or expended equals each partys
proportional share. The cash flow between the companies related
to our share of net VIVITROL losses was recorded in the
period in which it was made as Net collaborative
profit in the consolidated statements of income and
comprehensive income.
Under the terms of the Agreements, we were responsible for the
manufacture of clinical and commercial supplies of VIVITROL for
sale in the U.S., and we granted Cephalon a co-exclusive license
to the our patents and know-how necessary to use, sell, offer
for sale and import the products for all current and future
indications in the U.S. We recorded the earned portion of
the arrangement consideration allocated to the manufacturing of
the products at cost when the product was shipped to Cephalon
and also recorded manufacturing profit, which equaled a 10%
markup on VIVITROL cost of goods manufactured and drew
59
down unearned milestone revenue. We recorded the earned portion
of the arrangement consideration allocated to the product
license to revenue on a straight-line basis over the expected
life of VIVITROL, being 10 years.
In October 2006, we and Cephalon entered into the Amendments in
which the parties agreed that Cephalon would purchase from us
two VIVITROL manufacturing lines (and related equipment) under
construction. Amounts we received from Cephalon for the sale of
the two VIVITROL manufacturing lines were recorded as
Deferred revenue long-term
portion
in the consolidated balance sheets.
In connection with the termination of the VIVITROL collaboration
with Cephalon, we recognized $120.7 million of net
collaborative profit, consisting of $113.9 million of
unearned milestone revenue and $6.8 million of deferred
revenue remaining on our books at the Termination Date. At the
Termination Date, we had $22.8 million of deferred revenue
related to the original sale of the two partially completed
VIVITROL manufacturing lines to Cephalon. We paid Cephalon
$16.0 million to reacquire the title to these manufacturing
lines and accounted for the payment as a reduction to the
deferred revenue previously recognized. The remaining
$6.8 million of deferred revenue and the
$113.9 million of unearned milestone revenue were
recognized in the three months ended December 31, 2008,
through net collaborative profit, as we had no remaining
performance obligations to Cephalon beyond the Termination Date
and the amounts were nonrefundable to Cephalon. We received
$11.0 million from Cephalon as payment to fund their share
of estimated VIVITROL product losses during the one-year period
following the Termination Date, and we are recognizing this
payment as net collaborative profit through the application of a
proportional performance model based on net VIVITROL losses.
Investments
We invest in various types of securities including
U.S. government and agency obligations, corporate debt
securities and other debt securities including student loan
backed auction rate securities and asset backed debt securities
in accordance with our documented corporate policies. We also
have strategic investments which include the common stock and
warrants of companies we do or did have a collaborative
agreement with. Substantially all of our investments are
classified as available-for-sale, and are recorded
at fair value. Holding gains and losses on these investments are
considered unrealized and are reported within
accumulated other comprehensive income, a component of
shareholders equity. Realized gains and losses are
reported in other (expense) income, net. Valuation of
available-for-sale securities for purposes of determining the
amount of gains and losses is based on the specific
identification method. Our held-to-maturity investments are
restricted investments held as collateral under certain letters
of credit related to our lease arrangements and are recorded at
amortized cost.
The earnings on our investment portfolio may be adversely
affected by changes in interest rates, credit ratings,
collateral value, the overall strength of credit markets and
other factors that may result in other-than-temporary declines
in the value of the securities. On a quarterly basis, we review
the fair market value of our investments in comparison to
historical cost. If the fair market value of a security is
significantly less than its carrying value, we consider all
available evidence in assessing when and if the value of the
investment can be expected to recover to at least its historical
cost. This evidence would include:
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the extent and duration to which fair value is less than cost;
|
|
|
|
historical operating performance and financial condition of the
issuer, including industry and sector performance;
|
|
|
|
short and long-term prospects of the issuer and its industry;
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|
|
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specific events that occurred affecting the issuer;
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overall market conditions and trends; and
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|
our ability and intent to retain the investment for a period of
time sufficient to allow for a recovery in value.
|
If our review indicates that the decline in value is
other-than-temporary, we write down our investment to the then
current market value and record an impairment charge to our
consolidated statements of income and comprehensive income. The
determination of whether an unrealized loss is
other-than-temporary requires
60
significant judgment and can have a material impact on our
reported earnings. The liquidity of our student loan backed
auction rate securities and asset backed debt securities have
been affected due to the uncertainty in the credit markets. We
may have to record an other-than-temporary impairment charge in
the future on our auction rate securities if the trading in the
securities in the credit market does not resume or on our asset
backed securities if sinking fund redemptions do not occur.
In accordance with SFAS No. 157,
Fair Value
Measurement
(SFAS No. 157), we
have classified our financial assets and liabilities as
Level 1, 2 or 3 within the fair value hierarchy. Fair
values determined by Level 1 inputs utilize quoted prices
(unadjusted) in active markets for identical assets or
liabilities that we have the ability to access. Fair values
determined by Level 2 inputs utilize data points that are
observable such as quoted prices, interest rates and yield
curves. Fair values determined by Level 3 inputs utilize
unobservable data points for the asset.
Financial assets that are classified as Level 2 are
initially valued at the transaction price and subsequently
valued utilizing third party pricing sources. At March 31,
2009, we did not hold any investments classified as
Level 2. We hold investments classified as Level 3
which includes certain of our investments in corporate debt
securities, student loan backed auction rate securities and
asset backed debt securities. Fair value for these Level 3
investments are initially measured at transaction prices and
subsequently valued using discounted cash flow models which
consider, among other items, assumptions that the market
participants would use in their estimates of fair value, such as
the collateral underlying the security, the creditworthiness of
the issuer and any associated guarantees and the timing of
expected future cash flows. While we believe the valuation
methodologies are appropriate, the use of valuation
methodologies is highly judgmental and changes in methodologies
can have a material impact on our results of operations. We also
hold warrants to purchase the common stock of a former
collaborator which are classified using Level 3 inputs. The
carrying value of these warrants was immaterial at
March 31, 2009 and 2008.
Share-based
Compensation
In connection with valuing stock options, we utilize the
Black-Scholes option-pricing model, which requires us to
estimate certain subjective assumptions. These assumptions
include the expected option term, which takes into account both
the contractual term of the option and the effect of our
employees expected exercise and post-vesting termination
behavior; expected volatility of our common stock over the
options expected term, which is developed using both the
historical volatility of our common stock and implied volatility
from our publicly traded options; the risk-free interest rate
over the options expected term; and our expected annual
dividend yield. Due primarily to the expected exercise and
post-vesting termination behavior of our employees and
non-employee directors, we establish separate Black-Scholes
assumptions for three distinct populations which consist of our
senior management, our non-employee directors, and all other
employees. For the year ended March 31, 2009, the range in
weighted-average assumptions were as follows:
|
|
|
Expected option term
|
|
5 - 7 years
|
Expected stock volatility
|
|
36% - 46%
|
Risk-free interest rate
|
|
1.66% - 3.52%
|
Expected annual dividend yield
|
|
|
In addition, our management must also apply judgment in
developing an estimate of awards that may be forfeited. For the
year ended March 31, 2009, we used a forfeiture estimate of
0% for our non-employee directors, 4.75% for members of senior
management and 12% for all other employees. For all of the
assumptions used in determining the fair value and forfeiture
estimates, our historical experience is generally the starting
point for developing our expectations, which may be modified to
reflect information available at the time of grant that would
indicate that the future is reasonably expected to differ from
the past.
Income
Taxes
We use the asset and liability method of accounting for deferred
income taxes. Our most significant tax jurisdictions are the
U.S. federal government and states. Significant judgments,
estimates and assumptions regarding future events, such as the
amount, timing and character of income, deductions and tax
credits, are
61
required in the determination of our provision for income taxes
and whether valuation allowances are required against deferred
tax assets. In evaluating our ability to recover our deferred
tax assets, we consider all available positive and negative
evidence including our past operating results, the existence of
cumulative income in the most recent fiscal years, changes in
the business in which we operate and our forecast of future
taxable income. In determining future taxable income, we are
responsible for assumptions utilized including the amount of
state, federal and international pre-tax operating income, the
reversal of temporary differences and the implementation of
feasible and prudent tax planning strategies. These assumptions
require significant judgment about the forecasts of future
taxable income and are consistent with the plans and estimates
that we are using to manage the underlying businesses. As of
March 31, 2009, we determined that it is more likely than
not that the deferred tax assets will not be realized and a full
valuation allowance has been recorded.
We account for uncertain tax positions in accordance with
FIN No. 48. FIN No. 48 prescribes a
recognition threshold and measurement attribute for financial
statement recognition and measurement of a tax position taken or
expected to be taken in a tax return and also provides guidance
on various related matters such as derecognition, interest and
penalties and disclosure. We also recognize interest and
penalties, if any, related to unrecognized tax benefits in
income tax expense.
Recent
Accounting Pronouncements
In November 2007, the Emerging Issues Task Force
(EITF) of the FASB reached a final consensus on EITF
Issue
No. 07-1,
Accounting for Collaborative Arrangements Related to
the Development and Commercialization of Intellectual
Property
(EITF
No. 07-1).
EITF
No. 07-1
is effective for our fiscal year beginning April 1, 2009,
and adoption is on a retrospective basis to all prior periods
presented for all collaborative arrangements existing as of the
effective date. We do not expect the adoption of this standard
to have a significant impact on our consolidated financial
statements.
In March 2008, the FASB issued SFAS No. 161,
Disclosures about Derivative Instruments and Hedging
Activities
(SFAS No. 161).
SFAS No. 161 is intended to improve financial
reporting about derivative instruments and hedging activities by
requiring enhanced disclosures to enable investors to better
understand their effects on an entitys financial position,
financial performance and cash flows. SFAS No. 161 is
effective for our fiscal year beginning April 1, 2009, and
we do not expect the adoption of this standard to have a
significant impact on our consolidated financial statements.
In May 2008, the FASB issued FASB Staff Position
(FSP) No. APB
14-1,
Accounting for Convertible Debt Instruments That May Be
Settled in Cash upon Conversion (Including Partial Cash
Settlement)
(FSP No. APB
14-1).
FSP No. APB
14-1
specifies that issuers of convertible debt instruments that may
be settled in cash should separately account for the liability
and equity components in a manner that will reflect the
entitys nonconvertible debt borrowing rate when interest
cost is recognized in subsequent periods. FSP No. APB
14-1
is
effective for our fiscal year beginning April 1, 2009, and
we do not expect the adoption of this standard to have a
significant impact on our consolidated financial statements.
In April 2009, the FASB issued three FSPs related to
investments, FSP
No. FAS 157-4,
Determining Fair Value When the Volume and Level of
Activity for the Asset or Liability Have Significantly Decreased
and Identifying Transactions That Are Not Orderly
(FSP
FAS 157-4);
FSP
No. FAS 115-2
and
FAS 124-2,
Recognition and Presentation of Other-Than-Temporary
Impairments
(FSP
FAS 115-2
and FAS 124); and FSP
No. FAS 107-1
and APB
28-1,
Interim Disclosures about Fair Value of Financial
Instruments
(FSP
FAS 107-1
and APB
28-1).
FSP 157-4
provides additional guidance for estimating fair value in
accordance with SFAS No. 157 when the volume and level of
activity for the asset or liability have significantly decreased
and includes guidance on identifying circumstances that indicate
a transaction is not orderly. FSP
FAS 115-2
and FAS 124 amends the other-than-temporary impairment
guidance in existing U.S. GAAP for debt securities to make
the guidance more operational and to improve the presentation
and disclosure of other-than-temporary impairments on debt and
equity securities in the financial statements. FSP
FAS 107-1
and APB
28-1
requires disclosures about the fair value of financial
instruments be made in interim reporting periods as well as in
annual financial statements for publicly traded companies. The
three FSPs are effective for our fiscal year
62
beginning April 1, 2009, and we are currently evaluating
the impact the adoption of these standards will have on our
consolidated financial statements.
|
|
Item 7A.
|
Quantitative
and Qualitative Disclosures about Market Risk
|
We hold financial instruments in our investment portfolio that
are sensitive to market risks. Our investment portfolio,
excluding warrants and equity securities we hold in connection
with our collaborations and licensing activities, is used to
preserve capital until it is required to fund operations. Our
held-to-maturity investments are restricted and are held as
collateral under certain letters of credit related to our lease
agreements. Our short-term and long-term investments consist of
U.S. government debt securities, U.S. agency debt
securities, corporate debt securities, including auction rate
securities and asset backed debt securities. These debt
securities are: (i) classified as available-for-sale;
(ii) recorded at fair value; and (iii) subject to
interest rate risk, and could decline in value if interest rates
increase. Fixed rate interest securities may have their market
value adversely impacted by a rise in interest rates, while
floating rate securities may produce less income than expected
if interest rates fall. Due in part to these factors, our future
investment income may fall short of expectation due to a fall in
interest rates or we may suffer losses in principal if we are
forced to sell securities that decline in the market value due
to changes in interest rates. However, because we classify our
investments in debt securities as available-for-sale, no gains
or losses are recognized due to changes in interest rates unless
such securities are sold prior to maturity or declines in fair
value are determined to be other-than-temporary. Should interest
rates fluctuate by 10%, our interest income would change by
approximately $1.1 million over an annual period. Due to
the conservative nature of our short-term and long-term
investments and our investment policy, we do not believe that we
have a material exposure to interest rate risk. Although our
investments are subject to credit risk, our investment policies
specify credit quality standards for our investments and limit
the amount of credit exposure from any single issue, issuer or
type of investment.
Our investments that are subject to the greatest liquidity and
credit risk at this time are our investments in asset backed
debt securities and auction rate securities. Holding all other
factors constant, if we were to increase the discount rate
utilized in our valuation analysis of the asset backed debt
securities and auction rate securities by 50 basis points
(one-half of a percentage point), this change would have the
effect of reducing the fair value of these investments by less
than $0.1 million and $0.2 million at March 31,
2009, respectively. As it relates to auction rate securities,
holding all other factors constant, if we were to increase the
average expected term utilized in our fair value analysis by one
year, this change would have the effect of reducing the fair
value of these securities by approximately $0.1 million at
March 31, 2009.
At March 31, 2009, the fair value of our 7% Notes was
$74.7 million and the carrying value was
$75.9 million. The interest rate on these notes are fixed
and therefore not subject to interest rate risk.
We do not believe that inflation and changing prices have had a
material impact on our results of operations.
Foreign
Currency Exchange Rate Risk
The manufacturing and royalty revenues we receive on RISPERDAL
CONSTA are a percentage of the net sales made by our
collaborative partner, Janssen. A majority of these sales are
made in foreign countries and are denominated in foreign
currencies. The manufacturing and royalty payments on these
foreign sales is calculated initially in the foreign currency in
which the sale is made and is then converted into
U.S. dollars to determine the amount that Janssen pays us
for manufacturing and royalty revenues. Fluctuations in the
exchange ratio of the U.S. dollar and these foreign
currencies will have the effect of increasing or decreasing our
manufacturing and royalty revenues even if there is a constant
amount of sales in foreign currencies. For example, if the
U.S. dollar weakens against a foreign currency, then our
manufacturing and royalty revenues will increase given a
constant amount of sales in such foreign currency.
The impact on our manufacturing and royalty revenues from
foreign currency exchange rate risk is based on a number of
factors, including the exchange rate (and the change in the
exchange rate from the prior period) between a foreign currency
and the U.S. dollar, and the amount of RISPERDAL CONSTA
sales by Janssen that are denominated in foreign currencies. For
the year ended March 31, 2009, an average 10%
63
strengthening of the U.S. dollar relative to the currencies
in which RISPERDAL CONSTA is sold would have resulted in our
RISPERDAL CONTSTA manufacturing and royalty revenues being
reduced by approximately $7.0 million and
$3.7 million, respectively.
|
|
Item 8.
|
Financial
Statements and Supplementary Data
|
Selected
Quarterly Financial Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First
|
|
|
Second
|
|
|
Third
|
|
|
Fourth
|
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
|
(In thousands, except per share data)
|
|
|
Year Ended March 31, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
REVENUES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Manufacturing revenues
|
|
$
|
38,610
|
|
|
$
|
33,039
|
|
|
$
|
20,533
|
|
|
$
|
24,662
|
|
Royalty revenues
|
|
|
8,581
|
|
|
|
8,439
|
|
|
|
7,970
|
|
|
|
8,257
|
|
Product sales, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,467
|
|
Research and development revenue under collaborative arrangements
|
|
|
31,450
|
|
|
|
5,252
|
|
|
|
3,736
|
|
|
|
1,649
|
|
Net collaborative profit(1)
|
|
|
1,351
|
|
|
|
581
|
|
|
|
123,422
|
|
|
|
4,840
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
79,992
|
|
|
|
47,311
|
|
|
|
155,661
|
|
|
|
43,875
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EXPENSES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of goods manufactured and sold
|
|
|
14,314
|
|
|
|
12,071
|
|
|
|
5,536
|
|
|
|
11,475
|
|
Research and development
|
|
|
22,261
|
|
|
|
19,710
|
|
|
|
22,669
|
|
|
|
24,838
|
|
Selling, general and administrative
|
|
|
11,926
|
|
|
|
11,679
|
|
|
|
14,568
|
|
|
|
20,835
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
48,501
|
|
|
|
43,460
|
|
|
|
42,773
|
|
|
|
57,148
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING INCOME (LOSS)
|
|
|
31,491
|
|
|
|
3,851
|
|
|
|
112,888
|
|
|
|
(13,273
|
)
|
OTHER EXPENSE
|
|
|
(774
|
)
|
|
|
(2,216
|
)
|
|
|
(503
|
)
|
|
|
(452
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME (LOSS) BEFORE INCOME TAXES
|
|
|
30,717
|
|
|
|
1,635
|
|
|
|
112,385
|
|
|
|
(13,725
|
)
|
INCOME TAX PROVISION (BENEFIT)
|
|
|
1,030
|
|
|
|
(63
|
)
|
|
|
(330
|
)
|
|
|
(130
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCOME (LOSS)
|
|
$
|
29,687
|
|
|
$
|
1,698
|
|
|
$
|
112,715
|
|
|
$
|
(13,595
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BASIC NET INCOME (LOSS) PER SHARE
|
|
$
|
0.31
|
|
|
$
|
0.02
|
|
|
$
|
1.18
|
|
|
$
|
(0.14
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DILUTED NET INCOME (LOSS) PER SHARE
|
|
$
|
0.31
|
|
|
$
|
0.02
|
|
|
$
|
1.18
|
|
|
$
|
(0.14
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended March 31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
REVENUES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Manufacturing revenues
|
|
$
|
31,517
|
|
|
$
|
24,137
|
|
|
$
|
14,275
|
|
|
$
|
31,771
|
|
Royalty revenues
|
|
|
6,982
|
|
|
|
7,348
|
|
|
|
7,384
|
|
|
|
7,743
|
|
Research and development revenue under collaborative arrangements
|
|
|
23,450
|
|
|
|
21,206
|
|
|
|
23,985
|
|
|
|
20,869
|
|
Net collaborative profit
|
|
|
6,989
|
|
|
|
5,909
|
|
|
|
5,127
|
|
|
|
2,025
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
68,938
|
|
|
|
58,600
|
|
|
|
50,771
|
|
|
|
62,408
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EXPENSES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of goods sold
|
|
|
10,145
|
|
|
|
9,218
|
|
|
|
7,499
|
|
|
|
13,815
|
|
Research and development
|
|
|
32,619
|
|
|
|
28,317
|
|
|
|
30,395
|
|
|
|
33,937
|
|
Selling, general and administrative
|
|
|
15,400
|
|
|
|
14,487
|
|
|
|
15,249
|
|
|
|
14,372
|
|
Impairment and restructuring
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18,053
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
58,164
|
|
|
|
52,022
|
|
|
|
53,143
|
|
|
|
80,177
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING INCOME (LOSS)
|
|
|
10,774
|
|
|
|
6,578
|
|
|
|
(2,372
|
)
|
|
|
(17,769
|
)
|
OTHER INCOME (EXPENSE)(2)
|
|
|
355
|
|
|
|
1,320
|
|
|
|
174,442
|
|
|
|
(498
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME (LOSS) BEFORE INCOME TAXES
|
|
|
11,129
|
|
|
|
7,898
|
|
|
|
172,070
|
|
|
|
(18,267
|
)
|
INCOME TAX PROVISION
|
|
|
2,382
|
|
|
|
200
|
|
|
|
3,189
|
|
|
|
80
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCOME (LOSS)
|
|
$
|
8,747
|
|
|
$
|
7,698
|
|
|
$
|
168,881
|
|
|
$
|
(18,347
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BASIC NET INCOME (LOSS) PER SHARE
|
|
$
|
0.09
|
|
|
$
|
0.08
|
|
|
$
|
1.66
|
|
|
$
|
(0.19
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DILUTED NET INCOME (LOSS) PER SHARE
|
|
$
|
0.08
|
|
|
$
|
0.07
|
|
|
$
|
1.63
|
|
|
$
|
(0.19
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
64
|
|
|
(1)
|
|
Includes $120.7 million recognized as revenue upon the
termination of the VIVITROL collaboration with Cephalon during
the three months ended December 31, 2008.
|
|
(2)
|
|
Includes the gain on sale of investment in Reliant recognized in
the third quarter of fiscal 2008.
|
All financial statements, other than the quarterly financial
data as required by Item 302 of
Regulation S-K
summarized above, required to be filed hereunder, are filed as
an exhibit hereto, are listed under Item 15(a) (1) and
(2), and are incorporated herein by reference.
|
|
Item 9.
|
Changes
in and Disagreements with Accountants on Accounting and
Financial Disclosure
|
Not applicable.
|
|
Item 9A.
|
Controls
and Procedures
|
(a) Evaluation of disclosure controls and procedures
Our management, with the participation of our Chief Executive
Officer and Chief Financial Officer, evaluated the effectiveness
of our disclosure controls and procedures (as defined in
Rules 13a-15(e)
and
15d-15(e)
of
the Securities Exchange Act of 1934) as of March 31,
2009. This evaluation included consideration of the controls,
processes and procedures that comprise our internal control over
financial reporting. Based on such evaluation, our Chief
Executive Officer and Chief Financial Officer concluded that, as
of March 31, 2009, our disclosure controls and procedures
were effective to provide reasonable assurance that information
required to be disclosed by us in the reports that we file under
the Securities Exchange Act of 1934 is recorded, processed,
summarized and reported within the time periods specified in the
SECs rules and forms and that such information is
accumulated and communicated to our management as appropriate to
allow timely decisions regarding required disclosure.
(b) Evaluation of internal control over financial reporting
Managements Annual Report on Internal Control over
Financial Reporting
Management is responsible for establishing and maintaining
adequate internal control over financial reporting, as such term
is defined in Exchange Act
Rules 13a-15(f).
Under the supervision and with the participation of management,
including our Chief Executive Officer and Chief Financial
Officer, we conducted an evaluation of the effectiveness of our
internal control over financial reporting as of March 31,
2009, based on the framework in Internal
Control Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission
(COSO). In completing our assessment, no material
weaknesses in our internal controls over financial reporting as
of March 31, 2009 were identified. Based on this
assessment, management believes that the Companys internal
control over financial reporting was effective as of
March 31, 2009.
The effectiveness of our internal control over financial
reporting as of March 31, 2009 has been attested to by
PricewaterhouseCoopers LLP, an independent registered public
accounting firm, as stated in their report which is included
herein.
(c) Changes in internal controls
No change in our internal control over financial reporting (as
defined in
Rules 13a-15(f)
and
15d-15(f)
under the Exchange Act) occurred during the quarter ended
March 31, 2009 that has materially affected, or is
reasonably likely to materially affect, our internal control
over financial reporting.
(d) Inherent Limitations of Disclosure Controls and
Procedures and Internal Control Over Financial Reporting
The effectiveness of our disclosure controls and procedures and
our internal control over financial reporting is subject to
various inherent limitations, including cost limitations,
judgments used in decision making, assumptions about the
likelihood of future events, the soundness of our systems, the
possibility of human error, and the risk of fraud. Moreover,
projections of any evaluation of effectiveness to future periods
are subject to the risk that controls may become inadequate
because of changes in conditions and the risk that
65
the degree of compliance with policies or procedures may
deteriorate over time. Because of these limitations, there can
be no assurance that any system of disclosure controls and
procedures or internal control over financial reporting will be
successful in preventing all errors or fraud or in making all
material information known in a timely manner to the appropriate
levels of management.
|
|
Item 9B.
|
Other
Information
|
Our policy governing transactions in our securities by our
directors, officers and employees permits our officers,
directors and employees to enter into trading plans in
accordance with
Rule 10b5-1
under the Exchange Act. During the three months ended
March 31, 2009, Mr. Robert A. Breyer and Mr. Paul
J. Mitchell, directors of the Company, entered into trading
plans in accordance with
Rule 10b5-1
and our policy governing transactions in our securities by our
directors, officers and employees. We undertake no obligation to
update or revise the information provided herein, including for
revision or termination of an established trading plan.
PART III
|
|
Item 10.
|
Directors,
Executive Officers and Corporate Governance
|
The information required by this item is incorporated herein by
reference to our Proxy Statement for our annual
shareholders meeting (the 2009 Proxy
Statement).
|
|
Item 11.
|
Executive
Compensation
|
The information required by this item is incorporated herein by
reference to the 2009 Proxy Statement.
|
|
Item 12.
|
Security
Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters
|
The information required by this item is incorporated herein by
reference to the 2009 Proxy Statement.
|
|
Item 13.
|
Certain
Relationships and Related Transactions and Director
Independence
|
The information required by this item is incorporated herein by
reference to the 2009 Proxy Statement.
|
|
Item 14.
|
Principal
Accounting Fees and Services
|
The information required by this item is incorporated herein by
reference to the 2009 Proxy Statement.
PART IV
|
|
Item 15.
|
Exhibits
and Financial Statement Schedules
|
(a) (1)
Consolidated Financial Statements
The consolidated financial statements of
Alkermes, Inc. required by this item are submitted in a separate
section beginning on
page F-1
of this
Form 10-K.
(2)
Financial Statement Schedules
All
schedules have been omitted because of the absence of conditions
under which they are required or because the required
information is included in the consolidated financial statements
or notes thereto.
EXHIBIT INDEX
|
|
|
|
|
Exhibit
|
|
|
No.
|
|
|
|
|
3
|
.1
|
|
Third Amended and Restated Articles of Incorporation as filed
with the Pennsylvania Secretary of State on June 7, 2001.
(Incorporated by reference to Exhibit 3.1 to the
Registrants Report on
Form 10-K
for the fiscal year ended March 31, 2001 (File
No. 001-14131).)
|
66
|
|
|
|
|
Exhibit
|
|
|
No.
|
|
|
|
|
3
|
.1(a)
|
|
Amendment to Third Amended and Restated Articles of
Incorporation as filed with the Pennsylvania Secretary of State
on December 16, 2002 (2002 Preferred Stock Terms).
(Incorporated by reference to Exhibit 3.1 to the
Registrants Current Report on
Form 8-K
filed on December 16, 2002 (File
No. 001-14131).)
|
|
3
|
.1(b)
|
|
Amendment to Third Amended and Restated Articles of
Incorporation as filed with the Pennsylvania Secretary of State
on May 14, 2003. (Incorporated by reference to
Exhibit A to Exhibit 4.1 to the Registrants
Report on
Form 8-A
filed on May 2, 2003 (File
No. 000-19267).)
|
|
3
|
.2
|
|
Second Amended and Restated By-Laws of Alkermes, Inc.
(Incorporated by reference to Exhibit 3.2 to the
Registrants Current Report on
Form 8-K
filed on September 28, 2005.)
|
|
4
|
.1
|
|
Specimen of Common Stock Certificate of Alkermes, Inc.
(Incorporated by reference to Exhibit 4 to the
Registrants Registration Statement on
Form S-1,
as amended (File
No. 033-40250).)
|
|
4
|
.2
|
|
Specimen of Non-Voting Common Stock Certificate of Alkermes,
Inc. (Incorporated by reference to Exhibit 4.4 to the
Registrants Report on
Form 10-K
for the fiscal year ended March 31, 1999
(File No. 001-14131).)
|
|
4
|
.3
|
|
Rights Agreement, dated as of February 7, 2003, as amended,
between Alkermes, Inc. and EquiServe Trust Co., N.A., as
Rights Agent. (Incorporated by reference to Exhibit 4.1 to
the Registrants Report on
Form 8-A
filed on May 2, 2003
(File No. 000-19267).)
|
|
4
|
.4
|
|
Indenture, dated as of February 1, 2005, between RC Royalty
Sub LLC and U.S. Bank National Association, as Trustee.
(Incorporated by reference to Exhibit 4.1 to the
Registrants Current Report on
Form 8-K
filed on February 3, 2005.)
|
|
4
|
.5
|
|
Form of Risperdal
Consta
®
PhaRMA
sm
Secured 7% Notes due 2018. (Incorporated by reference to
Exhibit 4.1 to the Registrants Current Report on
Form 8-K
filed on
February 3, 2005.)
|
|
10
|
.1
|
|
Amended and Restated 1990 Omnibus Stock Option Plan, as amended.
(Incorporated by reference to Exhibit 10.2 to the
Registrants Report on
Form 10-K
for the fiscal year ended March 31, 1998
(File No. 001-14131).)+
|
|
10
|
.2
|
|
Stock Option Plan for Non-Employee Directors, as amended.
(Incorporated by reference to Exhibit 99.2 to the
Registrants Registration Statement on
Form S-8
filed on October 1, 2003
(File No. 333-109376).)+
|
|
10
|
.3
|
|
Lease, dated as of October 26, 2000, between FC88 Sidney,
Inc. and Alkermes, Inc. (Incorporated by reference to
Exhibit 10.3 to the Registrants Report on
Form 10-Q
for the quarter ended December 31, 2000
(File No. 001-14131).)
|
|
10
|
.4
|
|
Lease, dated as of October 26, 2000, between Forest City 64
Sidney Street, Inc. and Alkermes, Inc. (Incorporated by
reference to Exhibit 10.4 to the Registrants Report
on
Form 10-Q
for the quarter ended December 31, 2000
(File No. 001-14131).)
|
|
10
|
.5
|
|
Lease Agreement, dated as of April 22, 2009 between PDM
Unit 850, LLC, and Alkermes, Inc.#
|
|
10
|
.6
|
|
License Agreement, dated as of February 13, 1996, between
Medisorb Technologies International L.P. and Janssen
Pharmaceutica Inc. (U.S.) (assigned to Alkermes Inc. in July
2006). (Incorporated by reference to Exhibit 10.19 to the
Registrants Report on
Form 10-K
for the fiscal year ended March 31, 1996
(File No. 000-19267).)*
|
|
10
|
.7
|
|
License Agreement, dated as of February 21, 1996, between
Medisorb Technologies International L.P. and Janssen
Pharmaceutica International (worldwide except U.S.) (assigned to
Alkermes Inc. in July 2006). (Incorporated by reference to
Exhibit 10.20 to the Registrants Report on
Form 10-K
for the fiscal year ended March 31, 1996
(File No. 000-19267).)*
|
|
10
|
.8
|
|
Manufacturing and Supply Agreement, dated August 6, 1997,
by and among Alkermes Controlled Therapeutics Inc. II, Janssen
Pharmaceutica International and Janssen Pharmaceutica, Inc.
(assigned to Alkermes Inc. in July 2006). (Incorporated by
reference to Exhibit 10.19 to the Registrants Report
on
Form 10-K
for the fiscal year ended March 31, 2002
(File No. 001-14131).)***
|
67
|
|
|
|
|
Exhibit
|
|
|
No.
|
|
|
|
|
10
|
.8(a)
|
|
Third Amendment To Development Agreement, Second Amendment To
Manufacturing and Supply Agreement and First Amendment To
License Agreements by and between Janssen Pharmaceutica
International Inc. and Alkermes Controlled Therapeutics Inc. II,
dated April 1, 2000 (assigned to Alkermes Inc. in July
2006) (with certain confidential information deleted).
(Incorporated by reference to Exhibit 10.5 to the
Registrants Report on
Form 10-Q
for the quarter ended December 31, 2004.)****
|
|
10
|
.8(b)
|
|
Fourth Amendment To Development Agreement and First Amendment To
Manufacturing and Supply Agreement by and between Janssen
Pharmaceutica International Inc. and Alkermes Controlled
Therapeutics Inc. II, dated December 20, 2000 (assigned to
Alkermes Inc. in July 2006) (with certain confidential
information deleted). (Incorporated by reference to
Exhibit 10.4 to the Registrants Report on
Form 10-Q
for the quarter ended December 31, 2004.)****
|
|
10
|
.8(c)
|
|
Addendum to Manufacturing and Supply Agreement, dated August
2001, by and among Alkermes Controlled Therapeutics Inc. II,
Janssen Pharmaceutica International and Janssen Pharmaceutica,
Inc. (assigned to Alkermes Inc. in July 2006). (Incorporated by
reference to Exhibit 10.19(b) to the Registrants
Report on
Form 10-K
for the fiscal year ended March 31, 2002
(File No. 001-14131).)***
|
|
10
|
.8(d)
|
|
Letter Agreement and Exhibits to Manufacturing and Supply
Agreement, dated February 1, 2002, by and among Alkermes
Controlled Therapeutics Inc. II, Janssen Pharmaceutica
International and Janssen Pharmaceutica, Inc. (assigned to
Alkermes Inc. in July 2006). (Incorporated by reference to
Exhibit 10.19(a) to the Registrants Report on
Form 10-K
for the fiscal year ended March 31, 2002.)***
|
|
10
|
.8(e)
|
|
Amendment to Manufacturing and Supply Agreement by and between
JPI Pharmaceutica International, Janssen Pharmaceutica Inc. and
Alkermes Controlled Therapeutics Inc. II, dated
December 22, 2003 (assigned to Alkermes Inc. in July 2006)
(with certain confidential information deleted). (Incorporated
by reference to Exhibit 10.8 to the Registrants
Report on
Form 10-Q
for the quarter ended December 31, 2004.)****
|
|
10
|
.8(f)
|
|
Fourth Amendment To Manufacturing and Supply Agreement by and
between JPI Pharmaceutica International, Janssen Pharmaceutica
Inc. and Alkermes Controlled Therapeutics Inc. II, dated
January 10, 2005 (assigned to Alkermes Inc. in July 2006)
(with certain confidential information deleted). (Incorporated
by reference to Exhibit 10.9 to the Registrants
Report on
Form 10-Q
for the quarter ended December 31, 2004.)****
|
|
10
|
.9
|
|
Agreement by and between JPI Pharmaceutica International,
Janssen Pharmaceutica Inc. and Alkermes Controlled Therapeutics
Inc. II, dated December 21, 2002 (assigned to Alkermes Inc.
in July 2006) (with certain confidential information deleted).
(Incorporated by reference to Exhibit 10.6 to the
Registrants Report on
Form 10-Q
for the quarter ended December 31, 2004.)****
|
|
10
|
.9(a)
|
|
Amendment to Agreement by and between JPI Pharmaceutica
International, Janssen Pharmaceutica Inc. and Alkermes
Controlled Therapeutics Inc. II, dated December 16, 2003
(assigned to Alkermes Inc. in July 2006) (with certain
confidential information deleted). (Incorporated by reference to
Exhibit 10.7 to the Registrants Report on
Form 10-Q
for the quarter ended December 31, 2004.)****
|
|
10
|
.10
|
|
Patent License Agreement, dated as of August 11, 1997,
between Massachusetts Institute of Technology and Advanced
Inhalation Research, Inc. (assigned to Alkermes, Inc. in March
2007), as amended. (Incorporated by reference to
Exhibit 10.25 to the Registrants Report on
Form 10-K
for the fiscal year ended March 31, 1999
(File No. 001-14131).)**
|
|
10
|
.11
|
|
Employment agreement, dated as of December 12, 2007, by and
between Richard F. Pops and the Registrant. (Incorporated by
reference to Exhibit 10.1 to the Registrants Report
on
Form 10-Q
for the quarter ended December 31, 2007.)+
|
|
10
|
.11(a)
|
|
Amendment to Employment Agreement by and between Alkermes, Inc.
and Richard F. Pops. (Incorporated by reference to
Exhibit 10.5 to the Registrants Current Report on
Form 8-K
filed on October 7, 2008.)+
|
|
10
|
.12
|
|
Employment agreement, dated as of December 12, 2007, by and
between David A. Broecker and the Registrant. (Incorporated by
reference to Exhibit 10.2 to the Registrants Report
on
Form 10-Q
for the quarter ended December 31, 2007.)+
|
68
|
|
|
|
|
Exhibit
|
|
|
No.
|
|
|
|
|
10
|
.12(a)
|
|
Amendment to Employment Agreement by and between Alkermes, Inc.
and David A. Broecker. (Incorporated by reference to
Exhibit 10.6 to the Registrants Current Report on
Form 8-K
filed on October 7, 2008.)+
|
|
10
|
.13
|
|
Form of Employment Agreement, dated as of December 12,
2007, by and between the Registrant and each of Kathryn L.
Biberstein, Elliot W. Ehrich, M.D., James M. Frates,
Michael J. Landine, Gordon G. Pugh. (Incorporated by reference
to Exhibit 10.3 to the Registrants Report on
Form 10-Q
for the quarter ended December 31, 2007.)+
|
|
10
|
.13(a)
|
|
Form of Amendment to Employment Agreement by and between
Alkermes, Inc. and each of each of Kathryn L. Biberstein, Elliot
W. Ehrich, M.D., James M. Frates, Michael J. Landine,
Gordon G. Pugh. (Incorporated by reference to Exhibit 10.7
to the Registrants Current Report on
Form 8-K
filed on October 7, 2008.)+
|
|
10
|
.14
|
|
Form of Covenant Not to Compete, of various dates, by and
between the Registrant and each of Kathryn L. Biberstein and
James M. Frates. (Incorporated by reference to
Exhibit 10.15 to the Registrants Report on
Form 10-K
for the year ended March 31, 2007.)+
|
|
10
|
.14(a)
|
|
Form of Covenant Not to Compete, of various dates, by and
between the Registrant and each of Elliot W. Ehrich, M.D.,
Michael J. Landine, and Gordon G. Pugh. (Incorporated by
reference to Exhibit 10.15(a) to the Registrants
Report on
Form 10-K
for the year ended March 31, 2007.)+
|
|
10
|
.15
|
|
License and Collaboration Agreement between Alkermes, Inc. and
Cephalon, Inc. dated as of June 23, 2005. (Incorporated by
reference to Exhibit 10.1 to the Registrants Report
on
Form 10-Q
for the quarter ended June 30, 2005.)*****
|
|
10
|
.15(a)
|
|
Supply Agreement between Alkermes, Inc. and Cephalon, Inc. dated
as of June 23, 2005. (Incorporated by reference to
Exhibit 10.2 to the Registrants Report on
Form 10-Q
for the quarter ended June 30, 2005.)*****
|
|
10
|
.15(b)
|
|
Amendment to the License and Collaboration Agreement between
Alkermes, Inc. and Cephalon, Inc. dated as of December 21,
2006. (Incorporated by reference to Exhibit 10.16(b) to the
Registrants Report on
Form 10-K
for the year ended March 31, 2007.)******
|
|
10
|
.15(c)
|
|
Amendment to the Supply Agreement between Alkermes, Inc. and
Cephalon, Inc. dated as of December 21, 2006. (Incorporated
by reference to Exhibit 10.16(c) to the Registrants
Report on
Form 10-K
for the year ended March 31, 2007.)******
|
|
10
|
.16
|
|
Accelerated Share Repurchase Agreement, dated as of
February 7, 2008, between Morgan Stanley & Co.
Incorporated and Alkermes, Inc. (Incorporated by reference to
Exhibit 10.17 to the Registrants Report on
Form 10-K
for the year ended March 31, 2008.)
|
|
10
|
.17
|
|
Alkermes, Inc. 1998 Equity Incentive Plan as Amended and
Approved on November 2, 2006. (Incorporated by reference to
Exhibit 10.1 to the Registrants Report on
Form 10-Q
for the fiscal quarter ended December 31, 2006.)+
|
|
10
|
.17(a)
|
|
Form of Stock Option Certificate pursuant to Alkermes, Inc. 1998
Equity Incentive Plan. (Incorporated by reference to
Exhibit 10.37 to the Registrants Report on
Form 10-K
for the fiscal year ended March 31, 2006.)+
|
|
10
|
.18
|
|
Alkermes, Inc. Amended and Restated 1999 Stock Option Plan.
(Incorporated by reference to Appendix A to the
Registrants Definitive Proxy Statement on Form DEF
14/A filed on July 27, 2007.)+
|
|
10
|
.18(a)
|
|
Form of Incentive Stock Option Certificate pursuant to the 1999
Stock Option Plan, as amended. (Incorporated by reference to
Exhibit 10.35 to the Registrants Report on
Form 10-K
for the fiscal year ended March 31, 2006.)+
|
|
10
|
.18(b)
|
|
Form of Non-Qualified Stock Option Certificate pursuant to the
1999 Stock Option Plan, as amended. (Incorporated by reference
to Exhibit 10.36 to the Registrants Report on
Form 10-K
for the fiscal year ended March 31, 2006.)+
|
|
10
|
.19
|
|
Alkermes, Inc. 2002 Restricted Stock Award Plan as Amended and
Approved on November 2, 2006. (Incorporated by reference to
Exhibit 10.3 to the Registrants Report on
Form 10-Q
for the fiscal quarter ended December 31, 2006.)+
|
69
|
|
|
|
|
Exhibit
|
|
|
No.
|
|
|
|
|
10
|
.19(a)
|
|
Amendment to Alkermes, Inc. 2002 Restricted Stock Award Plan.
(Incorporated by reference to Appendix B to the
Registrants Definitive Proxy Statement on Form DEF
14/A filed on July 27, 2007.)+
|
|
10
|
.20
|
|
2006 Stock Option Plan for Non-Employee Directors. (Incorporated
by reference to Exhibit 10.4 to the Registrants
Report on
Form 10-Q
for the fiscal quarter ended September 30, 2006.)+
|
|
10
|
.20(a)
|
|
Amendment to 2006 Stock Option Plan for Non-Employee Directors.
(Incorporated by reference to Appendix C to the
Registrants Definitive Proxy Statement on Form DEF
14/A filed on July 27, 2007.)+
|
|
10
|
.21
|
|
Alkermes Fiscal 2008 Named-Executive Bonus Plan. (Incorporated
by reference to Exhibit 10.1 to the Registrants
Current Report on
Form 8-K
filed on April 26, 2007.)+
|
|
10
|
.22
|
|
Alkermes Fiscal Year 2009 Reporting Officer Performance Pay
Plan. (Incorporated by reference to Exhibit 10.1 to the
Registrants Current Report on
Form 8-K
filed on May 16, 2008.)+
|
|
10
|
.23
|
|
Alkermes, Inc., 2008 Stock Option and Incentive Plan
(Incorporated by reference to Exhibit 10.1 to the
Registrants Current Report on
Form 8-K
filed on October 7, 2008.)+
|
|
10
|
.23(a)
|
|
Alkermes, Inc. 2008 Stock Option and Incentive Plan, Stock
Option Award Certificate (Incentive Stock Option) (Incorporated
by reference to Exhibit 10.2 to the Registrants
Current Report on
Form 8-K
filed on October 7, 2008.)+
|
|
10
|
.23(b)
|
|
Alkermes, Inc. 2008 Stock Option and Incentive Plan, Stock
Option Award Certificate (Non-Qualified Option) (Incorporated by
reference to Exhibit 10.3 to the Registrants Current
Report on
Form 8-K
filed on October 7, 2008.)+
|
|
10
|
.23(c)
|
|
Alkermes, Inc. 2008 Stock Option and Incentive Plan, Stock
Option Award Certificate (Non-Employee Director) (Incorporated
by reference to Exhibit 10.4 to the Registrants
Current Report on
Form 8-K
filed on October 7, 2008.)+
|
|
10
|
.23(d)
|
|
Alkermes, Inc. 2008 Stock Option and Incentive Plan, Restricted
Stock Unit Award Certificate (Time Vesting Only). (Incorporated
by reference to Exhibit 10.1 to the Registrants
Current Report on
Form 8-K
filed on May 22, 2009.)+
|
|
10
|
.23(e)
|
|
Alkermes, Inc. 2008 Stock Option and Incentive Plan, Restricted
Stock Unit Award Certificate (Performance Vesting Only).
(Incorporated by reference to Exhibit 10.2 to the
Registrants Current Report on
Form 8-K
filed on May 22, 2009.)+
|
|
21
|
.1
|
|
Subsidiaries of the Registrant.#
|
|
23
|
.1
|
|
Consent of Independent Registered Public Accounting Firm
PricewaterhouseCoopers LLP.#
|
|
23
|
.2
|
|
Consent of Independent Registered Public Accounting Firm
Deloitte & Touche LLP.#
|
|
24
|
.1
|
|
Power of Attorney (included on signature pages).#
|
|
31
|
.1
|
|
Rule 13a-14(a)/15d-14(a)
Certification.#
|
|
31
|
.2
|
|
Rule 13a-14(a)/15d-14(a)
Certification.#
|
|
32
|
.1
|
|
Certification pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002.#
|
|
|
|
*
|
|
Confidential status has been granted for certain portions
thereof pursuant to a Commission Order granted September 3,
1996. Such provisions have been filed separately with the
Commission.
|
|
**
|
|
Confidential status has been granted for certain portions
thereof pursuant to a Commission Order granted August 19,
1999. Such provisions have been filed separately with the
Commission.
|
|
***
|
|
Confidential status has been granted for certain portions
thereof pursuant to a Commission Order granted
September 16, 2002. Such provisions have been separately
filed with the Commission.
|
|
****
|
|
Confidential status has been granted for certain portions
thereof pursuant to a Commission Order granted
September 26, 2005. Such provisions have been filed
separately with the Commission.
|
|
*****
|
|
Confidential status has been granted for certain portions
thereof pursuant to a Commission Order granted July 31,
2006. Such provisions have been filed separately with the
Commission.
|
70
|
|
|
******
|
|
Confidential status has been granted for certain portions
thereof pursuant to a Commission Order granted April 15,
2008. Such provisions have been filed separately with the
Commission.
|
|
+
|
|
Indicates a management contract or any compensatory plan,
contract or arrangement.
|
|
#
|
|
Filed herewith.
|
71
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Registrant has duly caused
this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
ALKERMES, INC.
|
|
|
|
By:
|
/s/ David
A. Broecker
|
David A. Broecker
President and Chief Executive Officer
May 28, 2009
POWER OF
ATTORNEY
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons
on behalf of the Registrant and in the capacities and on the
dates indicated.
Each person whose signature appears below in so signing also
makes, constitutes and appoints David A. Broecker and James M.
Frates, and each of them, his true and lawful attorney-in-fact,
with full power of substitution, for him in any and all
capacities, to execute and cause to be filed with the Securities
and Exchange Commission any and all amendments to this
Form 10-K,
with exhibits thereto and other documents in connection
therewith, and hereby ratifies and confirms all that said
attorney-in-fact or his substitute or substitutes may do or
cause to be done by virtue hereof.
|
|
|
|
|
|
|
Signature
|
|
Title
|
|
Date
|
|
|
|
|
|
|
/s/ David
A. Broecker
David
A. Broecker
|
|
President and Chief Executive Officer and Director (Principal
Executive Officer)
|
|
May 28, 2009
|
|
|
|
|
|
/s/ James
M. Frates
James
M. Frates
|
|
Senior Vice President, Chief Financial Officer and Treasurer
(Principal Financial and Accounting Officer)
|
|
May 28, 2009
|
|
|
|
|
|
/s/ Richard
F. Pops
Richard
F. Pops
|
|
Director and Chairman of the Board
|
|
May 28, 2009
|
|
|
|
|
|
/s/ David
W. Anstice
David
W. Anstice
|
|
Director
|
|
May 28, 2009
|
|
|
|
|
|
/s/ Floyd
E. Bloom
Floyd
E. Bloom
|
|
Director
|
|
May 28, 2009
|
|
|
|
|
|
/s/ Robert
A. Breyer
Robert
A. Breyer
|
|
Director
|
|
May 28, 2009
|
|
|
|
|
|
/s/ Gerri
Henwood
Gerri
Henwood
|
|
Director
|
|
May 28, 2009
|
72
|
|
|
|
|
|
|
Signature
|
|
Title
|
|
Date
|
|
|
|
|
|
|
/s/ Paul
J. Mitchell
Paul
J. Mitchell
|
|
Director
|
|
May 28, 2009
|
|
|
|
|
|
/s/ Alexander
Rich
Alexander
Rich
|
|
Director
|
|
May 28, 2009
|
|
|
|
|
|
/s/ Mark
B. Skaletsky
Mark
B. Skaletsky
|
|
Director
|
|
May 28, 2009
|
|
|
|
|
|
/s/ Michael
A. Wall
Michael
A. Wall
|
|
Director and Chairman Emeritus
|
|
May 28, 2009
|
73
Report of
Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders of Alkermes, Inc.
In our opinion, the accompanying consolidated balance sheets and
the related consolidated statements of income and comprehensive
income, shareholders equity and cash flows present fairly,
in all material respects, the financial position of Alkermes,
Inc. and its subsidiaries at March 31, 2009 and 2008, and
the results of their operations and their cash flows for each of
the two years in the period ended March 31, 2009 in
conformity with accounting principles generally accepted in the
United States of America. Also in our opinion, the Company
maintained, in all material respects, effective internal control
over financial reporting as of March 31, 2009, based on
criteria established in Internal Control Integrated
Framework issued by the Committee of Sponsoring Organizations of
the Treadway Commission (COSO). The Companys management is
responsible for these financial statements, for maintaining
effective internal control over financial reporting and for its
assessment of the effectiveness of internal control over
financial reporting, included in the accompanying
Managements Annual Report on Internal Control over
Financial Reporting under Item 9A. Our responsibility is to
express opinions on these financial statements and on the
Companys internal control over financial reporting based
on our integrated audits. We conducted our audits in accordance
with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and
perform the audits to obtain reasonable assurance about whether
the financial statements are free of material misstatement and
whether effective internal control over financial reporting was
maintained in all material respects. Our audits of the financial
statements included examining, on a test basis, evidence
supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the
overall financial statement presentation. Our audit of internal
control over financial reporting included obtaining an
understanding of internal control over financial reporting,
assessing the risk that a material weakness exists, and testing
and evaluating the design and operating effectiveness of
internal control based on the assessed risk. Our audits also
included performing such other procedures as we considered
necessary in the circumstances. We believe that our audits
provide a reasonable basis for our opinions.
A companys internal control over financial reporting is a
process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles. A companys
internal control over financial reporting includes those
policies and procedures that (i) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the
company; (ii) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of
financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the
company are being made only in accordance with authorizations of
management and directors of the company; and (iii) provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the
companys assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
/s/ PricewaterhouseCoopers
LLP
Boston, Massachusetts
May 28, 2009
F-1
Report of
Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders of Alkermes, Inc.
Cambridge, Massachusetts
We have audited the accompanying consolidated statements of
income and comprehensive income, shareholders equity, and
cash flows of Alkermes, Inc. and subsidiaries (the
Company) for the year ended March 31, 2007.
These financial statements are the responsibility of the
Companys management. Our responsibility is to express an
opinion on the financial statements based on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present
fairly, in all material respects, the results of operations and
cash flows of Alkermes, Inc. and subsidiaries for the year ended
March 31, 2007, in conformity with accounting principles
generally accepted in the United States of America.
As discussed in Note 2 to the financial statements, the
Company changed its method of accounting for share-based
payments upon the adoption of Statement of Financial Accounting
Standards No. 123(R),
Share-Based Payment
, effective
April 1, 2006.
/s/ Deloitte
and Touche LLP
Boston, Massachusetts
June 14, 2007
F-2
ALKERMES,
INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
March 31, 2009 and 2008
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(In thousands, except share
|
|
|
|
and per share amounts)
|
|
|
ASSETS
|
CURRENT ASSETS:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
86,893
|
|
|
$
|
101,241
|
|
Investments short-term
|
|
|
236,768
|
|
|
|
240,064
|
|
Receivables
|
|
|
24,588
|
|
|
|
47,249
|
|
Inventory
|
|
|
20,297
|
|
|
|
18,884
|
|
Prepaid expenses and other current assets
|
|
|
7,500
|
|
|
|
5,720
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
376,046
|
|
|
|
413,158
|
|
|
|
|
|
|
|
|
|
|
PROPERTY, PLANT AND EQUIPMENT, NET
|
|
|
106,461
|
|
|
|
112,539
|
|
INVESTMENTS LONG-TERM
|
|
|
80,821
|
|
|
|
119,056
|
|
OTHER ASSETS
|
|
|
3,158
|
|
|
|
11,558
|
|
|
|
|
|
|
|
|
|
|
TOTAL ASSETS
|
|
$
|
566,486
|
|
|
$
|
656,311
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS EQUITY
|
CURRENT LIABILITIES:
|
|
|
|
|
|
|
|
|
Accounts payable and accrued expenses
|
|
$
|
36,483
|
|
|
$
|
36,046
|
|
Unearned milestone revenue current
|
|
|
|
|
|
|
5,927
|
|
Deferred revenue current
|
|
|
6,840
|
|
|
|
|
|
Long-term debt current
|
|
|
25,667
|
|
|
|
47
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
68,990
|
|
|
|
42,020
|
|
|
|
|
|
|
|
|
|
|
NON-RECOURSE RISPERDAL CONSTA SECURED 7% NOTES
LONG-TERM
|
|
|
50,221
|
|
|
|
160,324
|
|
UNEARNED MILESTONE REVENUE LONG-TERM
|
|
|
|
|
|
|
111,730
|
|
DEFERRED REVENUE LONG-TERM
|
|
|
5,238
|
|
|
|
27,837
|
|
OTHER LONG-TERM LIABILITIES
|
|
|
7,149
|
|
|
|
9,086
|
|
|
|
|
|
|
|
|
|
|
TOTAL LIABILITIES
|
|
|
131,598
|
|
|
|
350,997
|
|
|
|
|
|
|
|
|
|
|
COMMITMENTS AND CONTINGENCIES (Note 15)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SHAREHOLDERS EQUITY:
|
|
|
|
|
|
|
|
|
Capital stock, par value, $0.01 per share; 4,550,000 shares
authorized (includes 3,000,000 shares of preferred stock);
none issued
|
|
|
|
|
|
|
|
|
Common stock, par value, $0.01 per share;
160,000,000 shares authorized; 104,044,663 and
102,977,348 shares issued; 94,536,212 and
95,099,166 shares outstanding at March 31, 2009 and
2008, respectively
|
|
|
1,040
|
|
|
|
1,030
|
|
Non-voting common stock, par value, $0.01 per share;
450,000 shares authorized; 382,632 shares issued and
outstanding at March 31, 2009 and 2008
|
|
|
4
|
|
|
|
4
|
|
Treasury stock, at cost (9,508,451 and 7,878,182 shares at
March 31, 2009 and 2008, respectively)
|
|
|
(126,025
|
)
|
|
|
(107,322
|
)
|
Additional paid-in capital
|
|
|
892,415
|
|
|
|
869,695
|
|
Accumulated other comprehensive loss
|
|
|
(6,484
|
)
|
|
|
(1,526
|
)
|
Accumulated deficit
|
|
|
(326,062
|
)
|
|
|
(456,567
|
)
|
|
|
|
|
|
|
|
|
|
TOTAL SHAREHOLDERS EQUITY
|
|
|
434,888
|
|
|
|
305,314
|
|
|
|
|
|
|
|
|
|
|
TOTAL LIABILITIES AND SHAREHOLDERS EQUITY
|
|
$
|
566,486
|
|
|
$
|
656,311
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
F-3
ALKERMES,
INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
Years Ended March 31, 2009, 2008 and 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
(In thousands, except per share amounts)
|
|
|
REVENUES:
|
|
|
|
|
|
|
|
|
|
|
|
|
Manufacturing revenues
|
|
$
|
116,844
|
|
|
$
|
101,700
|
|
|
$
|
105,416
|
|
Royalty revenues
|
|
|
33,247
|
|
|
|
29,457
|
|
|
|
23,151
|
|
Product sales, net
|
|
|
4,467
|
|
|
|
|
|
|
|
|
|
Research and development revenue under collaborative arrangements
|
|
|
42,087
|
|
|
|
89,510
|
|
|
|
74,483
|
|
Net collaborative profit
|
|
|
130,194
|
|
|
|
20,050
|
|
|
|
36,915
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
326,839
|
|
|
|
240,717
|
|
|
|
239,965
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EXPENSES:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of goods manufactured and sold
|
|
|
43,396
|
|
|
|
40,677
|
|
|
|
45,209
|
|
Research and development
|
|
|
89,478
|
|
|
|
125,268
|
|
|
|
117,315
|
|
Selling, general and administrative
|
|
|
59,008
|
|
|
|
59,508
|
|
|
|
66,399
|
|
Impairment of long-lived assets
|
|
|
|
|
|
|
11,630
|
|
|
|
|
|
Restructuring
|
|
|
|
|
|
|
6,423
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
191,882
|
|
|
|
243,506
|
|
|
|
228,923
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING INCOME (LOSS)
|
|
|
134,957
|
|
|
|
(2,789
|
)
|
|
|
11,042
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER (EXPENSE) INCOME:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
11,400
|
|
|
|
17,834
|
|
|
|
17,707
|
|
Interest expense
|
|
|
(13,756
|
)
|
|
|
(16,370
|
)
|
|
|
(17,725
|
)
|
Gain on sale of investment in Reliant Pharmaceuticals, Inc.
|
|
|
|
|
|
|
174,631
|
|
|
|
|
|
Other expense, net
|
|
|
(1,589
|
)
|
|
|
(476
|
)
|
|
|
(481
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other (expense) income, net
|
|
|
(3,945
|
)
|
|
|
175,619
|
|
|
|
(499
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME BEFORE INCOME TAXES
|
|
|
131,012
|
|
|
|
172,830
|
|
|
|
10,543
|
|
PROVISION FOR INCOME TAXES
|
|
|
507
|
|
|
|
5,851
|
|
|
|
1,098
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCOME
|
|
$
|
130,505
|
|
|
$
|
166,979
|
|
|
$
|
9,445
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EARNINGS PER COMMON SHARE:
|
|
|
|
|
|
|
|
|
|
|
|
|
BASIC
|
|
$
|
1.37
|
|
|
$
|
1.66
|
|
|
$
|
0.10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DILUTED
|
|
$
|
1.36
|
|
|
$
|
1.62
|
|
|
$
|
0.09
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING:
|
|
|
|
|
|
|
|
|
|
|
|
|
BASIC
|
|
|
95,161
|
|
|
|
100,742
|
|
|
|
99,242
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DILUTED
|
|
|
96,252
|
|
|
|
102,923
|
|
|
|
103,351
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
COMPREHENSIVE INCOME:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
130,505
|
|
|
$
|
166,979
|
|
|
$
|
9,445
|
|
Unrealized losses on marketable securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Holding losses
|
|
|
(6,153
|
)
|
|
|
(3,849
|
)
|
|
|
(1,054
|
)
|
Less: Reclassification adjustment for losses included in net
income
|
|
|
1,195
|
|
|
|
1,570
|
|
|
|
743
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized losses on marketable securities
|
|
|
(4,958
|
)
|
|
|
(2,279
|
)
|
|
|
(311
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL COMPREHENSIVE INCOME
|
|
$
|
125,547
|
|
|
$
|
164,700
|
|
|
$
|
9,134
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
F-4
ALKERMES,
INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY
Years Ended March 31, 2009, 2008 and 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Comprehensive
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
|
|
|
Unrealized
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
Currency
|
|
|
Gain/(Loss) on
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock
|
|
|
Non-voting Common Stock
|
|
|
Paid-In
|
|
|
Deferred
|
|
|
Translation
|
|
|
Marketable
|
|
|
Accumulated
|
|
|
Treasury Stock
|
|
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Compensation
|
|
|
Adjustments
|
|
|
Securities
|
|
|
Deficit
|
|
|
Shares
|
|
|
Amount
|
|
|
Total
|
|
|
|
(In thousands, except share data)
|
|
|
BALANCE April 1, 2006
|
|
|
91,744,680
|
|
|
$
|
917
|
|
|
|
382,632
|
|
|
$
|
4
|
|
|
$
|
664,596
|
|
|
$
|
(374
|
)
|
|
$
|
(142
|
)
|
|
$
|
1,206
|
|
|
$
|
(632,991
|
)
|
|
|
|
|
|
$
|
|
|
|
$
|
33,216
|
|
Issuance of common stock upon exercise of options or vesting of
restricted stock units
|
|
|
780,722
|
|
|
|
8
|
|
|
|
|
|
|
|
|
|
|
|
7,539
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,547
|
|
Elimination of deferred compensation with the adoption of
SFAS No. 123(R)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(374
|
)
|
|
|
374
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Conversion of 2.5% convertible subordinated notes into common
stock
|
|
|
9,025,271
|
|
|
|
90
|
|
|
|
|
|
|
|
|
|
|
|
124,312
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
124,402
|
|
Elimination of deferred financing costs on 2.5% convertible
subordinated notes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,751
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,751
|
)
|
Redemption of redeemable convertible preferred stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15,000
|
|
Repurchase of common stock for treasury, at cost
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(823,677
|
)
|
|
|
(12,492
|
)
|
|
|
(12,492
|
)
|
Share-based compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
28,249
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
28,249
|
|
Excess tax benefit from share-based compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
156
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
156
|
|
Unrealized loss on marketable securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(311
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(311
|
)
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9,445
|
|
|
|
|
|
|
|
|
|
|
|
9,445
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE March 31, 2007
|
|
|
101,550,673
|
|
|
$
|
1,015
|
|
|
|
382,632
|
|
|
$
|
4
|
|
|
$
|
837,727
|
|
|
$
|
|
|
|
$
|
(142
|
)
|
|
$
|
895
|
|
|
$
|
(623,546
|
)
|
|
|
(823,677
|
)
|
|
$
|
(12,492
|
)
|
|
$
|
203,461
|
|
Issuance of common stock upon exercise of options or vesting of
restricted stock units
|
|
|
1,426,675
|
|
|
|
15
|
|
|
|
|
|
|
|
|
|
|
|
11,144
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11,159
|
|
Receipt of Alkermes stock for the purchase of stock
options or to satisfy minimum tax withholding obligations
related to stock based awards
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,480
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(85,769
|
)
|
|
|
(1,480
|
)
|
|
|
|
|
Repurchase of common stock for treasury, at cost
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(6,968,736
|
)
|
|
|
(93,350
|
)
|
|
|
(93,350
|
)
|
Share-based compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
19,222
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
19,222
|
|
Excess tax benefit from share-based compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
122
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
122
|
|
Unrealized loss on marketable securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,279
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,279
|
)
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
166,979
|
|
|
|
|
|
|
|
|
|
|
|
166,979
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE March 31, 2008
|
|
|
102,977,348
|
|
|
$
|
1,030
|
|
|
|
382,632
|
|
|
$
|
4
|
|
|
$
|
869,695
|
|
|
$
|
|
|
|
$
|
(142
|
)
|
|
$
|
(1,384
|
)
|
|
$
|
(456,567
|
)
|
|
|
(7,878,182
|
)
|
|
$
|
(107,322
|
)
|
|
$
|
305,314
|
|
Issuance of common stock upon exercise of options or vesting of
restricted stock units
|
|
|
1,067,315
|
|
|
|
10
|
|
|
|
|
|
|
|
|
|
|
|
7,049
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,059
|
|
Receipt of Alkermes stock for the purchase of stock
options or to satisfy minimum tax withholding obligations
related to stock based awards
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
707
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(61,067
|
)
|
|
|
(707
|
)
|
|
|
|
|
Repurchase of common stock for treasury, at cost
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,569,202
|
)
|
|
|
(17,996
|
)
|
|
|
(17,996
|
)
|
Share-based compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14,884
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14,884
|
|
Excess tax benefit from share-based compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
80
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
80
|
|
Unrealized loss on marketable securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4,958
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4,958
|
)
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
130,505
|
|
|
|
|
|
|
|
|
|
|
|
130,505
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE March 31, 2009
|
|
|
104,044,663
|
|
|
$
|
1,040
|
|
|
|
382,632
|
|
|
$
|
4
|
|
|
$
|
892,415
|
|
|
$
|
|
|
|
$
|
(142
|
)
|
|
$
|
(6,342
|
)
|
|
$
|
(326,062
|
)
|
|
|
(9,508,451
|
)
|
|
$
|
(126,025
|
)
|
|
$
|
434,888
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
F-5
ALKERMES,
INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended March 31, 2009, 2008 and 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
(In thousands)
|
|
|
CASH FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
130,505
|
|
|
$
|
166,979
|
|
|
$
|
9,445
|
|
Adjustments to reconcile net income to cash flows from operating
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Share-based compensation expense
|
|
|
14,810
|
|
|
|
19,445
|
|
|
|
27,687
|
|
Depreciation
|
|
|
10,265
|
|
|
|
12,138
|
|
|
|
11,991
|
|
Impairment of long-lived assets
|
|
|
|
|
|
|
11,630
|
|
|
|
|
|
Gain on sale of investments in Reliant Pharmaceuticals,
Inc.
|
|
|
|
|
|
|
(174,631
|
)
|
|
|
|
|
Realized losses on investments
|
|
|
1,195
|
|
|
|
1,570
|
|
|
|
743
|
|
Loss on purchase of non-recourse RISPERDAL CONSTA secured
7% Notes
|
|
|
2,512
|
|
|
|
|
|
|
|
|
|
Other non-cash charges
|
|
|
4,283
|
|
|
|
3,732
|
|
|
|
3,253
|
|
Changes in assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Receivables
|
|
|
13,710
|
|
|
|
15,041
|
|
|
|
(13,537
|
)
|
Inventory, prepaid expenses and other assets
|
|
|
(5,140
|
)
|
|
|
(1,450
|
)
|
|
|
(12,240
|
)
|
Accounts payable and accrued expenses
|
|
|
2,014
|
|
|
|
(8,033
|
)
|
|
|
7,574
|
|
Unearned milestone revenue
|
|
|
(117,657
|
)
|
|
|
(11,093
|
)
|
|
|
29,214
|
|
Deferred revenue
|
|
|
(14,525
|
)
|
|
|
6,961
|
|
|
|
18,694
|
|
Other long-term liabilities
|
|
|
(1,366
|
)
|
|
|
135
|
|
|
|
649
|
|
Purchase of non-recourse RISPERDAL CONSTA secured 7% notes
attributable to original issue discount
|
|
|
(6,016
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows provided by operating activities
|
|
|
34,590
|
|
|
|
42,424
|
|
|
|
83,473
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
Additions to property, plant and equipment
|
|
|
(5,502
|
)
|
|
|
(21,890
|
)
|
|
|
(36,305
|
)
|
Proceeds from the sale of equipment
|
|
|
7,717
|
|
|
|
|
|
|
|
12,571
|
|
Proceeds from the sale of investment in Reliant Pharmaceuticals,
Inc.
|
|
|
7,766
|
|
|
|
166,865
|
|
|
|
|
|
Purchases of investments
|
|
|
(609,741
|
)
|
|
|
(639,582
|
)
|
|
|
(329,234
|
)
|
Sales and maturities of investments
|
|
|
645,120
|
|
|
|
556,572
|
|
|
|
322,989
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows provided by (used-in) investing activities
|
|
|
45,360
|
|
|
|
61,965
|
|
|
|
(29,979
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from the issuance of common stock for share-based
compensation arrangements
|
|
|
7,059
|
|
|
|
11,159
|
|
|
|
7,547
|
|
Excess tax benefit from share-based compensation
|
|
|
80
|
|
|
|
122
|
|
|
|
156
|
|
Payment of debt and capital leases
|
|
|
(47
|
)
|
|
|
(1,579
|
)
|
|
|
(1,783
|
)
|
Purchase of non-recourse RISPERDAL CONSTA secured 7% notes
|
|
|
(83,394
|
)
|
|
|
|
|
|
|
|
|
Purchase of common stock for treasury
|
|
|
(17,996
|
)
|
|
|
(93,350
|
)
|
|
|
(12,492
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows used-in financing activities
|
|
|
(94,298
|
)
|
|
|
(83,648
|
)
|
|
|
(6,572
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS
|
|
|
(14,348
|
)
|
|
|
20,741
|
|
|
|
46,922
|
|
CASH AND CASH EQUIVALENTS Beginning of period
|
|
|
101,241
|
|
|
|
80,500
|
|
|
|
33,578
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS End of period
|
|
$
|
86,893
|
|
|
$
|
101,241
|
|
|
$
|
80,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL CASH FLOW DISCLOSURE:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for interest
|
|
$
|
15,342
|
|
|
$
|
12,002
|
|
|
$
|
13,647
|
|
Cash paid for taxes
|
|
$
|
860
|
|
|
$
|
5,300
|
|
|
$
|
1,051
|
|
Non-cash investing and financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Conversion of 2.5% convertible subordinated notes into common
stock
|
|
$
|
|
|
|
$
|
|
|
|
$
|
125,000
|
|
Redemption of redeemable convertible preferred stock
|
|
$
|
|
|
|
$
|
|
|
|
$
|
15,000
|
|
Purchased capital expenditures included in accounts payable and
accrued expenses
|
|
$
|
(1,299
|
)
|
|
$
|
(663
|
)
|
|
$
|
(1,321
|
)
|
Sales of property, plant and equipment included in receivables
|
|
$
|
|
|
|
$
|
7,717
|
|
|
$
|
|
|
Net share exercise of warrants into common stock of the issuer
|
|
$
|
|
|
|
$
|
2,994
|
|
|
$
|
|
|
Receipt of Alkermes shares for the purchase of stock options or
to satisfy minimum tax withholding obligations related to stock
based awards
|
|
$
|
707
|
|
|
$
|
1,480
|
|
|
$
|
|
|
Funds held in escrow for the sale of investment in Reliant
Pharmaceuticals, Inc.
|
|
$
|
|
|
|
$
|
7,766
|
|
|
$
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
F-6
ALKERMES,
INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
Alkermes, Inc. (as used in this section, together with its
subsidiaries, Alkermes or the Company)
is a fully integrated biotechnology company committed to
developing innovative medicines to improve patients lives.
The Company developed, manufactures and commercializes
VIVITROL
®
for alcohol dependence and manufactures
RISPERDAL
®
CONSTA
®
for schizophrenia. The Companys robust pipeline includes
extended-release
injectable, pulmonary and oral products for the treatment of
prevalent, chronic diseases, such as central nervous system
disorders, addiction and diabetes. The Company has research
facilities in Massachusetts and a commercial manufacturing
facility in Ohio. In April 2009, the Company announced that it
will move its corporate headquarters from Cambridge,
Massachusetts, to Waltham, Massachusetts in early calendar 2010.
|
|
2.
|
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
|
Principles
of Consolidation
The consolidated financial statements include the accounts of
Alkermes, Inc. and its wholly-owned subsidiaries: Alkermes
Controlled Therapeutics, Inc. (ACT I); Alkermes
Europe, Ltd. and RC Royalty Sub LLC (Royalty Sub).
The assets of Royalty Sub are not available to satisfy
obligations of Alkermes and its subsidiaries, other than the
obligations of Royalty Sub including Royalty Subs
non-recourse RISPERDAL CONSTA secured 7% notes (the
7% Notes), and the assets of Alkermes are not
available to satisfy obligations of Royalty Sub. Intercompany
accounts and transactions have been eliminated.
Use of
Estimates
The preparation of the Companys consolidated financial
statements in conformity with accounting principles generally
accepted in the United States (GAAP) necessarily
requires management to make estimates and assumptions that
affect the following: (1) reported amounts of assets and
liabilities; (2) disclosure of contingent assets and
liabilities at the date of the consolidated financial
statements; and (3) the reported amounts of revenues and
expenses during the reporting period. Actual results could
differ from these estimates.
Cash
and Cash Equivalents
The Company values its cash and cash equivalents at cost plus
accrued interest, which the Company believes approximates their
market value. The Company considers only those investments which
are highly liquid, readily convertible into cash and that mature
within three months from the date of purchase to be cash
equivalents.
Investments
The Company invests in various types of securities including
United States (U.S.) government and agency
obligations, corporate debt securities and other debt securities
including student loan backed auction rate securities and asset
backed debt securities. The Company also has strategic
investments which include the common stock and warrants of
companies the Company does or did have a collaborative
arrangement with. The Company places substantially all of its
interest-bearing investments with major financial institutions
and in accordance with documented corporate policies, the
Company limits the amount of credit exposure to any one
financial institution or corporate issuer. At March 31,
2009, substantially all these investments are classified as
available-for-sale
and are recorded at fair value. Holding gains and losses on
these investments are considered unrealized and are
reported within accumulated other comprehensive income, a
component of shareholders equity. The Companys
held-to-maturity
investments are restricted investments held as
F-7
ALKERMES,
INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
collateral under certain letters of credit related to the
Companys lease agreements and are recorded at amortized
cost as Investments Long-Term in the
consolidated balance sheets.
Declines in value judged to be
other-than-temporary
on
available-for-sale
securities are charged to the statement of income and reported
in other (expense) income, net. Valuation of
available-for-sale
securities for purposes of determining the amount of gains and
losses is based on the specific identification method. The
Company reviews its investments for impairment in accordance
with the Financial Accounting Standard Boards
(FASB) Statement of Financial Accounting Standards
(SFAS) No. 115,
Accounting for Certain
Investments in Debt and Equity Securities,
the
SECs Staff Accounting Bulletin (SAB) Topic 5,
Miscellaneous Accounting
and FASB Staff
Position (FSP)
FAS No. 115-1
and FSP
FAS No. 124-
1,
The Meaning of
Other-Than-Temporary
Impairment and Its Application to Certain Investments,
to determine if a decline in the fair value of an investment
is temporary or
other-than-temporary.
In making this determination, the Company reviews several
factors to determine whether losses are
other-than-temporary,
including, but not limited to: i) the length of time each
security was in an unrealized loss position; ii) the extent
to which fair value was less than cost; iii) the financial
condition and near term prospects of the issuer or insurer; and
iv) the Companys intent and ability to hold each
security for a period of time sufficient to allow for any
anticipated recovery in fair value.
Fair
Value of Financial Instruments
Effective April 1, 2008, the Company implemented
SFAS No. 157,
Fair Value
Measurements
(SFAS No. 157) for
its financial assets and liabilities that are re-measured and
reported at fair value at each reporting period. The adoption of
SFAS No. 157 did not have a material impact on the
Companys financial position and results of operations. In
accordance with the provisions of FASB Staff Position
FAS 157-2,
Effective
Date of FASB Statement No. 157
(FSP
FAS 157-2),
the Company has elected to defer implementation of
SFAS No. 157 as it relates to non-financial assets and
non-financial liabilities that are recognized and disclosed at
fair value in the financial statements on a nonrecurring basis
until April 1, 2009. The Company does not expect the
adoption of this standard to have a significant impact on its
consolidated financial statements.
SFAS No. 157 provides a framework for measuring fair
value and requires expanded disclosures regarding fair value
measurements. SFAS No. 157 defines fair value as the
price that would be received to sell an asset or paid to
transfer a liability (the exit price) in an orderly
transaction between market participants at the measurement date.
In determining fair value, SFAS No. 157 permits the
use of various valuation approaches, including market, income
and cost approaches. SFAS No. 157 establishes a
hierarchy for inputs used in measuring fair value that maximizes
the use of observable inputs and minimizes the use of
unobservable inputs by requiring that the observable inputs be
used when available. In October 2008, the FASB issued FASB Staff
Position
FAS 157-3
Determining the Fair Value of a Financial Asset When
the Market for that Asset is not Active
(FSP
FAS 157-3).
FSP
FAS 157-3
clarifies the application of SFAS No. 157 in a market
that is not active and provides an example to illustrate key
considerations in determining the fair value of a financial
asset when the market for that financial asset is not active.
FSP
FAS 157-3
was effective for the Companys condensed consolidated
financial statements for the quarter ended September 30,
2008. The adoption of this standard did not have a material
impact on the consolidated financial statements.
The fair value hierarchy is broken down into three levels based
on the reliability of inputs. The Company has categorized its
financial assets and liabilities consisting primarily of cash
equivalents and investments within the hierarchy as follows:
Level 1
These valuations are based on a
market approach using quoted prices in active markets for
identical assets. Valuations of these products do not require a
significant degree of judgment. Assets utilizing Level 1
inputs include investments in money market funds,
U.S. government and agency debt securities, bank
F-8
ALKERMES,
INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
deposits and our strategic investments, which include the common
stock of companies which we have or did have a collaborative
agreement with;
Level 2
These valuations are based on a
market approach using quoted prices obtained from brokers or
dealers for similar securities or for securities for which we
have limited visibility into their trading volumes. Valuations
of these financial instruments do not require a significant
degree of judgment. At March 31, 2009, the Company did not
have any financial instruments utilizing Level 2
inputs; and
Level 3
These valuations are based on an
income approach using certain inputs that are unobservable and
are significant to the overall fair value measurement.
Valuations of these products require a significant degree of
judgment. Assets utilizing Level 3 inputs consist of
certain of the Companys investment in corporate debt
securities and other debt securities including auction rate
securities and asset backed debt securities that are not
currently trading. In addition, the Company holds warrants to
purchase the common stock of a former collaborator that is
classified using Level 3 inputs. The carrying value of the
warrants was immaterial at March 31, 2009 and 2008.
The carrying amounts reflected in the consolidated balance
sheets for cash and cash equivalents, accounts receivable, other
current assets, accounts payable and accrued expenses
approximate fair value due to their short-term nature. The
following table sets forth the carrying values and estimated
fair values of the Companys debt instruments, which are
not re-measured and reported at fair value at March 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
|
Carrying
|
|
|
Fair
|
|
|
Carrying
|
|
|
Fair
|
|
|
|
Value
|
|
|
Value
|
|
|
Value
|
|
|
Value
|
|
|
|
(In thousands)
|
|
|
7% Notes
|
|
$
|
75,888
|
|
|
$
|
74,690
|
|
|
$
|
160,324
|
|
|
$
|
153,000
|
|
Obligation under capital lease
|
|
|
|
|
|
|
|
|
|
|
47
|
|
|
|
47
|
|
The estimated fair value of the 7% Notes was based on
quoted market price indications. The estimated fair values of
the obligation under capital lease were based on prevailing
interest rates or rates of return on similar instruments.
Inventory
Inventory is stated at the lower of cost or market value. Cost
is determined using the
first-in,
first-out method. Included in inventory are raw materials used
in production of pre-clinical and clinical products, which have
alternative future use and are charged to research and
development expense when consumed. VIVITROL inventory that is
held at our third-party logistics provider and that is in the
sales distribution channel is classified as consigned-out
inventory.
Property,
Plant and Equipment
Property, plant and equipment are recorded at cost, subject to
review for impairment whenever events or changes in
circumstances indicate that the carrying amount of the assets
may not be recoverable. Expenditures for repairs and maintenance
are charged to expense as incurred and major renewals and
improvements are capitalized. Depreciation is generally
calculated using the straight-line method over the following
estimated useful lives of the assets:
|
|
|
Asset group
|
|
Term
|
|
Buildings
|
|
25 years
|
Furniture, fixtures and equipment
|
|
3 - 7 years
|
Leasehold improvements
|
|
Shorter of useful life or
lease term (1 - 20 years)
|
F-9
ALKERMES,
INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Impairment
of Long-Lived Assets
In accordance with SFAS No. 144,
Accounting
for the Impairment or Disposal of Long-Lived Assets
(SFAS No. 144), long-lived assets to
be held and used, including property, plant and equipment, are
reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of the assets
may not be recoverable. Conditions that would necessitate an
impairment assessment include a significant decline in the
observable market value of an asset, a significant change in the
extent or manner in which an asset is used, or a significant
adverse change that would indicate that the carrying amount of
an asset or group of assets is not recoverable. Determination of
recoverability is based on an estimate of undiscounted future
cash flows resulting from the use of the asset and its eventual
disposition. In the event that such cash flows are not expected
to be sufficient to recover the carrying amount of the assets,
the assets are written-down to their estimated fair values.
Long-lived assets to be disposed of are carried at fair value
less costs to sell.
Asset
Retirement Obligations
In accordance with SFAS No. 143,
Accounting
for Asset Retirement Obligations
(SFAS No. 143), as interpreted by FASB
Interpretation No. 47,
Accounting for Conditional Asset
Retirement Obligations
(FIN No. 47),
the Company has recognized an asset retirement obligation for an
obligation to remove leasehold improvements and other related
activities at the conclusion of the Companys lease for its
AIR
®
manufacturing facility located in Chelsea, Massachusetts.
The carrying amount of the asset retirement obligation at
March 31, 2009 and 2008, was $1.4 million and
$1.3 million, respectively, and is included within
Other Long-Term Liabilities in the accompanying
consolidated balance sheets. The following table shows changes
in the carrying amount of the Companys asset retirement
obligation for the years ended March 31, 2009 and 2008:
|
|
|
|
|
|
|
Carrying
|
|
|
|
Amount
|
|
|
|
(In thousands)
|
|
|
Balance, April 1, 2007
|
|
$
|
864
|
|
Accretion expense
|
|
|
87
|
|
Revisions in estimated cash flows
|
|
|
316
|
|
|
|
|
|
|
Balance, March 31, 2008
|
|
|
1,267
|
|
Accretion expense
|
|
|
130
|
|
|
|
|
|
|
Balance, March 31, 2009
|
|
$
|
1,397
|
|
|
|
|
|
|
Revenue
Recognition
Manufacturing revenues
The Company recognizes
manufacturing revenues from the sale of RISPERDAL CONSTA to
Janssen Pharmaceutica, Inc., a division of Ortho-McNeil-Janssen
Pharmaceuticals, Inc. and Janssen Pharmaceutica International, a
division of Cilag International (together, Janssen),
and on the sale of VIVITROL to Cilag GmbH International
(Cilag), an affiliate of Janssen, and Cephalon, Inc.
(Cephalon) prior to the termination of the
collaboration on December 1, 2008.
Manufacturing revenues are recognized in accordance with the
Securities and Exchange Commissions Staff Accounting
Bulletin No. 101,
Revenue Recognition in Financial
Statements
(SAB 101), as amended by SEC
Staff Accounting Bulletin No. 104,
Revenue
Recognition
(SAB 104). Specifically,
manufacturing revenue is recognized when persuasive evidence of
an arrangement exists, delivery has occurred and title to the
product and associated risk of loss has passed to the customer,
the sales price is fixed or determinable and collectibility is
reasonably assured. Manufacturing revenues recognized by the
Company for RISPERDAL
F-10
ALKERMES,
INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
CONSTA are based on information supplied to the Company by
Janssen and require estimates to be made. Differences between
the actual manufacturing revenues and estimated manufacturing
revenues are reconciled and adjusted for in the period in which
they become known. Historically, adjustments have not been
material based on actual amounts paid by Janssen.
Prior to December 1, 2008, the Company manufactured and
sold VIVITROL exclusively to Cephalon for sale of the product in
the U.S. under certain manufacturing and supply
arrangements (see
Revenue Recognition Net
Collaborative Profit
). The Company recorded manufacturing
revenues upon shipment of the product to Cephalon at cost plus a
manufacturing profit of 10%. The Company records manufacturing
revenues under its agreement with Cilag upon shipment of the
product at an agreed upon price. Cilag has a license to resell
VIVITROL in Russia and the other countries in the Commonwealth
of Independent States (CIS).
Royalty revenue
The Company receives
royalties related to the sale of RISPERDAL CONSTA under certain
license arrangements with Janssen. The Company receives
royalties related to the sale of VIVITROL in Russia under a
license arrangement with Cilag. Royalty revenues are earned in
the period the products are sold by Janssen and Cilag.
Product sales, net
The Companys product
sales consist of sales of VIVITROL in the U.S. primarily to
wholesalers, specialty distributors and specialty pharmacies
made after the termination of the VIVITROL collaboration with
Cephalon. Product sales are recognized from the sale of VIVITROL
when persuasive evidence of an arrangement exists, title to the
product and associated risk of loss has passed to the customer,
which is considered to have occurred when the product has been
received by the customer, the sales price is fixed or
determinable and collectibility is reasonably assured. In
accordance with SFAS No. 48,
Revenue
Recognition When Right of Return Exists
(SFAS No. 48), the Company does not
recognize product sales on VIVITROL shipments until it can
reasonably estimate returns related to these shipments. The
Company defers the recognition of product sales on shipments of
VIVITROL to its customers until the product has left the
distribution channel. The Company estimates product shipments
out of the distribution channel through data provided by
external sources, including information on inventory levels
provided by its customers in the distribution channel, as well
as prescription information. In order to match the cost of goods
sold related to products shipped to customers with the
associated revenue, the Company defers the recognition of the
cost of goods sold to the period in which the associated revenue
is recognized.
The Company records estimated payment term discounts,
fee-for-service
discounts, rebates payable under governmental and managed care
programs and other discounts as a reduction of product sales at
the time VIVITROL product sales are recorded. The Companys
calculations related to its sales discount and allowance
accruals require estimates to be made. The Company updates its
estimates and assumptions each period and records any necessary
adjustments.
Research and development revenue under collaborative
arrangements
Research and development revenue
under collaborative arrangements consists of nonrefundable
research and development funding under collaborative
arrangements with various collaborative partners. Research and
development funding generally compensates the Company for
formulation, preclinical and clinical testing related to the
collaborative research programs. The Company generally bills its
partners under collaborative arrangements using a single
full-time equivalent (FTE) or hourly rate. This rate
is established by the Company based on its annual budget of
employee compensation, employee benefits and billable
non-project-specific costs and is generally increased annually
based on increases in the consumer price index. Each
collaborative partner is billed using a FTE or hourly rate for
the hours worked by the Companys employees on a particular
project, plus any direct external costs, if any.
The Company recognizes research and development revenue under
collaborative arrangements over the term of the applicable
agreements through the application of a proportional performance
model where revenue is recognized equal to the lesser of the
amount due under the agreements or the amount based on the
F-11
ALKERMES,
INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
proportional performance to date. The Company recognizes
nonrefundable payments and fees for the licensing of technology
or intellectual property rights over the related performance
period or when there are no remaining performance obligations.
Nonrefundable payments and fees are recorded as deferred revenue
upon receipt and may require deferral of revenue recognition to
future periods.
Multiple element arrangements
The Company
evaluates revenue from arrangements that have multiple elements
to determine whether the components of the arrangement represent
separate units of accounting as defined in the FASBs
Emerging Issues Task Force (EITF) Issue
No. 00-21,
Revenue Arrangements with Multiple Deliverables
(EITF
No. 00-21).
To recognize a delivered item in a multiple element arrangement,
EITF
No. 00-21
requires that the delivered items have value to the customer on
a stand-alone basis, that there is objective and reliable
evidence of fair value of the undelivered items and that it is
within the Companys control for any delivered items that
have a right of return.
Net collaborative profit
The Companys
revenue recognition policy related to the License and
Collaboration Agreement and Supply Agreement (together, the
Agreements) entered into in June 2005 for sale of
VIVITROL in the U.S., later amended in October 2006 (the
Amendments) entered into with Cephalon, Inc.
(Cephalon) complies with the SECs
SAB 101, SAB 104 and EITF
No. 00-21.
For purposes of revenue recognition, the deliverables under
these Agreements are generally separated into three units of
accounting: (i) net losses on the products;
(ii) manufacturing of the products; and (iii) the
product license.
Under the terms of the Agreements and Amendments, the Company
was responsible for the first $124.6 million of net
VIVITROL losses through December 31, 2007 (the
cumulative net loss cap). Net VIVITROL losses
excluded development costs incurred by the Company to obtain
U.S. Food and Drug Administration (FDA)
approval of VIVITROL and costs incurred by the Company to
complete the first VIVITROL manufacturing line, both of which
were the Companys sole responsibility. Cephalon was
responsible to pay all net VIVITROL losses in excess of the
cumulative net loss cap through December 31, 2007. After
December 31, 2007, all net VIVITROL losses were divided
between the Company and Cephalon in approximately equal shares.
Cephalon recorded net sales from VIVITROL in the U.S. The
Company and Cephalon reconciled the costs incurred by each party
to develop, commercialize and manufacture VIVITROL against
revenues earned to determine net losses in each reporting
period. To the extent that the cash earned or expended by either
of the parties exceeded or was less than its proportional share
of net loss for a period, the parties settled by delivering cash
such that the net cash earned or expended equals each
partys proportional share. The cash flow between the
companies related to the Companys share of net VIVITROL
losses was recorded in the period in which it was earned as
Net collaborative profit in the consolidated
statements of income and comprehensive income.
The costs incurred by the Company and Cephalon with respect to
the development and commercialization of VIVITROL which were
charged into the collaboration, included employee time, which
was billed to the collaboration at negotiated FTE rates and
external expenses incurred by the parties with respect to
VIVITROL. FTE rates varied depending on the nature of the
activity performed (such as development and sales) and were
intended to approximate the Companys actual costs. Cost of
goods sold related to VIVITROL was based on a fully burdened
manufacturing cost, determined in accordance with GAAP.
The nonrefundable payments of $160.0 million and
$110.0 million the Company received from Cephalon in June
2005 and April 2006, respectively, and the $4.6 million
payment the Company received from Cephalon in December 2006,
pursuant to the Amendments, was deemed to be arrangement
consideration in accordance with EITF
No. 00-21.
This arrangement consideration was allocated to each of the
accounting units noted above based on the fair value of each
unit as determined at the date the consideration was received.
The arrangement consideration was recorded in the consolidated
balance sheets as Unearned milestone revenue
current portion and Unearned milestone revenue
long-term portion prior to being
F-12
ALKERMES,
INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
earned. The classification between the current and long-term
portions was based on the Companys best estimate of
whether the milestone revenue would be recognized during or
after the
12-month
period following the reporting period, respectively.
Under the Amendments, the parties agreed that Cephalon would
purchase from the Company two VIVITROL manufacturing lines (and
related equipment) under construction. Amounts the Company
received from Cephalon for the sale of the two VIVITROL
manufacturing lines were recorded as Deferred
revenue long-term portion in the consolidated
balance sheets.
Under the terms of the Agreements, the Company was responsible
for the manufacture of clinical and commercial supplies of
VIVITROL for sale in the U.S. and the Company granted
Cephalon a co-exclusive license to the Companys patents
and know-how necessary to use, sell, offer for sale and import
the products for all current and future indications in the
U.S. The Company recorded the earned portion of the
arrangement consideration allocated to the manufacturing of the
products at cost when the product was shipped to Cephalon. The
Company recorded the earned portion of the arrangement
consideration allocated to the product license to revenue on a
straight-line basis over the expected life of VIVITROL, being
ten years.
As discussed in Note 13,
Collaborative Arrangements
,
the Company and Cephalon agreed to end the VIVITROL
collaboration, effective December 1, 2008 (the
Termination Date). In connection with the
termination of the collaboration, the Company recognized
$120.7 million of net collaborative profit, consisting of
$113.9 million of unearned milestone revenue and
$6.8 million of deferred revenue remaining at the
Termination Date. At the Termination Date, the Company had
$22.8 million of deferred revenue related to the original
sale of the two partially completed VIVITROL manufacturing lines
to Cephalon. The Company paid Cephalon $16.0 million to
reacquire the title to these manufacturing lines and accounted
for the payment as a reduction to the deferred revenue
previously recorded. The remaining $6.8 million of deferred
revenue and the $113.9 million of unearned milestone
revenue were recognized in the three months ended
December 31, 2008, through net collaborative profit, as the
Company had no remaining performance obligations to Cephalon
beyond the Termination Date and the amounts were nonrefundable
to Cephalon. The Company received $11.0 million from
Cephalon as payment to fund its share of estimated VIVITROL
product losses during the one-year period following the
Termination Date and the Company is recognizing this payment as
net collaborative profit through the application of a
proportional performance model based on VIVITROL net product
losses.
Concentrations
Financial instruments that potentially subject the Company to
concentrations of credit risk are accounts receivable and
marketable securities. Large pharmaceutical companies account
for the majority of the Companys accounts receivable and
collateral is generally not required from these customers. To
mitigate credit risk, the Company monitors the financial
performance and credit worthiness of its customers.
The following represents revenue and receivables from the
Companys customers exceeding 10% of the total in each
category as of and for the year ended March 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
2008
|
|
2007
|
Customer
|
|
Receivables
|
|
Revenue
|
|
Receivables
|
|
Revenue
|
|
Receivables
|
|
Revenue
|
|
Janssen
|
|
|
84
|
%
|
|
|
46
|
%
|
|
|
33
|
%
|
|
|
52
|
%
|
|
|
35
|
%
|
|
|
47
|
%
|
Cephalon
|
|
|
15
|
%
|
|
|
41
|
%
|
|
|
5
|
%
|
|
|
11
|
%
|
|
|
14
|
%
|
|
|
24
|
%
|
Eli Lilly and Company
|
|
|
|
|
|
|
8
|
%
|
|
|
30
|
%
|
|
|
23
|
%
|
|
|
33
|
%
|
|
|
20
|
%
|
Amylin Pharmaceuticals, Inc.
|
|
|
1
|
%
|
|
|
3
|
%
|
|
|
31
|
%
|
|
|
14
|
%
|
|
|
18
|
%
|
|
|
1
|
%
|
F-13
ALKERMES,
INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Shipping
and Handling Costs
Shipping and handling costs incurred for product shipments are
included in cost of goods sold in the accompanying consolidated
statements of income and comprehensive income.
Research
and Development Expenses
The Companys research and development expenses include
employee compensation, including share-based compensation
expense and related benefits, laboratory supplies, temporary
help costs, external research costs, consulting costs, occupancy
costs, depreciation expense and other allocable costs directly
related to the Companys research and development
activities. Research and development expenses are incurred in
conjunction with the development of the Companys
technologies, proprietary product candidates,
collaborators product candidates and in-licensing
arrangements. External research costs relate to toxicology
studies, pharmacokinetic studies and clinical trials that are
performed for the Company under contract by external companies,
hospitals or medical centers. A significant portion of the
Companys research and development expenses (including
laboratory supplies, travel, dues and subscriptions, recruiting
costs, temporary help costs, consulting costs and allocable
costs such as occupancy and depreciation) are not tracked by
project as they benefit multiple projects or the Companys
technologies in general. Expenses incurred to purchase specific
services from third parties to support the Companys
collaborative research and development activities are tracked by
project and are reimbursed to the Company by its partners. The
Company accounts for its research and development expenses on a
departmental and functional basis in accordance with its budget
and management practices. All such costs are expensed as
incurred.
Share-Based
Compensation
The Companys share-based compensation programs consist of
share-based awards granted to employees and members of the
Companys board of directors, including stock options,
restricted stock units and performance-based restricted stock
units. The Company adopted SFAS No. 123 (revised
2004),
Share-Based Payments
(SFAS No. 123(R)) in April 1, 2006,
replacing Accounting Principles Board (APB) Opinion
No. 25,
Accounting for Stock Issued to
Employees
(APB No. 25). Upon adoption
of SFAS No. 123(R) in fiscal 2007, the Company
recognized a benefit of approximately $0.02 million as a
cumulative effect of a change in accounting principle resulting
from the requirement to estimate forfeitures on the
Companys restricted stock units at the date of grant under
SFAS No. 123(R) rather than recognizing forfeitures as
incurred under APB No. 25. An estimated forfeiture rate was
applied to previously recorded compensation expense for the
Companys unvested restricted stock units to determine the
cumulative effect of a change in accounting principle. The
cumulative benefit, net of tax, was immaterial for separate
presentation in the consolidated statement of income and
comprehensive income for the year ended March 31, 2007 and
was included in operating income in the quarter ended
June 30, 2006.
SFAS No. 123(R) requires compensation cost relating to
share-based payment transactions to be recognized in the
financial statements using a fair-value measurement method.
Under the fair value method, the estimated fair value of awards
is charged against income over the requisite service period for
awards expected to vest, which is generally the vesting period.
Certain of the Companys employees are retirement eligible
under the terms of the Companys stock option plans (the
Plans) and awards to these employees generally vest
in full upon retirement; since there are no effective future
service requirements for these employees, the fair value of
these awards is expensed in full on the grant date.
Income
Taxes
The Company recognizes income taxes under the asset and
liability method. Deferred income taxes are recognized for
differences between the financial reporting and tax bases of
assets and liabilities at enacted
F-14
ALKERMES,
INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
statutory tax rates in effect for the years in which the
differences are expected to reverse. The effect on deferred
taxes of a change in tax rates is recognized in income in the
period that includes the enactment date.
Effective April 1, 2007, the Company accounts for uncertain
tax positions in accordance with FASB Interpretation
No. 48,
Accounting for Uncertainty in Income
Taxes an Interpretation of FASB Statement
No. 109
(FIN No. 48).
FIN No. 48 prescribes a recognition threshold and
measurement attribute for financial statement recognition and
measurement of a tax position taken or expected to be taken in a
tax return and also provides guidance on various related matters
such as derecognition, interest and penalties, and disclosure.
The Company also recognizes interest and penalties, if any,
related to unrecognized tax benefits in income tax expense.
Comprehensive
Income
SFAS No. 130,
Reporting Comprehensive
Income
(SFAS No. 130) requires
the Company to display comprehensive income and its components
as part of the Companys consolidated financial statements.
Comprehensive income consists of net income and other
comprehensive income. Other comprehensive income includes
changes in equity that are excluded from net income, such as
unrealized holding gains and losses on
available-for-sale
marketable securities.
Earnings
per Share
The Company calculates earnings per share in accordance with
SFAS No. 128,
Earnings per Share
(SFAS No. 128). SFAS No. 128
requires the presentation of basic earnings per share and
diluted earnings per share. Basic earnings per share is
calculated based upon net income available to holders of common
shares divided by the weighted average number of shares
outstanding. For the calculation of diluted earnings per share,
the Company uses the weighted average number of shares
outstanding, as adjusted for the effect of potential outstanding
shares, including stock options, restricted stock units and
redeemable convertible preferred stock.
Segment
Information
SFAS No. 131,
Disclosures about Segments of
and Enterprise and Related Information
(SFAS No. 131) establishes standards
for reporting information on operating segments in interim and
annual financial statements. The Company operates as one
segment, which is the business of developing, manufacturing and
commercializing innovative medicines for the treatment of
prevalent, chronic diseases. The Companys chief decision
maker, the Chief Executive Officer, reviews the Companys
operating results on an aggregate basis and manages the
Companys operations as a single operating unit.
Employee
Benefit Plans
The Company maintains a 401(k) retirement savings plan (the
401(k) Plan), which covers substantially all of its
employees. Eligible employees may contribute up to 100% of their
eligible compensation, subject to certain Internal Revenue
Service limitations. The Company matches 50% of the first 6% of
employee pay and employee and Company contributions are fully
vested when made. During the years ended March 31, 2009,
2008 and 2007, the Company contributed approximately
$1.7 million, $1.6 million and $1.5 million,
respectively, to match employee deferrals under the 401(k) Plan.
New
Accounting Pronouncements
In November 2007, the EITF reached a final consensus on EITF
Issue
No. 07-1,
Accounting for Collaborative Arrangements Related to
the Development and Commercialization of Intellectual
Property
(EITF
No. 07-1).
EITF
No. 07-1
is effective for the Companys fiscal year beginning
April 1, 2009 and
F-15
ALKERMES,
INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
adoption is on a retrospective basis to all prior periods
presented for all collaborative arrangements existing as of the
effective date. The Company does not expect the adoption of this
standard to have a significant impact on its consolidated
financial statements.
In March 2008, the FASB issued SFAS No. 161,
Disclosures about Derivative Instruments and Hedging
Activities
(SFAS No. 161).
SFAS No. 161 is intended to improve financial
reporting about derivative instruments and hedging activities by
requiring enhanced disclosures to enable investors to better
understand their effects on an entitys financial position,
financial performance and cash flows. SFAS No. 161 is
effective for the Companys fiscal year beginning
April 1, 2009, and the Company does not expect the adoption
of this standard to have a significant impact on its
consolidated financial statements.
In May 2008, the FASB issued FASB Staff Position
(FSP) No. APB
14-1,
Accounting for Convertible Debt Instruments That May Be
Settled in Cash upon Conversion (Including Partial Cash
Settlement)
(FSP No. APB
14-1).
FSP No. APB
14-1
specifies that issuers of convertible debt instruments that may
be settled in cash should separately account for the liability
and equity components in a manner that will reflect the
entitys nonconvertible debt borrowing rate when interest
cost is recognized in subsequent periods. FSP No. APB
14-1
is
effective for the Companys fiscal year beginning
April 1, 2009, and the Company does not expect the adoption
of this standard to have a significant impact on its
consolidated financial statements.
In April 2009, the FASB issued three FSPs related to
investments: FSP
No. FAS 157-4,
Determining Fair Value When the Volume and Level of
Activity for the Asset or Liability Have Significantly Decreased
and Identifying Transactions That Are Not Orderly
(FSP
FAS 157-4);
FSP
No. FAS 115-2
and
FAS 124-2,
Recognition and Presentation of
Other-Than-Temporary
Impairments
(FSP
FAS 115-2
and FAS 124); and FSP
No. FAS 107-1
and APB
28-1,
Interim Disclosures about Fair Value of Financial
Instruments
(FSP
FAS 107-1
and APB
28-1).
FSP
FAS 157-4
provides additional guidance for estimating fair value in
accordance with SFAS No. 157 when the volume and level of
activity for the asset or liability have significantly decreased
and includes guidance on identifying circumstances that indicate
a transaction is not orderly. FSP
FAS 115-2
and FAS 124 amends the
other-than-temporary
impairment guidance in existing U.S. GAAP for debt
securities to make the guidance more operational and to improve
the presentation and disclosure of
other-than-temporary
impairments on debt and equity securities in the financial
statements. FSP
FAS 107-1
and APB
28-1
requires disclosures about the fair value of financial
instruments be made in interim reporting periods as well as in
annual financial statements for publicly traded companies. The
three FSPs are effective for the Companys fiscal
year beginning April 1, 2009 and the Company is currently
evaluating the impact the adoption of these standards will have
on its consolidated financial statements.
F-16
ALKERMES,
INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Basic and diluted earnings per share is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended March 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
(In thousands)
|
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
130,505
|
|
|
$
|
166,979
|
|
|
$
|
9,445
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares outstanding
|
|
|
95,161
|
|
|
|
100,742
|
|
|
|
99,242
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options
|
|
|
884
|
|
|
|
2,101
|
|
|
|
3,411
|
|
Restricted stock units
|
|
|
207
|
|
|
|
80
|
|
|
|
254
|
|
Redeemable convertible preferred stock
|
|
|
|
|
|
|
|
|
|
|
444
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dilutive common share equivalents
|
|
|
1,091
|
|
|
|
2,181
|
|
|
|
4,109
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used in calculating diluted earnings per share
|
|
|
96,252
|
|
|
|
102,923
|
|
|
|
103,351
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following amounts were not included in the calculation of
earnings per share because their effects were anti-dilutive:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended March 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
(In thousands)
|
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustment for interest, net of tax
|
|
$
|
|
|
|
$
|
|
|
|
$
|
1,246
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options
|
|
|
15,647
|
|
|
|
12,300
|
|
|
|
6,985
|
|
2.5% convertible subordinated notes
|
|
|
|
|
|
|
|
|
|
|
1,879
|
|
3.75% convertible subordinated notes
|
|
|
|
|
|
|
|
|
|
|
9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
15,647
|
|
|
|
12,300
|
|
|
|
8,873
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-17
ALKERMES,
INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Investments consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortized
|
|
|
Gross Unrealized
|
|
|
Estimated
|
|
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Fair Value
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
March 31, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale
securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government and agency debt securities
|
|
$
|
225,490
|
|
|
$
|
2,635
|
|
|
$
|
(6
|
)
|
|
$
|
228,119
|
|
Corporate debt securities
|
|
|
8,160
|
|
|
|
9
|
|
|
|
|
|
|
|
8,169
|
|
Other debt securities
|
|
|
500
|
|
|
|
|
|
|
|
(20
|
)
|
|
|
480
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total short-term investments
|
|
|
234,150
|
|
|
|
2,644
|
|
|
|
(26
|
)
|
|
|
236,768
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale
securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government and agency debt securities
|
|
|
10,149
|
|
|
|
|
|
|
|
(3
|
)
|
|
|
10,146
|
|
Corporate debt securities
|
|
|
57,887
|
|
|
|
|
|
|
|
(6,326
|
)
|
|
|
51,561
|
|
Other debt securities
|
|
|
16,350
|
|
|
|
|
|
|
|
(2,683
|
)
|
|
|
13,667
|
|
Strategic investments
|
|
|
738
|
|
|
|
53
|
|
|
|
|
|
|
|
791
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
85,124
|
|
|
|
53
|
|
|
|
(9,012
|
)
|
|
|
76,165
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Held-to-maturity
securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government obligations
|
|
|
416
|
|
|
|
|
|
|
|
|
|
|
|
416
|
|
Certificates of deposit
|
|
|
4,240
|
|
|
|
|
|
|
|
|
|
|
|
4,240
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,656
|
|
|
|
|
|
|
|
|
|
|
|
4,656
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total long-term investments
|
|
|
89,780
|
|
|
|
53
|
|
|
|
(9,012
|
)
|
|
|
80,821
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investments
|
|
$
|
323,930
|
|
|
$
|
2,697
|
|
|
$
|
(9,038
|
)
|
|
$
|
317,589
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale
securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government and agency debt securities
|
|
$
|
216,479
|
|
|
$
|
1,261
|
|
|
$
|
|
|
|
$
|
217,740
|
|
Corporate debt securities
|
|
|
22,327
|
|
|
|
|
|
|
|
(3
|
)
|
|
|
22,324
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total short-term investments
|
|
|
238,806
|
|
|
|
1,261
|
|
|
|
(3
|
)
|
|
|
240,064
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale
securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate debt securities
|
|
|
95,627
|
|
|
|
|
|
|
|
(1,539
|
)
|
|
|
94,088
|
|
Other debt securities
|
|
|
19,485
|
|
|
|
|
|
|
|
(1,142
|
)
|
|
|
18,343
|
|
Strategic investments
|
|
|
1,908
|
|
|
|
91
|
|
|
|
(27
|
)
|
|
|
1,972
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
117,020
|
|
|
|
91
|
|
|
|
(2,708
|
)
|
|
|
114,403
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Held-to-maturity
securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government obligations
|
|
|
413
|
|
|
|
|
|
|
|
|
|
|
|
413
|
|
Certificates of deposit
|
|
|
4,240
|
|
|
|
|
|
|
|
|
|
|
|
4,240
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,653
|
|
|
|
|
|
|
|
|
|
|
|
4,653
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total long-term investments
|
|
|
121,673
|
|
|
|
91
|
|
|
|
(2,708
|
)
|
|
|
119,056
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investments
|
|
$
|
360,479
|
|
|
$
|
1,352
|
|
|
$
|
(2,711
|
)
|
|
$
|
359,120
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-18
ALKERMES,
INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The proceeds from the sales and maturities of marketable
securities, excluding strategic investments, which were
primarily reinvested and resulting realized gains and losses
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended March 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
(In thousands)
|
|
|
Proceeds from the sales and maturities of marketable securities
|
|
$
|
645,122
|
|
|
$
|
556,572
|
|
|
$
|
322,989
|
|
Realized gains
|
|
$
|
621
|
|
|
$
|
172
|
|
|
$
|
220
|
|
Realized losses
|
|
$
|
131
|
|
|
$
|
48
|
|
|
$
|
144
|
|
The Companys
available-for-sale
and
held-to-maturity
securities at March 31, 2009 have contractual maturities in
the following periods:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-Sale
|
|
|
Held-to-Maturity
|
|
|
|
Amortized
|
|
|
Estimated
|
|
|
Amortized
|
|
|
Estimated
|
|
|
|
Cost
|
|
|
Fair Value
|
|
|
Cost
|
|
|
Fair Value
|
|
|
|
(In thousands)
|
|
|
Within 1 year
|
|
$
|
154,886
|
|
|
$
|
155,869
|
|
|
$
|
4,656
|
|
|
$
|
4,656
|
|
After 1 year through 5 years(1)
|
|
|
126,569
|
|
|
|
125,410
|
|
|
|
|
|
|
|
|
|
After 5 years through 10 years(2)
|
|
|
27,081
|
|
|
|
22,787
|
|
|
|
|
|
|
|
|
|
After 10 years
|
|
|
10,000
|
|
|
|
8,076
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
318,536
|
|
|
$
|
312,142
|
|
|
$
|
4,656
|
|
|
$
|
4,656
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Includes investments with an amortized cost of
$72.6 million and an estimated fair value of
$70.8 million that have issuer call dates prior to
July 2010.
|
|
(2)
|
|
All of the investments within this category have issuer call
dates prior to May 2011.
|
As of March 31, 2009, the Company believes that the
unrealized losses on its
available-for-sale
investments are temporary and it has the intent and ability to
hold these securities to recovery, which may be at maturity. The
investments generally consist of corporate debt securities and
other debt securities including auction rate debt securities and
asset backed debt securities.
During the three months ended March 31, 2009, the
Companys investments in corporate debt securities with an
original cost of $66.0 million had minimal to no trades.
These securities consist primarily of investment grade
subordinated, medium term, callable
step-up
floating rate notes (FRN) issued by several large
European and U.S. banks. At March 31, 2009, the
FRNs had composite ratings by Moodys,
Standard & Poors (S&P) and
Fitch of between AA and A-. These FRNs did not trade
either because they were nearing their scheduled call dates or
due to increasing credit spreads on the debt of the issuers. The
Company estimates the fair value of the FRNs to be
$59.7 million at March 31, 2009. Similar securities
the Company has held have been called at par by issuers prior to
maturity.
Since the FRNs were not trading and fair value could not
be derived from quoted prices, the Company used a discounted
cash flow model to determine the estimated fair value of the
securities at March 31, 2009. The assumptions used in the
discounted cash flow model included estimates for interest
rates, expected holding periods and risk adjusted discount
rates, which the Company believes to be the most critical
assumptions utilized within the analysis. The valuation analysis
considered, among other items, assumptions that market
participants would use in their estimates of fair value, such as
the creditworthiness and credit spreads of the issuer and when
callability features may be exercised by the issuer. These
securities were also compared, where possible, to securities
with observable market data with similar characteristics to the
securities held by the Company.
In making the determination that the decline in fair value of
the FRNs was temporary, the Company considered various
factors, including but not limited to: the length of time each
security was in an unrealized
F-19
ALKERMES,
INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
loss position, the extent to which fair value was less than
cost, financial condition and near term prospects of the issuers
and the Companys intent and ability to hold each security
for a period of time sufficient to allow for any anticipated
recovery in fair value. The estimated fair value of the
FRNs could change significantly based on future financial
market conditions. The Company will continue to monitor the
securities and the financial markets, and if there is continued
deterioration, the fair value of these securities could decline
further resulting in an
other-than-temporary
impairment charge.
The Companys two investments in auction rate securities
each had an original cost of $5.0 million and invest in
taxable student loan revenue bonds issued by the Colorado
Student Obligation Bond Authority (Colorado) and
Brazos Higher Education Service Corporation (Brazos)
which service student loans under the Federal Family Education
Loan Program. The bonds are collateralized by student loans
purchased by the authorities which are guaranteed by state
sponsored agencies and reinsured by the U.S. Department of
Education. Liquidity for these securities is typically provided
by an auction process that resets the applicable interest rate
at pre-determined intervals. The Colorado securities are Aaa
rated by Moodys and the Brazos securities were downgraded
during the three months ended March 31, 2009 to Baa3 by
Moodys due to the increase in funding costs as a result of
the continuing and prolonged dislocation of the auction rate
securities market. Due to repeated failed auctions since January
2008, the Company no longer considers these securities to be
liquid and classified them as long-term investments in the
consolidated balance sheets. The securities continue to pay
interest during the periods in which the auctions have failed.
The Company estimated the fair value of the auction rate
securities to be $8.1 million. Since the security auctions
have failed and fair value cannot be derived from quoted prices,
the Company used a discounted cash flow model to determine the
estimated fair value of the securities at March 31, 2009.
The assumptions used in the discounted cash flow model includes
estimates for interest rates, timing of cash flows, expected
holding periods and risk adjusted discount rates, which include
a provision for default and liquidity risk, which the Company
believes to be the most critical assumptions utilized within the
analysis. The valuation analysis considers, among other items,
assumptions that market participants would use in their
estimates of fair value, such as the collateral underlying the
security, the creditworthiness of the issuer and any associated
guarantees, the timing of expected future cash flows, and the
expectation of the next time the security will have a successful
auction or when callability features may be exercised by the
issuer. These securities were also compared, where possible, to
other observable market data with similar characteristics to the
securities held by us.
In making the determination that the decline in fair value of
the auction rate securities was temporary, the Company
considered various factors, including, but not limited to: the
length of time each security was in an unrealized loss position;
the extent to which fair value was less than cost; financial
condition and near term prospects of the issuers and the
Companys intent and ability to hold each security for a
period of time sufficient to allow for any anticipated recovery
in fair value. The estimated fair value of the auction rate
securities could change significantly based on future financial
market conditions. The Company will continue to monitor the
securities and the financial markets, and if there is continued
deterioration, the fair value of these securities could decline
further resulting in an
other-than-temporary
impairment charge.
At March 31, 2009, the Company had investments in asset
backed debt securities with a cost of $6.9 million and
represent the Companys investment in medium term floating
rate notes (MTN) of Aleutian Investments, LLC
(Aleutian) and Meridian Funding Company, LLC
(Meridian), which are qualified special purpose
entities (QSPEs) of Ambac Financial Group,
Inc. (Ambac) and MBIA, Inc. (MBIA),
respectively. Ambac and MBIA are guarantors of financial
obligations and are referred to as monoline financial guarantee
insurance companies. The QSPEs, which purchase pools of
assets or securities and fund the purchase through the issuance
of MTNs, have been established to provide a vehicle to
access the capital markets for asset backed debt securities and
corporate borrowers. The MTNs include sinking fund
redemption features which match-fund the terms of redemptions to
the maturity dates of the underlying pools of assets or
securities in order to mitigate potential liquidity risk to the
QSPEs. At March 31, 2009, $5.5 million of the
Companys initial investment in
F-20
ALKERMES,
INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
the Meridian MTNs had been redeemed by MBIA through
scheduled sinking fund redemptions at par value and the first
sinking fund redemption on the Aleutian MTN is scheduled for
June 2009.
The liquidity and fair value of these securities has been
negatively impacted by the uncertainty in the credit markets and
the exposure of these securities to the financial condition of
monoline financial guarantee insurance companies, including
Ambac and MBIA. In April 2009, Moodys downgraded Ambac to
Ba3 from Baa1 and in November 2008, S&P downgraded Ambac to
A from AA. In February 2009, Moodys downgraded MBIA to B3
from Baa1 and S&P downgraded MBIA to BBB+ from AA. The
downgrades were all attributed to Ambacs and MBIAs
inability to maintain adequate capital levels.
The Company estimated the fair value of the asset backed
securities to be $6.1 million. Because the MTNs are
not actively trading in the credit markets and fair value cannot
be derived from quoted prices, the Company used a discounted
cash flow model to determine the estimated fair value of the
securities at March 31, 2009. The Companys valuation
analyses consider, among other items, assumptions that market
participants would use in their estimates of fair value such as
the collateral underlying the security, the creditworthiness of
the issuer and the associated guarantees by Ambac and MBIA, the
timing of expected future cash flows, including whether the
callability features of these investments may be exercised by
the issuer. The Company believes there are several significant
assumptions that are utilized in its valuation analysis, the
most critical of which is the discount rate, which includes a
provision for default and liquidity risk.
The Company may not be able to liquidate its investment in these
securities before the scheduled redemptions or until trading in
the securities resumes in the credit markets, which may not
occur. At March 31, 2009, the Company determined that the
securities had been temporarily impaired due to the length of
time each security was in an unrealized loss position, the
extent to which fair value was less than cost, the financial
condition and near term prospects of the issuers, current
redemptions made by one of the issuers and the Companys
intent and ability to hold each security for a period of time
sufficient to allow for any anticipated recovery in fair value
or until scheduled redemption.
The Companys strategic investments include common stock
and warrants in companies which it has or did have a
collaborative agreement with. For the years ended March 31,
2009, 2008 and 2007, the Company recognized $1.2 million,
$1.6 million and none, respectively, in charges for
other-than-temporary
losses on its strategic investments due to declines in the fair
value of the common stock of certain companies which the Company
did not believe would recover in the near term.
The Company also holds warrants to purchase the common stock of
a former collaborator that is considered to be a derivative
instrument. As of March 31, 2009 and 2008, the
warrants carrying value was immaterial. Warrants are
valued using an established option pricing model and changes in
value are recorded in the consolidated statement of income and
comprehensive income as Other (expense) income, net.
During the year ended March 31, 2009, 2008 and 2007, the
Company recorded income of none, $1.4 million and a charge
of $0.7 million, respectively, related to changes in the
value of warrants. The recorded value of the warrants can
fluctuate significantly based on fluctuations in the market
value of the underlying securities of the issuer of the
warrants. In the year ended March 31, 2008, the Company
exercised certain of its warrants to purchase the common stock
of a collaborator.
In November 2007, Reliant Pharmaceuticals, Inc.
(Reliant) was acquired by GlaxoSmithKline
(GSK). Under the terms of the acquisition, the
Company received $166.9 million upon the closing of the
transaction in December 2007 in exchange for the Companys
investment in Series C convertible, redeemable preferred
stock of Reliant. The Company purchased the Series C
convertible, redeemable preferred stock of Reliant for
$100.0 million in December 2001. The Companys
investment in Reliant had been written down to zero prior to the
time of the sale. This transaction was recorded as a
non-operating gain on sale of investment in Reliant of
$174.6 million in the three months ended December 31,
2007. In March 2009, the Company received the final
$7.7 million of funds, which were released from escrow
subject to the terms of an escrow agreement between GSK and
Reliant.
F-21
ALKERMES,
INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
5.
|
FAIR
VALUE MEASUREMENTS
|
The following table presents information about the
Companys assets that are measured at fair value on a
recurring basis and indicates the fair value hierarchy of the
valuation techniques the Company utilized to determine such fair
value:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
|
(In thousands)
|
|
|
Cash equivalents
|
|
$
|
822
|
|
|
$
|
822
|
|
|
$
|
|
|
|
$
|
|
|
U.S. government and agency debt securities
|
|
|
238,265
|
|
|
|
238,265
|
|
|
|
|
|
|
|
|
|
Corporate debt securities
|
|
|
59,730
|
|
|
|
|
|
|
|
|
|
|
|
59,730
|
|
Other debt securities
|
|
|
14,147
|
|
|
|
|
|
|
|
|
|
|
|
14,147
|
|
Strategic equity investments
|
|
|
791
|
|
|
|
791
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
313,755
|
|
|
$
|
239,878
|
|
|
$
|
|
|
|
$
|
73,877
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table is a rollforward of the fair value of the
Companys investments whose fair value is determined using
Level 3 inputs:
|
|
|
|
|
|
|
Fair Value
|
|
|
|
(In thousands)
|
|
|
Balance, April 1, 2008
|
|
$
|
18,612
|
|
Investments transferred to Level 3
|
|
|
59,730
|
|
Total unrealized losses included in comprehensive income
|
|
|
(1,561
|
)
|
Redemptions, at par value
|
|
|
(2,904
|
)
|
|
|
|
|
|
Balance, March 31, 2009
|
|
$
|
73,877
|
|
|
|
|
|
|
The fair values of the Companys investments in its
corporate debt securities and other debt securities including
auction rate securities and asset backed debt securities are
determined using certain inputs that are unobservable and
considered significant to the overall fair value measurement.
Through the nine months ended December 31, 2008, the
Company used quoted market prices for identical or similar
investments to determine the fair value of its corporate debt
securities. During the three months ended March 31, 2009,
the corporate debt securities held by the Company had minimal or
no trades and as a result were transferred to a Level 3
classification. During the year ended March 31, 2009, the
security auctions for the Companys auction rate securities
have failed and the Companys investments in asset backed
debt securities have not actively traded. The Company is unable
to derive a fair value for these investments using quoted market
prices.
The Company used a discounted cash flow model to determine the
estimated fair value of its Level 3 investments. The
assumptions used in the discounted cash flow models used to
determine the estimated fair value of these securities include
estimates for interest rates, timing of cash flows, expected
holding periods and risk adjusted discount rates, which include
a provision for default risk and in the case of asset backed
securities, liquidity risk. The Companys valuation
analyses consider, among other items, assumptions that market
participants would use in their estimates of fair value, such as
the collateral underlying the security, the inability to sell
the investment in an active market, the creditworthiness of the
issuer and any associated guarantees, the credit rating of the
underlying security, the timing of expected future cash flows
and the expectation of the next time the security will have a
successful auction or when callability features may be exercised
by the issuer. These securities were also compared, where
possible, to other observable market data with similar
characteristics.
In February 2007, the FASB issued SFAS No. 159,
The Fair Value Option for Financial Assets and
Financial Liabilities Including an Amendment of FASB Statement
No. 115
(SFAS No. 159).
SFAS No. 159 permits, but does not require, entities
to elect to measure selected financial instruments and certain
other items
F-22
ALKERMES,
INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
at fair value. Unrealized gains and losses on items for which
the fair value option has been elected are recognized in
earnings at each reporting period. The Company adopted the
provisions of SFAS No. 159 on April 1, 2008 and
did not elect to measure any new assets or liabilities at their
respective fair values and, therefore, the adoption of
SFAS No. 159 did not have an impact on its results of
operations and financial position.
Inventory consists of the following:
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(In thousands)
|
|
|
Raw materials
|
|
$
|
5,916
|
|
|
$
|
8,373
|
|
Work in process
|
|
|
5,397
|
|
|
|
3,060
|
|
Finished goods
|
|
|
7,015
|
|
|
|
7,451
|
|
Consigned-out inventory
|
|
|
1,969
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Inventory
|
|
$
|
20,297
|
|
|
$
|
18,884
|
|
|
|
|
|
|
|
|
|
|
|
|
7.
|
PROPERTY,
PLANT AND EQUIPMENT
|
Property, plant and equipment consists of the following:
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(In thousands)
|
|
|
Land
|
|
$
|
301
|
|
|
$
|
301
|
|
Building and improvements
|
|
|
36,325
|
|
|
|
35,003
|
|
Furniture, fixture and equipment
|
|
|
67,165
|
|
|
|
63,828
|
|
Leasehold improvements
|
|
|
33,996
|
|
|
|
33,387
|
|
Construction in progress
|
|
|
41,908
|
|
|
|
42,859
|
|
|
|
|
|
|
|
|
|
|
Subtotal
|
|
|
179,695
|
|
|
|
175,378
|
|
Less: accumulated depreciation
|
|
|
(73,234
|
)
|
|
|
(62,839
|
)
|
|
|
|
|
|
|
|
|
|
Total property, plant and equipment, net
|
|
$
|
106,461
|
|
|
$
|
112,539
|
|
|
|
|
|
|
|
|
|
|
Depreciation expense was $10.3 million, $12.1 million,
and $12.0 million for the years ended March 31, 2009,
2008 and 2007, respectively. The Company has $0.5 million
of equipment acquired under a capital lease and accumulated
depreciation of this equipment totaled $0.5 million and
$0.4 million at March 31, 2009 and 2008, respectively.
During the years ended March 31, 2009 and 2008, the Company
wrote off none and $1.6 million, respectively, of fully
depreciated furniture, fixtures and equipment in accordance with
its capital assets accounting policy. Also, during the year
ended March 31, 2009 and 2008, the Company wrote off
furniture, fixtures and equipment that had a carrying value of
less than $0.1 million and $0.8 million, respectively,
at the time of disposition.
Amounts recorded as construction in progress in the consolidated
balance sheets consist primarily of costs incurred for the
expansion of the Companys manufacturing facility in Ohio.
F-23
ALKERMES,
INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
8.
|
ACCOUNTS
PAYABLE AND ACCRUED EXPENSES
|
Accounts payable and accrued expenses consists of the following:
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(In thousands)
|
|
|
Accounts payable
|
|
$
|
8,046
|
|
|
$
|
7,042
|
|
Accrued compensation
|
|
|
13,817
|
|
|
|
11,245
|
|
Accrued interest
|
|
|
1,549
|
|
|
|
2,975
|
|
Accured restructuring current
|
|
|
743
|
|
|
|
4,037
|
|
Amounts due to Cephalon
|
|
|
1,169
|
|
|
|
|
|
Accrued other
|
|
|
11,159
|
|
|
|
10,747
|
|
|
|
|
|
|
|
|
|
|
Total accounts payable and accrued expenses
|
|
$
|
36,483
|
|
|
$
|
36,046
|
|
|
|
|
|
|
|
|
|
|
Long-term debt consists of the following:
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(In thousands)
|
|
|
Non-recourse RISPERDAL CONSTA secured 7% Notes
|
|
$
|
75,888
|
|
|
$
|
160,324
|
|
Obligation under capital lease
|
|
|
|
|
|
|
47
|
|
|
|
|
|
|
|
|
|
|
Total long-term debt
|
|
|
75,888
|
|
|
|
160,371
|
|
Less: current portion
|
|
|
(25,667
|
)
|
|
|
(47
|
)
|
|
|
|
|
|
|
|
|
|
Long-term debt
|
|
$
|
50,221
|
|
|
$
|
160,324
|
|
|
|
|
|
|
|
|
|
|
Non-Recourse
RISPERDAL CONSTA Secured 7% Notes
On February 1, 2005, the Company, pursuant to the terms of
a purchase and sale agreement, sold, assigned and contributed to
Royalty Sub the rights of the Company to collect certain royalty
payments and manufacturing fees (the Royalty
Payments) earned under the Janssen Agreements (defined
below) and certain agreements that may arise in the future, in
exchange for approximately $144.2 million in cash. The
Royalty Payments arise under: (i) the license agreements
dated February 13, 1996 for the U.S. and its
territories and February 21, 1996 for all countries other
than the U.S. and its territories, by and between the
Company, and its successors, and Janssen Pharmaceutical, Inc.
and certain of its affiliated entities (JP); and
(ii) the manufacturing and supply agreement dated
August 6, 1997 by and between JPI Pharmaceutica
International (JPI and together with JP,
Janssen), JP and the Company (collectively, the
Janssen Agreements). The assets of Royalty Sub
consist principally of the rights to the Royalty Payments
described above.
Concurrently with the purchase and sale agreement, on
February 1, 2005, Royalty Sub issued an aggregate principal
amount of $170.0 million of its 7% Notes to certain
institutional investors in a private placement, for net proceeds
of approximately $144.2 million, after the original issue
discount and offering costs of approximately $19.7 million
and $6.1 million, respectively. The yield to maturity at
the time of the offer was 9.75%. The annual cash coupon rate is
7% and is payable quarterly, beginning on April 1, 2005,
however, portions of the principal amount that are not paid off
in accordance with the expected principal repayment profile will
accrue interest at 9.75%. Through January 1, 2009, the
holders received only quarterly
F-24
ALKERMES,
INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
cash interest payments. Beginning on April 1, 2009,
principal payments will be made to the holders, subject to
certain conditions. Timing of the principal repayment will be
based on the revenues received by Royalty Sub but will occur no
earlier than equally over the twelve quarters between
April 1, 2009 and January 1, 2012, subject to certain
conditions. Non-payment of principal will not be an event of
default prior to the legal maturity date of January 1,
2018. The 7% Notes, however, may be redeemed at Royalty
Subs option, subject, in certain circumstances, to the
payment of a redemption premium. The 7% Notes are secured
by: (i) all of Royalty Subs property and rights,
including the royalty rights; and (ii) the Companys
ownership interests in Royalty Sub. Accordingly, the assets of
Royalty Sub will not be available to satisfy other obligations
of Alkermes and the assets of Alkermes are not available to
satisfy obligations of Royalty Sub. During the years ended
March 31, 2009, 2008 and 2007, amortization of the original
issue discount and offering costs, which are being amortized
over the expected principal repayment period ending
January 1, 2012 totaled $3.7 million,
$4.4 million and $4.1 million, respectively.
During the year ended March 31, 2009, the Company
purchased, in five separate, privately negotiated transactions,
an aggregate of $93.0 million in principal amount of its
outstanding 7% Notes for $89.4 million. As a result of
the purchases, $77.0 million principal amount of the
7% Notes remains outstanding at March 31, 2009. The
Company recorded a loss on the extinguishment of the purchased
7% Notes of $2.5 million, consisting of
$0.9 million of transaction fees and a $1.6 million
difference between the carrying value and the purchase price of
the 7% Notes, which was recorded as interest expense.
The Royalty Payments received by Royalty Sub under the Janssen
Agreements are the sole source of payment of the interest,
principal and redemption premium, if any, for the 7% Notes.
The Company will receive all of the RISPERDAL CONSTA revenues in
excess of amounts required to pay interest, principal and
redemption premium, if any. The Companys rights to receive
such excess revenues will be subject to certain restrictions
while the 7% Notes remain outstanding. The Company is also
subject to comply with certain other customary affirmative
covenants and event of default provisions. At March 31,
2009, the Company was in compliance with all such covenants.
Scheduled maturities with respect to the 7% notes are as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2011
|
|
|
2012
|
|
|
|
(In thousands)
|
|
|
7% Notes(1)
|
|
$
|
25,667
|
|
|
$
|
25,667
|
|
|
$
|
25,666
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
The 7% Notes were issued by Royalty Sub. The 7% Notes
are non-recourse to Alkermes.
|
2.5% Subordinated
Notes
In August and September 2003, the Company issued an aggregate of
$100.0 million and $25.0 million, respectively,
principal amount of the 2.5% convertible subordinated notes due
2023 (the 2.5% Subordinated Notes). The
2.5% Subordinated Notes were convertible into shares of the
Companys common stock at a conversion price of $13.85 per
share, subject to adjustment in certain events. Prior to the
conversion, the 2.5% Subordinated Notes bore interest at
2.5% per year, payable semiannually on March 1 and
September 1, commencing on March 1, 2004 and were
subordinated to existing and future senior indebtedness of the
Company.
On June 15, 2006, the Company converted all of the
outstanding $125.0 million principal amount of the
2.5% Subordinated Notes into 9,025,271 shares of the
Companys common stock. The book value of the
2.5% Subordinated Notes at the time of the conversion was
$124.4 million. In connection with the conversion, the
Company paid approximately $0.6 million in cash to satisfy
the Three-Year Interest Make-Whole provision in the note
indenture, which was recorded as additional interest expense on
the date of the conversion. None of the 2.5% Subordinated
Notes were outstanding as of March 31, 2009 or 2008, and no
gain or loss was
F-25
ALKERMES,
INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
recorded on the conversion of the 2.5% Subordinated Notes
in the year ended March 31, 2007, which was executed in
accordance with the underlying indenture.
Term
Loan and Equipment Financing Arrangement
In December 2004, the Company entered into a term loan in the
principal amount of $3.7 million with General Electric
Capital Corporation (GE). The term loan was secured
by certain of the Companys equipment pursuant to a
security agreement and was subject to an ongoing financial
covenant related to the Companys available cash position.
The loan was payable in 36 monthly installments and matured
in December 2007 and bore a floating interest rate equal to the
one-month London Interbank Offered Rate (LIBOR) plus
5.45%.
In addition, in December 2004, the Company entered into a
commitment for equipment financing with GE. The equipment
financing, in the form of an equipment lease line, provided the
Company with the ability to finance up to $18.3 million in
new equipment purchases. The lease line expired unused in
December 2008 and was not renewed.
Obligation
Under Capital Lease
In September 2003, the Company and Johnson & Johnson
Finance Corporation (J&J Finance) entered into
a
60-month
sale-leaseback agreement to provide the Company with equipment
financing under which the Company received approximately
$0.5 million in proceeds from J&J Finance. The lease
matured in September 2008 and no amounts remain outstanding
under this lease at March 31, 2009.
In March 2008, the Companys collaborative partner Lilly
announced the decision to discontinue the AIR Insulin
development program and gave notice of termination under the
collaborative development and license agreement. In March 2008,
in connection with the program termination, the Companys
board of directors approved a plan (the 2008
Restructuring) to reduce the Companys workforce by
approximately 150 employees and to cease operations at the
Companys AIR commercial manufacturing facility located in
Chelsea, Massachusetts. In connection with the 2008
Restructuring, the Company recorded charges of $6.9 million
during the year ended March 31, 2008. Activity related to
the 2008 Restructuring was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Facility
|
|
|
|
|
|
Other Contract
|
|
|
|
|
|
|
Closure
|
|
|
Severance
|
|
|
Losses
|
|
|
Total
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
Initial restructuring charge in March 2008
|
|
$
|
3,886
|
|
|
$
|
2,881
|
|
|
$
|
146
|
|
|
$
|
6,913
|
|
Payments
|
|
|
|
|
|
|
|
|
|
|
(109
|
)
|
|
|
(109
|
)
|
Other adjustments(1)
|
|
|
1,044
|
|
|
|
|
|
|
|
|
|
|
|
1,044
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, March 31, 2008(2)
|
|
$
|
4,930
|
|
|
$
|
2,881
|
|
|
$
|
37
|
|
|
$
|
7,848
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additions
|
|
|
43
|
|
|
|
78
|
|
|
|
|
|
|
|
121
|
|
Payments
|
|
|
(802
|
)
|
|
|
(2,959
|
)
|
|
|
(13
|
)
|
|
|
(3,774
|
)
|
Other adjustments
|
|
|
22
|
|
|
|
|
|
|
|
(24
|
)
|
|
|
(2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, March 31, 2009(2)
|
|
$
|
4,193
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
4,193
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Relates to a reclassification of amounts previously accrued by
the Company related to escalating lease payments under the
Companys AIR commercial manufacturing facility lease.
|
F-26
ALKERMES,
INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
(2)
|
|
At March 31, 2009 and 2008, the restructuring liability
related to the 2008 Restructuring consists of $0.7 million
and $3.8 million classified as current, respectively, and
$3.5 million and $4.0 million classified as long-term,
respectively, in the accompanying consolidated balance sheets.
|
As of March 31, 2009, the Company had paid
$3.9 million in connection with the 2008 Restructuring. The
amounts remaining in the restructuring accrual as of
March 31, 2009 are expected to be paid out through fiscal
2016 and relate primarily to estimates of lease costs associated
with the exited facility and may require adjustment in the
future.
In connection with the termination of the AIR Insulin
development program, the Company performed an impairment
analysis on the assets that supported the production of AIR
Insulin, which consisted of equipment and leasehold improvements
at the AIR commercial manufacturing facility. The Company
determined that the carrying value of these assets exceeded
their fair value and recorded an impairment charge of
$11.6 million in March 2008. Fair value of the impaired
assets was based on internally and externally established
estimates and selling prices of similar assets.
In June 2004, the Company and its former collaborative partner
Genentech, Inc. (Genentech) announced the decision
to discontinue commercialization of NUTROPIN
DEPOT
®
(the 2004 Restructuring). In connection with the
2004 Restructuring, the Company recorded charges of
$11.5 million in the year ended March 31, 2005. In
addition to the restructuring, the Company also recorded a
one-time write-off of NUTROPIN DEPOT inventory of approximately
$1.3 million, which was recorded as Cost of goods
manufactured in the consolidated statement of income and
comprehensive income in the year ended March 31, 2005. For
the years ended March 31, 2009, 2008 and 2007, the company
made facility related payments of $0.1 million,
$0.4 million and $0.8 million, respectively, and had
made non-cash adjustments of $0.1 million,
$0.5 million and $0.5 million, respectively, to the
2004 Restructuring accrual. The 2004 Restructuring was completed
as of September 30, 2008.
Share
Repurchase Programs
In November 2007, the board of directors authorized a share
repurchase program to repurchase up to $175.0 million of
the Companys common stock at the discretion of management
from time to time in the open market or through privately
negotiated transactions (the 2007 repurchase
program). In June 2008, the board of directors authorized
the expansion of this repurchase program by an additional
$40.0 million, bringing the total authorization under this
program to $215.0 million. The objective of the 2007
repurchase program is to improve shareholders returns. At
March 31, 2009, approximately $103.7 million was
available to repurchase common stock pursuant to the 2007
repurchase program. All shares repurchased are recorded as
treasury stock. The repurchase program has no set expiration
date and may be suspended or discontinued at any time.
During the years ended March 31, 2009 and 2008, the Company
expended approximately $18.0 million and
$33.4 million, respectively, on open market purchases and
repurchased 1,569,202 and 2,278,194 shares, respectively,
of outstanding common stock at an average price of $11.47 and
$14.64 per share, respectively, under the 2007 repurchase
program. During the year ended March 31, 2008, the Company
entered into and completed a structured stock repurchase
arrangement with a large financial institution in order to lower
the average cost to acquire shares. The Company made an up-front
payment of $60.0 million to the counterparty financial
institution and took delivery of 4,690,542 shares at an
average price of $12.79.
In September 2005, the Companys board of directors
authorized a share repurchase program up to $15.0 million
of common stock to be repurchased in the open market or through
privately negotiated transactions. During the year ended
March 31, 2007, the Company expended approximately
$12.5 million and repurchased 823,677 shares at an
average price of $15.20, respectively, under this program. Upon
the adoption
F-27
ALKERMES,
INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
of the $175.0 million share repurchase program in November
2007, the repurchase authorization of $2.5 million
remaining under this program was superseded, and no repurchase
authorization remains outstanding under this program.
Shareholder
Rights Plan
In February 2003, the board of directors of the Company adopted
a shareholder rights plan (the Rights Plan) under
which all common shareholders of record as of February 20,
2003 received rights to purchase shares of a new series of
preferred stock. The Rights Plan is designed to enable all
Alkermes shareholders to realize the full value of their
investment and to provide for fair and equal treatment for all
shareholders in the event that an unsolicited attempt is made to
acquire the Company. The adoption of the Rights Plan is intended
as a means to guard against coercive takeover tactics and is not
in response to any particular proposal. The rights will be
distributed as a nontaxable dividend and will expire ten years
from the record date. Each right will initially entitle common
shareholders to purchase a fractional share of the preferred
stock for $80. Subject to certain exceptions, the rights will be
exercisable only if a person or group acquires 15% or more of
the Companys common stock or announces a tender or
exchange offer upon the consummation of which such person or
group would own 15% or more of the Companys common stock.
Subject to certain exceptions, if any person or group acquires
15% or more of the Companys common stock, all rights
holders, except the acquiring person or group, will be entitled
to acquire the Companys common stock (and in certain
instances, the stock of the acquirer) at a discount. The rights
will trade with the Companys common stock, unless and
until they are separated upon the occurrence of certain future
events. Generally, the Companys board of directors may
amend the Rights Plan or redeem the rights prior to ten days
(subject to extension) following a public announcement that a
person or group has acquired 15% or more of the Companys
common stock.
|
|
12.
|
SHARE-BASED
COMPENSATION
|
Share-based
Compensation Expense
The following table presents share-based compensation expense
included in the Companys consolidated statements of income
and comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended March 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
Cost of goods manufactured and sold
|
|
$
|
1,348
|
|
|
$
|
1,812
|
|
|
$
|
2,713
|
|
Research and development
|
|
|
4,438
|
|
|
|
7,010
|
|
|
|
8,604
|
|
Selling, general and administrative
|
|
|
9,024
|
|
|
|
10,623
|
|
|
|
16,370
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total share-based compensation expense
|
|
$
|
14,810
|
|
|
$
|
19,445
|
|
|
$
|
27,687
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of March 31, 2009, 2008 and 2007, $0.4 million,
$0.3 million and $0.6 million, respectively, of
share-based compensation cost was capitalized and recorded as
Inventory in the consolidated balance sheets.
Share-based
Compensation Plans
The Company has one compensation plan pursuant to which awards
are currently being made, the Alkermes, Inc. 2008 Stock Option
and Incentive Plan (the 2008 Plan). The Company has
six share-based compensation plans pursuant to which outstanding
awards have been made, but from which no further awards can or
will be made: (i) the 1990 Omnibus Stock Option Plan (the
1990 Plan); (ii) the 1996 Stock Option Plan for
Non-Employee Directors (the 1996 Plan);
(iii) the 1998 Equity Incentive Plan (the 1998
Plan); (iv) the 1999 Stock Option Plan (the
1999 Plan); (v) the 2002 Restricted Stock Award
Plan (the 2002 Plan); and (vi) the 2006 Stock
Option Plan for Non-Employee Directors (the 2006
Plan).
F-28
ALKERMES,
INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The 2008 Plan provides for issuance of non-qualified and
incentive stock options, restricted stock, restricted stock
units, cash-based awards and performance shares to employees,
officers and directors of, and consultants to, the Company in
such amounts and with such terms and conditions as may be
determined by the compensation committee of our board of
directors, subject to provisions of the 2008 Plan. Shares of
common stock available for issuance under the 2008 Plan consist
of 6.4 million shares reserved for this purpose, plus
shares of common stock that remained available for issuance
under the 1999 Plan, the 2002 Plan and 2006 Plan, plus shares of
stock underlying any grants pursuant to the 1999 Plan, the 2002
Plan and 2006 Plan that are forfeited, cancelled, repurchased or
are terminated (other than by exercise) from and after the date
that the Companys stockholders approved the 2008 Plan. The
2008 Plan provides that awards other than stock options will be
counted against the total number of shares available under the
plan in a 2-to-1 ratio.
Stock
Options
Stock option grants to employees generally expire ten years from
the grant date and generally vest one-fourth per year over four
years from the anniversary of the date of grant, provided the
employee remains continuously employed with the Company, except
as otherwise provided in the plan. Stock option grants to
directors are for ten-year terms and generally vest over a
6-month
period provided the director continues to serve on the
Companys board of directors through the vesting date,
except as otherwise provided in the plan. The estimated fair
value of options is recognized over the requisite service
period, which is generally the vesting period. Share-based
compensation expense is based on awards ultimately expected to
vest. Forfeitures are estimated based on historical experience
at the time of grant and revised in subsequent periods if actual
forfeitures differ from those estimates.
The fair value of stock option grants is based on estimates as
of the date of grant using a Black-Scholes option valuation
model. The Company used historical data as the basis for
estimating option terms and forfeitures. Separate groups of
employees that have similar historical stock option exercise and
forfeiture behavior are considered separately for valuation
purposes. The ranges of expected terms disclosed below reflect
different expected behavior among certain groups of employees.
Expected stock volatility factors are based on a weighted
average of implied volatilities from traded options on the
Companys common stock and historical stock price
volatility of the Companys common stock, which is
determined based on a review of the weighted average of
historical daily price changes of the Companys common
stock. The risk-free interest rate for periods commensurate with
the expected term of the share option is based on the
U.S. treasury yield curve in effect at the time of grants.
The dividend yield on the Companys common stock is
estimated to be zero as the Company has not paid and does not
expect to pay dividends. The exercise price of options granted
prior to October 7, 2008 equals the average of the high and
low of the Companys common stock traded on the NASDAQ
Global Market on the date of grant. Beginning with the adoption
of the 2008 Plan, the exercise price of option grants made after
October 7, 2008 is equal to the closing price of the
Companys common stock traded on the NASDAQ Global Market
on the date of grant.
The fair value of each stock option grant was estimated on the
grant date with the following weighted-average assumptions:
|
|
|
|
|
|
|
|
|
Year Ended March 31,
|
|
|
2009
|
|
2008
|
|
2007
|
|
Expected option term
|
|
5 - 7 years
|
|
4 - 7 years
|
|
4 - 5 years
|
Expected stock volatility
|
|
36% - 46%
|
|
38% - 50%
|
|
50%
|
Risk-free interest rate
|
|
1.66% - 3.52%
|
|
2.78% - 5.07%
|
|
4.45% - 5.07%
|
Expected annual dividend yield
|
|
|
|
|
|
|
F-29
ALKERMES,
INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
A summary of stock option activity is presented in the following
table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Average
|
|
|
|
Number of
|
|
|
Exercise
|
|
|
|
Shares
|
|
|
Price
|
|
|
Outstanding, April 1, 2008
|
|
|
18,577,155
|
|
|
$
|
16.53
|
|
Granted(1)
|
|
|
1,940,500
|
|
|
|
12.01
|
|
Exercised
|
|
|
(919,817
|
)
|
|
|
8.32
|
|
Forfeited
|
|
|
(555,778
|
)
|
|
|
16.07
|
|
Expired(1)
|
|
|
(896,471
|
)
|
|
|
18.65
|
|
|
|
|
|
|
|
|
|
|
Outstanding, March 31, 2009
|
|
|
18,145,589
|
|
|
$
|
16.37
|
|
|
|
|
|
|
|
|
|
|
Exercisable, March 31, 2009
|
|
|
14,233,910
|
|
|
$
|
16.94
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
The Company determined that the compensation attributable to
certain grants of non-qualified stock options made to certain of
its executive officers in the past may not be deductible by the
Company as a result of the limitations imposed by
Section 162(m) of the Internal Revenue Code
(Section 162(m)) because such stock options
were granted pursuant to a stock option plan that did not
contain one of the provisions necessary in order to maintain
such deductibility under Section 162(m). As such, the
Company cancelled and reissued 365,740 and 977,780 options on
October 15, 2008 and November 19, 2008, respectively,
under the 2008 Plan for the sole purpose of preserving the
Companys tax deduction in the future with respect to such
stock options. The options that were cancelled were re-issued
with the same terms and there was no incremental compensation
cost as a result of the modifications. These amounts are not
included in the table above.
|
The weighted average grant date fair value of stock options
granted during the years ended March 31, 2009, 2008 and
2007 was $5.41, $6.93 and $8.13, respectively. The aggregate
intrinsic value of stock options exercised during the years
ended March 31, 2009, 2008 and 2007 was $4.9 million,
$7.0 million and $4.8 million, respectively.
As of March 31, 2009, there were 17,887,833 stock options
vested and expected to vest with a weighted average exercise
price of $16.40 per share, a weighted average contractual
remaining life of 5.0 years and an aggregate intrinsic
value of $10.8 million. As of March 31, 2009, the
aggregate intrinsic value of stock options exercisable was
$10.3 million with a weighted average remaining contractual
term of 4.1 years. The expected to vest options are
determined by applying the pre-vesting forfeiture rate to the
total outstanding options. The intrinsic value of a stock option
is the amount by which the market value of the underlying stock
exceeds the exercise price of the stock option.
As of March 31, 2009, there was $8.7 million of
unrecognized compensation cost related to unvested stock
options, which is expected to be recognized over a weighted
average period of approximately 1.9 years.
Cash received from option exercises under the Companys
Plans during the years ended March 31, 2009 and 2008 was
$7.1 million and $11.1 million, respectively. The
Company issued new shares upon option exercises during the years
ended March 31, 2009 and 2008.
Since its adoption of SFAS No. 123(R) on April 1,
2006, the Company has been subject to the U.S. Alternative
Minimum Tax (AMT), due to certain limitations on NOL
utilization. As a result, the Company has recorded a
$0.4 million benefit to additional paid-in capital for the
reduction to the AMT tax related to these excess tax benefits.
F-30
ALKERMES,
INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Restricted
Stock Units
Restricted stock units (RSUs) awarded to employees
generally vest one-fourth per year over four years from the
anniversary of the date of grant, provided the employee remains
continuously employed with the Company. Shares of the
Companys common stock is delivered to the employee upon
vesting, subject to payment of applicable withholding taxes. The
fair value of all RSUs is based on the market value of the
Companys stock on the date of grant. Compensation expense,
including the effect of forfeitures, is recognized over the
applicable service period.
A summary of RSU activity is presented in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Average
|
|
|
|
Number of
|
|
|
Grant Date
|
|
|
|
Shares
|
|
|
Fair Value
|
|
|
Outstanding, April 1, 2008
|
|
|
482,500
|
|
|
$
|
16.11
|
|
Granted
|
|
|
581,500
|
|
|
|
12.29
|
|
Vested
|
|
|
(147,498
|
)
|
|
|
16.86
|
|
Forfeited
|
|
|
(114,562
|
)
|
|
|
13.46
|
|
|
|
|
|
|
|
|
|
|
Outstanding, March 31, 2009
|
|
|
801,940
|
|
|
$
|
13.52
|
|
|
|
|
|
|
|
|
|
|
At March 31, 2009, there was $4.7 million of total
unrecognized compensation cost related to unvested RSUs, which
will be recognized over the a weighted average remaining
contractual term of 2.1 years.
Performance-Based
Restricted Stock Units
In May 2008, the board of directors awarded 40,000
performance-based RSUs to certain of the Companys
executive officers under the 2002 Plan. The award vests upon the
achievement of a market condition specified in the award terms.
As of March 31, 2009, the market condition had not been met
and the award had not vested. The grant date fair value of the
award was determined through the use of a Monte Carlo simulation
model, which utilizes multiple input variables that determines
the probability of satisfying the market condition stipulated in
the award and calculates the fair market value for the
performance award. The valuation model for the performance-based
RSUs used the following assumptions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-Average
|
|
Expected
|
|
Risk-Free
|
Grant Date
|
|
Expected Volatility
|
|
Dividend Yield
|
|
Interest Rate
|
|
May 27, 2008
|
|
|
42.7
|
%
|
|
|
|
|
|
|
2.5
|
%
|
The compensation cost for the awards grant date fair value
of $0.4 million is being recognized over a derived service
period of 1.4 years. At March 31, 2009, there was
$0.2 million of unrecognized compensation cost related to
unvested performance-based RSUs that will be recognized over the
following seven months.
|
|
13.
|
COLLABORATIVE
ARRANGEMENTS
|
The Companys business strategy includes forming
collaborations to develop and commercialize its products, and to
access technological, financial, marketing, manufacturing and
other resources. The Company has entered into several
collaborative arrangements, as described below:
Janssen
Under a product development agreement, the Company collaborated
with Janssen on the development of RISPERDAL CONSTA. Under the
development agreement, Janssen provided funding to the Company
for the development of RISPERDAL CONSTA, and Janssen is
responsible for securing all necessary regulatory approvals for
the product. RISPERDAL CONSTA has been approved in approximately
85 countries and has
F-31
ALKERMES,
INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
been launched in approximately 60 countries, including the
U.S. and several major international markets. The Company
exclusively manufactures RISPERDAL CONSTA for commercial sale
and records revenue when product is shipped to Janssen and
royalty revenues upon the final sale of the product. In
addition, the Company and Janssen have recently agreed to begin
work to develop a four week formulation of RISPERDAL CONSTA.
Under license agreements, the Company granted Janssen and an
affiliate of Janssen exclusive worldwide licenses to use and
sell RISPERDAL CONSTA. Under the Companys license
agreements with Janssen, the Company receives royalties equal to
2.5% of Janssens net sales of RISPERDAL CONSTA in the
quarter when the product is sold by Janssen. Janssen can
terminate the license agreements upon 30 days prior written
notice to the Company.
Under the manufacturing and supply agreement with Janssen, the
Company records manufacturing revenue when product is shipped to
Janssen, based on a percentage of Janssens net unit sales
price for RISPERDAL CONSTA for the calendar year. This
percentage is determined based on Janssens unit demand for
the calendar year and varies based on the volume of units
shipped, with a minimum manufacturing fee of 7.5%.
The manufacturing and supply agreement terminates on expiration
of the license agreements. In addition, either party may
terminate the manufacturing and supply agreement upon a material
breach by the other party which is not resolved within
60 days written notice or upon written notice in the event
of the other partys insolvency or bankruptcy. Janssen may
terminate the agreement upon six months written notice to the
Company. In the event that Janssen terminates the manufacturing
and supply agreement without terminating the license agreements,
the royalty rate payable to the Company on Janssens net
sales of RISPERDAL CONSTA would increase from 2.5% to 5.0%.
During the years ended March 31, 2009, 2008 and 2007, the
Company recognized $150.2 million, $124.7 million, and
$113.6 million, respectively, of revenue from its
arrangements with Janssen.
Cephalon
In June 2005 and October 2006, the Company entered into the
Agreements and Amendments, respectively, with Cephalon to
jointly develop, manufacture and commercialize extended-release
forms of naltrexone, including VIVITROL (the product
or products), in the U.S. Under the terms of
the Agreements, the Company provided Cephalon with a
co-exclusive license to use and sell the product in the
U.S. and a non-exclusive license to manufacture the product
under certain circumstances, with the ability to sublicense. The
Company was responsible for obtaining marketing approval for
VIVITROL in the U.S. for the treatment of alcohol
dependence, which was received from the FDA in April 2006, for
completing the first VIVITROL manufacturing line and
manufacturing the product. The companies shared responsibility
for additional development of the products, and also shared
responsibility for developing the commercial strategy for the
products. Cephalon had primary responsibility for the
commercialization, including distribution and marketing, of the
products in the U.S. and the Company supported this effort
with a team of managers of market development. Cephalon paid the
Company an aggregate of $274.6 million in nonrefundable
milestone payments related to the Agreements and Amendments and
the Company was responsible to fund the first
$124.6 million of cumulative net losses incurred on the
product.
In November 2008, the Company and Cephalon agreed to end the
collaboration for the development, supply and commercialization
of certain products, including VIVITROL in the U.S., effective
on the Termination Date, and the Company assumed the risks and
responsibilities for the marketing and sale of VIVITROL in the
U.S. The Company paid Cephalon $16.0 million for title
to two partially completed VIVITROL manufacturing lines, and the
Company received $11.0 million from Cephalon as payment to
fund their share of estimated VIVITROL product losses during the
one-year period following the Termination Date.
F-32
ALKERMES,
INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
As of the Termination Date, the Company was responsible for all
VIVITROL profits or losses, net of $11.0 million Cephalon
paid the Company to fund its share of estimated VIVITROL product
losses during the one-year period following the Termination
Date, and Cephalon has no rights to royalty payments on future
sales of VIVITROL. In order to facilitate the full transfer of
all commercialization of VIVITROL to the Company, Cephalon, at
the Companys option, and on its behalf, has agreed to
perform certain transition services until May 31, 2009 at
an FTE rate agreed to by the parties.
During the years ended March 31, 2009, 2008 and 2007, the
Company recognized $134.0 million, $27.7 million and
$58.3 million, respectively, of revenue from its
arrangements with Cephalon. During the year ended March 31,
2009, the Company recorded expense of $1.8 million related
to certain transition services performed by Cephalon on its
behalf.
Cilag
GmbH International
In December 2007, the Company entered into a license and
commercialization agreement with Cilag GmbH International
(Cilag), an affiliate of Janssen, to commercialize
VIVITROL for the treatment of alcohol dependence and opioid
dependence in Russia and other countries in the Commonwealth of
Independent States (CIS). Under the terms of the
agreement, Cilag will have primary responsibility for securing
all necessary regulatory approvals for VIVITROL and
Janssen-Cilag, an affiliate of Cilag, will commercialize the
product. The Company will be responsible for the manufacture of
VIVITROL and will receive manufacturing revenue upon shipment of
VIVITROL to Cilag and royalty revenues based upon Cilag product
sales.
In December 2007, Cilag made a nonrefundable payment of
$5.0 million to the Company upon signing the agreement and
in August 2008, paid the Company an additional $1.0 million
upon achieving regulatory approval of VIVITROL for the treatment
of alcohol dependence in Russia. Cilag could pay the Company up
to an additional $33.0 million upon the receipt of
additional regulatory approvals for the product, the occurrence
of certain
agreed-upon
events and levels of VIVITROL sales.
Commencing five years after the effective date of the agreement,
Cilag will have the right to terminate the agreement at any time
by providing 90 days prior written notice to the Company,
subject to certain continuing rights and obligations between the
parties. Cilag will also have the right to terminate the
agreement upon 90 days advance written notice to the
Company if a change in the pricing
and/or
reimbursement of VIVITROL in Russia and other countries of the
CIS has a material adverse effect on the underlying economic
value of commercializing the product such that it is no longer
reasonably profitable to Cilag. In addition, either party may
terminate the agreement upon a material breach by the other
party which is not cured within 90 days advance written
notice of material breach or, in certain circumstances, a
30 day extension of that period.
During the year ended March 31, 2009, the Company
recognized $1.4 million of revenue from its arrangement
with Cilag. There was no revenue recognized from this
arrangement in the years ended March 31, 2008 and 2007.
Amylin
In May 2000, the Company entered into a development and license
agreement with Amylin Pharmaceuticals, Inc. (Amylin)
for the development of exenatide once weekly, an injectable
formulation of Amylins
BYETTA
®
(exenatide), which is under development for the
treatment of type 2 diabetes. Pursuant to the development and
license agreement, Amylin has an exclusive, worldwide license to
the Companys
Medisorb
®
technology for the development and commercialization of
injectable extended-release formulations of exendins and other
related compounds. Amylin has entered into a collaboration
agreement with Eli Lilly and Company (Lilly) for the
development and commercialization of exenatide, including
exenatide once weekly. The Company receives funding for research
and development and milestone payments consisting of cash and
F-33
ALKERMES,
INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
warrants for Amylin common stock upon achieving certain
development and commercialization goals and will also receive
royalty payments based on future product sales, if any. The
Company is responsible for formulation and non-clinical
development of any products that may be developed pursuant to
the agreement and for manufacturing these products for use in
clinical trials and, in certain cases, for commercial sale.
Subject to its arrangement with Lilly, Amylin is responsible for
conducting clinical trials, securing regulatory approvals and
marketing any products resulting from the collaboration on a
worldwide basis.
In October 2005, the Company amended its existing development
and license agreement with Amylin, and reached agreement
regarding the construction of a manufacturing facility for
exenatide once weekly and certain technology transfer related
thereto. In December 2005, Amylin purchased a facility for the
manufacture of exenatide once weekly and began construction in
early calendar year 2006. Amylin is responsible for all costs
and expenses associated with the design, construction and
validation of the facility. The parties have agreed that the
Company will transfer its technology for the manufacture of
exenatide once weekly to Amylin. Amylin agreed to reimburse the
Company for any time, at an
agreed-upon
FTE rate, and materials the Company incurred with respect to the
transfer of technology. In January 2009, the parties agreed that
the technology transfer was complete. Amylin will be responsible
for the manufacture of exenatide once weekly and will operate
the facility. Amylin will pay the Company royalties for
commercial sales of this product, if approved, in accordance
with the development and license agreement.
Amylin may terminate the development and license agreement for
any reason upon 90 days written notice to the Company if
such termination occurs before filing a New Drug Application
(NDA) with the FDA for a product developed under the
development and license agreement or upon 180 days written
notice to the Company after such event. In addition, either
party may terminate the development and license agreement upon a
material default or breach by the other party that is not cured
within 60 days after receipt of written notice specifying
the default or breach.
During the years ended March 31, 2009, 2008 and 2007, the
Company recognized $9.5 million, $32.9 million, and
$19.3 million, respectively, of revenue from its
arrangements with Amylin.
Lilly
AIR
Insulin
On March 7, 2008, the Company received a letter from Lilly
terminating the development and license agreement between Lilly
and the Company dated April 1, 2001, as amended, relating
to the development of inhaled formulations of insulin and other
compounds potentially useful for the treatment of diabetes,
based on the Companys proprietary AIR pulmonary
technology. In June 2008, the Company entered into an agreement
(the AIR Insulin Termination Agreement) with Lilly
whereby the Company received $40.0 million in cash as
payment for all services we had performed through the date of
the AIR Insulin Termination Agreement and title to the
Lilly-owned manufacturing equipment located at the
Companys AIR manufacturing facility. Upon entering into
the AIR Insulin Termination Agreement, the license the Company
granted to Lilly under the development and license agreement
reverted to the Company.
AIR
Parathyroid Hormone
On August 31, 2007, the Company received written notice
from Lilly terminating the development and license agreement,
dated December 16, 2005, between the Company and Lilly
pursuant to which the Company and Lilly were collaborating to
develop inhaled formulations of parathyroid hormone
(PTH). This termination became effective
90 days after the receipt of the written notice. Upon the
effective date of termination of the development and license
agreement, the license the Company granted to Lilly under this
agreement reverted to the Company.
F-34
ALKERMES,
INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
During the years ended March 31, 2009, 2008 and 2007, the
Company recognized $26.8 million, $54.6 million and
$48.0 million, respectively, of revenue from its
arrangements with Lilly.
Rensselaer
Polytechnic Institute
In September 2006, the Company and Rensselaer Polytechnic
Institute (RPI) entered into a license agreement
granting the Company exclusive rights to a family of opioid
receptor compounds discovered at RPI. These compounds represent
an opportunity for the Company to develop therapeutics for a
broad range of diseases and medical conditions, including
addiction, pain and other central nervous system disorders.
Under the terms of the agreement, RPI granted the Company an
exclusive worldwide license to certain patents and patent
applications relating to its compounds designed to modulate
opioid receptors. The Company will be responsible for the
continued research and development of any resulting product
candidates. The Company paid RPI a nonrefundable upfront payment
of $0.5 million and is obligated to pay annual fees of up
to $0.2 million, and tiered royalty payments of between 1%
and 4% of annual net sales in the event any products developed
under the agreement are commercialized. In addition, the Company
is obligated to make milestone payments in the aggregate of up
to $9.1 million, upon certain
agreed-upon
development events. All amounts paid to RPI under this license
agreement have been expensed and are included in research and
development expenses. In July 2008, the parties amended the
agreement to expand the license to include certain additional
patent applications. The Company paid RPI an additional
nonrefundable payment of $125,000 and slightly increased the
annual fees in consideration of this amendment.
The components of the Companys net deferred tax asset were
as follows:
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(In thousands)
|
|
|
Net operating loss (NOL) carryforwards
federal and state
|
|
$
|
36,403
|
|
|
$
|
48,270
|
|
Tax benefit from the exercise of stock options
|
|
|
38,776
|
|
|
|
41,694
|
|
Tax credit carryforwards
|
|
|
19,274
|
|
|
|
18,425
|
|
Alkermes Europe, Ltd. NOL carryforward
|
|
|
5,531
|
|
|
|
7,764
|
|
Deferred revenue
|
|
|
1,772
|
|
|
|
47,063
|
|
Share-based compensation
|
|
|
12,256
|
|
|
|
10,347
|
|
Property, plant and equipment
|
|
|
(9,915
|
)
|
|
|
(6,969
|
)
|
Other
|
|
|
7,657
|
|
|
|
2,506
|
|
Less: valuation allowance
|
|
|
(111,754
|
)
|
|
|
(169,100
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
As of March 31, 2009, the Company had approximately
$222.4 million of federal domestic NOL carryforwards,
$130.6 million of state NOL carryforwards and
$19.8 million of foreign net operating loss and foreign
capital loss carryforwards, which either expire on various dates
through the year 2026 or can be carried forward indefinitely.
These loss carryforwards are available to reduce future federal
and foreign taxable income, if any. These loss carryforwards are
subject to review and possible adjustment by the appropriate
taxing authorities. These loss carryforwards, that may be
utilized in any future period, may be subject to limitations
based upon changes in the ownership of the Companys stock.
The valuation allowance relates to the Companys
U.S. NOLs and deferred tax assets and certain other
foreign deferred tax assets and is recorded based upon the
uncertainty surrounding their realizability, as these assets can
only be realized to
F-35
ALKERMES,
INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
offset profitable operations in the respective tax
jurisdictions. In addition, the Company performed a detailed
study of its NOL carryforwards to determine whether such amounts
are limited under IRC Sec. 382. The Company does not believe the
limitations will significantly impact its ability to offset
income with available NOLs.
The Company records a deferred tax asset or liability based on
the difference between the financial statement and tax bases of
assets and liabilities, as measured by enacted tax rates assumed
to be in effect when these differences reverse. In evaluating
the Companys ability to recover its deferred tax assets,
the Company considers all available positive and negative
evidence including its past operating results, changes in the
business in which the Company operates and its forecast of
future taxable income. In determining future taxable income, the
Company is responsible for assumptions utilized including the
amount of state, federal and international pre-tax operating
income, the reversal of temporary differences and the
implementation of feasible and prudent tax planning strategies.
These assumptions require significant judgment about the
forecasts of future taxable income and are consistent with the
plans and estimates that the Company is using to manage the
underlying businesses. As of March 31, 2009, the Company
determined that it is more likely than not that the deferred tax
assets will not be realized and a full valuation allowance has
been recorded.
The tax benefit from stock option exercises included in the
table above represents benefits accumulated prior to the
adoption of SFAS No. 123(R) that have not been
realized. Subsequent to the adoption of
SFAS No. 123(R) on April 1, 2006, an additional
$5.4 million of tax benefits from stock option exercises
have not been recognized in the financial statements and will be
once they are realized. In total, the Company has approximately
$44.1 million related to certain operating loss
carryforwards resulting from the exercise of employee stock
options, the tax benefit of which, when recognized, will be
accounted for as a credit to additional paid-in capital rather
than a reduction of income tax.
In fiscal 2008, the Company concluded a comprehensive study of
its historic research and development credit calculations. The
Company determined that certain expenditures originally utilized
in the calculations did not qualify as research and development
charges for purposes of the credit. As a result, the Company
reduced its federal and state research and development credit by
$17.3 million and $1.6 million, respectively. This
reduction did not have an impact on reported net income, as the
write off of the asset was offset by the reversal of a valuation
allowance which had been set up against the asset. The Company
has yet to utilize any of its federal research credits and a
full valuation allowance continues to be maintained against all
of the Companys deferred tax assets. The reduction in the
state credit amount did not result in any additional taxes.
The Companys provision for income taxes was comprised of
the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended March 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
(In thousands)
|
|
|
Current income tax expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
483
|
|
|
$
|
5,770
|
|
|
$
|
1,098
|
|
State
|
|
|
24
|
|
|
|
81
|
|
|
|
|
|
Deferred income tax expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
|
|
|
|
|
|
|
|
|
|
State
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total tax provision
|
|
$
|
507
|
|
|
$
|
5,851
|
|
|
$
|
1,098
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Companys current provision for federal income taxes in
the amount of $0.5 million and $5.9 million for the
years ended March 31, 2009 and 2008, respectively,
represents alternative minimum tax (AMT) due without
regard to the cash benefit of excess share-based compensation
deductions. The AMT paid creates a
F-36
ALKERMES,
INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
credit carryforward and a resulting deferred tax asset, for
which the Company has recorded a full valuation allowance.
Included in the provision for income taxes for the year ended
March 31, 2009 is a $0.3 million estimated benefit as
a result of the recently enacted
Housing and Economic
Recovery Act of 2008
. This legislation allows for certain
taxpayers to forego bonus depreciation in lieu of a refundable
cash credit based on certain qualified asset purchases.
No amount for U.S. income tax has been provided on
undistributed earnings of the Companys foreign subsidiary
because the Company considers such earnings to be indefinitely
reinvested. In the event of distribution of those earnings in
the form of dividends or otherwise, the Company would be subject
to both U.S. income taxes, subject to an adjustment, if
any, for foreign tax credits and foreign withholding taxes
payable to certain foreign tax authorities. Determination of the
amount of U.S. income tax liability that would be incurred
is not practicable because of the complexities associated with
this hypothetical calculation, however, unrecognized foreign tax
credit carryforwards may be available to reduce some portion of
the U.S. tax liability, if any.
A reconciliation of the Companys federal statutory tax
rate to its effective rate is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended March 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Statutory federal rate
|
|
|
34.0
|
%
|
|
|
34.0
|
%
|
|
|
34.0
|
%
|
Research and development benefit
|
|
|
(0.5
|
)%
|
|
|
|
|
|
|
(0.9
|
)%
|
Share-based compensation
|
|
|
1.0
|
%
|
|
|
1.5
|
%
|
|
|
33.5
|
%
|
Other permanent items
|
|
|
0.5
|
%
|
|
|
0.4
|
%
|
|
|
0.5
|
%
|
Non-deductible interest
|
|
|
|
|
|
|
|
|
|
|
4.2
|
%
|
True-up
of
prior year AMT liability
|
|
|
|
|
|
|
|
|
|
|
1.1
|
%
|
Change in FIN No. 48 reserve
|
|
|
0.1
|
%
|
|
|
0.1
|
%
|
|
|
|
|
Change in valuation allowance
|
|
|
(34.7
|
)%
|
|
|
(32.6
|
)%
|
|
|
(62.0
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective tax rate
|
|
|
0.4
|
%
|
|
|
3.4
|
%
|
|
|
10.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company adopted FIN No. 48 on April 1, 2007.
The Company did not record any liabilities upon the
implementation of FIN No. 48 due to historic loss
carryovers. A reconciliation of the beginning and ending amount
of unrecognized tax benefits is as follows:
|
|
|
|
|
|
|
Unrecognized
|
|
|
|
Tax Benefits
|
|
|
|
(In thousands)
|
|
|
Balance, April 1, 2007
|
|
$
|
|
|
Additions based on tax positions related to the current period
|
|
|
1,796
|
|
|
|
|
|
|
Balance, March 31, 2008
|
|
|
1,796
|
|
Additions based on tax positions related to prior periods
|
|
|
30
|
|
|
|
|
|
|
Balance, March 31, 2009
|
|
$
|
1,826
|
|
|
|
|
|
|
The Company has an unrecognized tax benefit of $0.2 million
at March 31, 2009, which is recorded as part of Other
Long-Term Liabilities in the accompanying consolidated
balance sheet. If the unrecognized tax benefit at March 31,
2009 is recognized, there would be no effect on the
Companys effective income tax rate in any future period.
The Company does not expect a significant increase in
unrecognized tax benefits within the next twelve months.
The tax years 1993 through 2008 remain open to examination by
major taxing jurisdictions to which the Company is subject,
which are primarily in the U.S. as carryforward attributes
generated in years past may
F-37
ALKERMES,
INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
still be adjusted upon examination by the Internal Revenue
Service or state tax authorities if they have or will be used in
a future period. The Company has elected to include interest and
penalties related to uncertain tax positions as a component of
its provision for taxes. For the year ended March 31, 2009,
the Companys accrued interest and penalties recorded in
its consolidated financial statements was not significant.
|
|
15.
|
COMMITMENTS
AND CONTINGENCIES
|
Lease
Commitments
The Company leases certain of its offices, research laboratories
and manufacturing facilities under operating leases with initial
terms of one to twenty years, expiring through the year 2016.
Certain of the leases contain provisions for extensions of up to
ten years. These lease commitments are primarily related to the
Companys corporate headquarters and manufacturing
facilities in Massachusetts.
As of March 31, 2009, the total future annual minimum lease
payments under the Companys non-cancelable operating
leases are as follows:
|
|
|
|
|
|
|
Payment
|
|
|
|
Amount
|
|
|
|
(In thousands)
|
|
|
Fiscal Years:
|
|
|
|
|
2010
|
|
$
|
10,233
|
|
2011
|
|
|
10,255
|
|
2012
|
|
|
10,322
|
|
2013
|
|
|
3,122
|
|
2014
|
|
|
722
|
|
Thereafter
|
|
|
1,264
|
|
|
|
|
|
|
|
|
|
35,918
|
|
Less: estimated sublease income
|
|
|
(5,582
|
)
|
|
|
|
|
|
Total future minimum lease payments
|
|
$
|
30,336
|
|
|
|
|
|
|
Rent expense related to operating leases charged to operations
was approximately $11.7 million, $11.9 million, and
$11.5 million for the years ended March 31, 2009, 2008
and 2007, respectively. These amounts are net of sublease income
of $1.7 million, $2.0 million and $1.6 million
earned in the years ended March 31, 2009, 2008 and 2007,
respectively.
In addition to its lease commitments, the Company has open
purchase orders totaling $30.0 million at March 31,
2009.
License
and Royalty Commitments
The Company has entered into license agreements with certain
corporations and universities that require the Company to pay
annual license fees and royalties based on a percentage of
revenues from sales of certain products and royalties from
sublicenses granted by the Company. Amounts paid under these
agreements were approximately $0.9 million,
$0.2 million and $0.8 million for the years ended
March 31, 2009, 2008 and 2007, respectively, and were
recorded as Research and development expenses in the
consolidated statements of income and comprehensive income.
Litigation
From time to time, the Company may be subject to legal
proceedings and claims in the ordinary course of business. The
Company is not aware of any such proceedings or claims that it
believes will have, individually or in the aggregate, a material
adverse effect on its business, financial condition or results
of operations.
F-38
ALKERMES,
INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
In April 2009, the Company announced that it will move its
corporate headquarters from Cambridge, Massachusetts to Waltham,
Massachusetts, and entered into an operating lease agreement for
this space. The lease term begins on the date the Company moves
into the building, which is estimated to occur in early calendar
2010 and ends 10 years from the beginning of the lease
term, with provisions for the Company to extend the lease term
up to an additional 10 years. The Companys rent
expense related to this new space will be approximately
$2.7 million a year during the initial lease term.
In April 2009, in connection with the move of its corporate
headquarters to Waltham, Massachusetts, the Company entered into
an agreement to sublease its Cambridge, Massachusetts facility.
The sublease agreement begins in phases beginning in August 2009
and will expire in June 2012. The Company estimates it will
collect sublease rental income of approximately
$14.8 million during the term of the sublease, which will
partially offset $22.7 million of the Companys remaining
lease obligations.
* * * * *
F-39
EXHIBIT INDEX
|
|
|
|
|
Exhibit
|
|
|
No.
|
|
|
|
|
3
|
.1
|
|
Third Amended and Restated Articles of Incorporation as filed
with the Pennsylvania Secretary of State on June 7, 2001.
(Incorporated by reference to Exhibit 3.1 to the
Registrants Report on Form 10-K for the fiscal year ended
March 31, 2001 (File No. 001-14131).)
|
|
3
|
.1(a)
|
|
Amendment to Third Amended and Restated Articles of
Incorporation as filed with the Pennsylvania Secretary of State
on December 16, 2002 (2002 Preferred Stock Terms). (Incorporated
by reference to Exhibit 3.1 to the Registrants Current
Report on Form 8-K filed on December 16, 2002 (File No.
001-14131).)
|
|
3
|
.1(b)
|
|
Amendment to Third Amended and Restated Articles of
Incorporation as filed with the Pennsylvania Secretary of State
on May 14, 2003. (Incorporated by reference to Exhibit A to
Exhibit 4.1 to the Registrants Report on Form 8-A filed on
May 2, 2003 (File No. 000-19267).)
|
|
3
|
.2
|
|
Second Amended and Restated By-Laws of Alkermes, Inc.
(Incorporated by reference to Exhibit 3.2 to the
Registrants Current Report on Form 8-K filed on September
28, 2005.)
|
|
4
|
.1
|
|
Specimen of Common Stock Certificate of Alkermes, Inc.
(Incorporated by reference to Exhibit 4 to the Registrants
Registration Statement on Form S-1, as amended (File No.
033-40250).)
|
|
4
|
.2
|
|
Specimen of Non-Voting Common Stock Certificate of Alkermes,
Inc. (Incorporated by reference to Exhibit 4.4 to the
Registrants Report on Form 10-K for the fiscal year ended
March 31, 1999 (File No. 001-14131).)
|
|
4
|
.3
|
|
Rights Agreement, dated as of February 7, 2003, as amended,
between Alkermes, Inc. and EquiServe Trust Co., N.A., as Rights
Agent. (Incorporated by reference to Exhibit 4.1 to the
Registrants Report on Form 8-A filed on May 2, 2003
(File No. 000-19267).)
|
|
4
|
.4
|
|
Indenture, dated as of February 1, 2005, between RC Royalty Sub
LLC and U.S. Bank National Association, as Trustee.
(Incorporated by reference to Exhibit 4.1 to the
Registrants Current Report on Form 8-K filed on February
3, 2005.)
|
|
4
|
.5
|
|
Form of Risperdal
Consta
®
PhaRMA
sm
Secured 7% Notes due 2018. (Incorporated by reference to
Exhibit 4.1 to the Registrants Current Report on Form 8-K
filed on February 3, 2005.)
|
|
10
|
.1
|
|
Amended and Restated 1990 Omnibus Stock Option Plan, as amended.
(Incorporated by reference to Exhibit 10.2 to the
Registrants Report on Form 10-K for the fiscal year ended
March 31, 1998 (File No. 001-14131).)+
|
|
10
|
.2
|
|
Stock Option Plan for Non-Employee Directors, as amended.
(Incorporated by reference to Exhibit 99.2 to the
Registrants Registration Statement on Form S-8 filed on
October 1, 2003 (File No. 333-109376).)+
|
|
10
|
.3
|
|
Lease, dated as of October 26, 2000, between FC88 Sidney, Inc.
and Alkermes, Inc. (Incorporated by reference to Exhibit 10.3 to
the Registrants Report on Form 10-Q for the quarter ended
December 31, 2000 (File No. 001-14131).)
|
|
10
|
.4
|
|
Lease, dated as of October 26, 2000, between Forest City 64
Sidney Street, Inc. and Alkermes, Inc. (Incorporated by
reference to Exhibit 10.4 to the Registrants Report on
Form 10-Q for the quarter ended December 31, 2000
(File No. 001-14131).)
|
|
10
|
.5
|
|
Lease Agreement, dated as of April 22, 2009 between PDM Unit
850, LLC, and Alkermes, Inc.#
|
|
10
|
.6
|
|
License Agreement, dated as of February 13, 1996, between
Medisorb Technologies International L.P. and Janssen
Pharmaceutica Inc. (U.S.) (assigned to Alkermes Inc. in July
2006). (Incorporated by reference to Exhibit 10.19 to the
Registrants Report on Form 10-K for the fiscal year ended
March 31, 1996 (File No. 000-19267).)*
|
|
10
|
.7
|
|
License Agreement, dated as of February 21, 1996, between
Medisorb Technologies International L.P. and Janssen
Pharmaceutica International (worldwide except U.S.) (assigned to
Alkermes Inc. in July 2006). (Incorporated by reference to
Exhibit 10.20 to the Registrants Report on Form 10-K for
the fiscal year ended March 31, 1996
(File No. 000-19267).)*
|
|
10
|
.8
|
|
Manufacturing and Supply Agreement, dated August 6, 1997, by and
among Alkermes Controlled Therapeutics Inc. II, Janssen
Pharmaceutica International and Janssen Pharmaceutica, Inc.
(assigned to Alkermes Inc. in July 2006). (Incorporated by
reference to Exhibit 10.19 to the Registrants Report on
Form 10-K for the fiscal year ended March 31, 2002
(File No. 001-14131).)***
|
|
|
|
|
|
Exhibit
|
|
|
No.
|
|
|
|
|
10
|
.8(a)
|
|
Third Amendment To Development Agreement, Second Amendment To
Manufacturing and Supply Agreement and First Amendment To
License Agreements by and between Janssen Pharmaceutica
International Inc. and Alkermes Controlled Therapeutics Inc. II,
dated April 1, 2000 (assigned to Alkermes Inc. in July 2006)
(with certain confidential information deleted). (Incorporated
by reference to Exhibit 10.5 to the Registrants Report on
Form 10-Q for the quarter ended December 31, 2004.)****
|
|
10
|
.8(b)
|
|
Fourth Amendment To Development Agreement and First Amendment To
Manufacturing and Supply Agreement by and between Janssen
Pharmaceutica International Inc. and Alkermes Controlled
Therapeutics Inc. II, dated December 20, 2000 (assigned to
Alkermes Inc. in July 2006) (with certain confidential
information deleted). (Incorporated by reference to Exhibit 10.4
to the Registrants Report on Form 10-Q for the quarter
ended December 31, 2004.)****
|
|
10
|
.8(c)
|
|
Addendum to Manufacturing and Supply Agreement, dated August
2001, by and among Alkermes Controlled Therapeutics Inc. II,
Janssen Pharmaceutica International and Janssen Pharmaceutica,
Inc. (assigned to Alkermes Inc. in July 2006). (Incorporated by
reference to Exhibit 10.19(b) to the Registrants Report on
Form 10-K for the fiscal year ended March 31, 2002
(File No. 001-14131).)***
|
|
10
|
.8(d)
|
|
Letter Agreement and Exhibits to Manufacturing and Supply
Agreement, dated February 1, 2002, by and among Alkermes
Controlled Therapeutics Inc. II, Janssen Pharmaceutica
International and Janssen Pharmaceutica, Inc. (assigned to
Alkermes Inc. in July 2006). (Incorporated by reference to
Exhibit 10.19(a) to the Registrants Report on Form 10-K
for the fiscal year ended March 31, 2002.)***
|
|
10
|
.8(e)
|
|
Amendment to Manufacturing and Supply Agreement by and between
JPI Pharmaceutica International, Janssen Pharmaceutica Inc. and
Alkermes Controlled Therapeutics Inc. II, dated December 22,
2003 (assigned to Alkermes Inc. in July 2006) (with certain
confidential information deleted). (Incorporated by reference to
Exhibit 10.8 to the Registrants Report on Form 10-Q for
the quarter ended December 31, 2004.)****
|
|
10
|
.8(f)
|
|
Fourth Amendment To Manufacturing and Supply Agreement by and
between JPI Pharmaceutica International, Janssen Pharmaceutica
Inc. and Alkermes Controlled Therapeutics Inc. II, dated January
10, 2005 (assigned to Alkermes Inc. in July 2006) (with certain
confidential information deleted). (Incorporated by reference to
Exhibit 10.9 to the Registrants Report on Form 10-Q for
the quarter ended December 31, 2004.)****
|
|
10
|
.9
|
|
Agreement by and between JPI Pharmaceutica International,
Janssen Pharmaceutica Inc. and Alkermes Controlled Therapeutics
Inc. II, dated December 21, 2002 (assigned to Alkermes Inc. in
July 2006) (with certain confidential information deleted).
(Incorporated by reference to Exhibit 10.6 to the
Registrants Report on Form 10-Q for the quarter ended
December 31, 2004.)****
|
|
10
|
.9(a)
|
|
Amendment to Agreement by and between JPI Pharmaceutica
International, Janssen Pharmaceutica Inc. and Alkermes
Controlled Therapeutics Inc. II, dated December 16, 2003
(assigned to Alkermes Inc. in July 2006) (with certain
confidential information deleted). (Incorporated by reference to
Exhibit 10.7 to the Registrants Report on Form 10-Q for
the quarter ended December 31, 2004.)****
|
|
10
|
.10
|
|
Patent License Agreement, dated as of August 11, 1997, between
Massachusetts Institute of Technology and Advanced Inhalation
Research, Inc. (assigned to Alkermes, Inc. in March 2007), as
amended. (Incorporated by reference to Exhibit 10.25 to the
Registrants Report on Form 10-K for the fiscal year ended
March 31, 1999 (File No. 001-14131).)**
|
|
10
|
.11
|
|
Employment agreement, dated as of December 12, 2007, by and
between Richard F. Pops and the Registrant. (Incorporated by
reference to Exhibit 10.1 to the Registrants Report on
Form 10-Q for the quarter ended December 31, 2007.)+
|
|
10
|
.11(a)
|
|
Amendment to Employment Agreement by and between Alkermes, Inc.
and Richard F. Pops. (Incorporated by reference to Exhibit 10.5
to the Registrants Current Report on Form 8-K filed on
October 7, 2008.)+
|
|
10
|
.12
|
|
Employment agreement, dated as of December 12, 2007, by and
between David A. Broecker and the Registrant. (Incorporated by
reference to Exhibit 10.2 to the Registrants Report on
Form 10-Q for the quarter ended December 31, 2007.)+
|
|
|
|
|
|
Exhibit
|
|
|
No.
|
|
|
|
|
10
|
.12(a)
|
|
Amendment to Employment Agreement by and between Alkermes, Inc.
and David A. Broecker. (Incorporated by reference to Exhibit
10.6 to the Registrants Current Report on Form 8-K filed
on October 7, 2008.)+
|
|
10
|
.13
|
|
Form of Employment Agreement, dated as of December 12, 2007, by
and between the Registrant and each of Kathryn L. Biberstein,
Elliot W. Ehrich, M.D., James M. Frates, Michael J.
Landine, Gordon G. Pugh. (Incorporated by reference to Exhibit
10.3 to the Registrants Report on
Form 10-Q
for the quarter ended December 31, 2007.)+
|
|
10
|
.13(a)
|
|
Form of Amendment to Employment Agreement by and between
Alkermes, Inc. and each of each of Kathryn L. Biberstein, Elliot
W. Ehrich, M.D., James M. Frates, Michael J. Landine,
Gordon G. Pugh. (Incorporated by reference to Exhibit 10.7 to
the Registrants Current Report on Form 8-K filed on
October 7, 2008.)+
|
|
10
|
.14
|
|
Form of Covenant Not to Compete, of various dates, by and
between the Registrant and each of Kathryn L. Biberstein and
James M. Frates. (Incorporated by reference to Exhibit 10.15 to
the Registrants Report on Form 10-K for the year ended
March 31, 2007.)+
|
|
10
|
.14(a)
|
|
Form of Covenant Not to Compete, of various dates, by and
between the Registrant and each of Elliot W. Ehrich, M.D.,
Michael J. Landine, and Gordon G. Pugh. (Incorporated by
reference to Exhibit 10.15(a) to the Registrants Report on
Form 10-K for the year ended March 31, 2007.)+
|
|
10
|
.15
|
|
License and Collaboration Agreement between Alkermes, Inc. and
Cephalon, Inc. dated as of June 23, 2005. (Incorporated by
reference to Exhibit 10.1 to the Registrants Report on
Form 10-Q for the quarter ended June 30, 2005.)*****
|
|
10
|
.15(a)
|
|
Supply Agreement between Alkermes, Inc. and Cephalon, Inc. dated
as of June 23, 2005. (Incorporated by reference to Exhibit 10.2
to the Registrants Report on Form 10-Q for the quarter
ended June 30, 2005.)*****
|
|
10
|
.15(b)
|
|
Amendment to the License and Collaboration Agreement between
Alkermes, Inc. and Cephalon, Inc. dated as of December 21, 2006.
(Incorporated by reference to Exhibit 10.16(b) to the
Registrants Report on Form 10-K for the year ended March
31, 2007.)******
|
|
10
|
.15(c)
|
|
Amendment to the Supply Agreement between Alkermes, Inc. and
Cephalon, Inc. dated as of December 21, 2006. (Incorporated by
reference to Exhibit 10.16(c) to the Registrants Report on
Form 10-K for the year ended March 31, 2007.)******
|
|
10
|
.16
|
|
Accelerated Share Repurchase Agreement, dated as of February 7,
2008, between Morgan Stanley & Co. Incorporated and
Alkermes, Inc. (Incorporated by reference to Exhibit 10.17 to
the Registrants Report on Form 10-K for the year ended
March 31, 2008.)
|
|
10
|
.17
|
|
Alkermes, Inc. 1998 Equity Incentive Plan as Amended and
Approved on November 2, 2006. (Incorporated by reference to
Exhibit 10.1 to the Registrants Report on Form 10-Q for
the fiscal quarter ended December 31, 2006.)+
|
|
10
|
.17(a)
|
|
Form of Stock Option Certificate pursuant to Alkermes, Inc. 1998
Equity Incentive Plan. (Incorporated by reference to Exhibit
10.37 to the Registrants Report on Form 10-K for the
fiscal year ended March 31, 2006.)+
|
|
10
|
.18
|
|
Alkermes, Inc. Amended and Restated 1999 Stock Option Plan.
(Incorporated by reference to Appendix A to the
Registrants Definitive Proxy Statement on Form DEF 14/A
filed on July 27, 2007.)+
|
|
10
|
.18(a)
|
|
Form of Incentive Stock Option Certificate pursuant to the 1999
Stock Option Plan, as amended. (Incorporated by reference to
Exhibit 10.35 to the Registrants Report on Form 10-K for
the fiscal year ended March 31, 2006.)+
|
|
10
|
.18(b)
|
|
Form of Non-Qualified Stock Option Certificate pursuant to the
1999 Stock Option Plan, as amended. (Incorporated by reference
to Exhibit 10.36 to the Registrants Report on Form 10-K
for the fiscal year ended March 31, 2006.)+
|
|
10
|
.19
|
|
Alkermes, Inc. 2002 Restricted Stock Award Plan as Amended and
Approved on November 2, 2006. (Incorporated by reference to
Exhibit 10.3 to the Registrants Report on Form 10-Q for
the fiscal quarter ended December 31, 2006.)+
|
|
10
|
.19(a)
|
|
Amendment to Alkermes, Inc. 2002 Restricted Stock Award Plan.
(Incorporated by reference to Appendix B to the
Registrants Definitive Proxy Statement on Form DEF 14/A
filed on July 27, 2007.)+
|
|
|
|
|
|
Exhibit
|
|
|
No.
|
|
|
|
|
10
|
.20
|
|
2006 Stock Option Plan for Non-Employee Directors. (Incorporated
by reference to Exhibit 10.4 to the Registrants Report on
Form 10-Q for the fiscal quarter ended September 30, 2006.)+
|
|
10
|
.20(a)
|
|
Amendment to 2006 Stock Option Plan for Non-Employee Directors.
(Incorporated by reference to Appendix C to the
Registrants Definitive Proxy Statement on Form DEF 14/A
filed on July 27, 2007.)+
|
|
10
|
.21
|
|
Alkermes Fiscal 2008 Named-Executive Bonus Plan. (Incorporated
by reference to Exhibit 10.1 to the Registrants Current
Report on Form 8-K filed on April 26, 2007.)+
|
|
10
|
.22
|
|
Alkermes Fiscal Year 2009 Reporting Officer Performance Pay
Plan. (Incorporated by reference to Exhibit 10.1 to the
Registrants Current Report on Form 8-K filed on May 16,
2008.)+
|
|
10
|
.23
|
|
Alkermes, Inc., 2008 Stock Option and Incentive Plan
(Incorporated by reference to Exhibit 10.1 to the
Registrants Current Report on Form 8-K filed on October 7,
2008.)+
|
|
10
|
.23(a)
|
|
Alkermes, Inc. 2008 Stock Option and Incentive Plan, Stock
Option Award Certificate (Incentive Stock Option) (Incorporated
by reference to Exhibit 10.2 to the Registrants Current
Report on Form 8-K filed on October 7, 2008.)+
|
|
10
|
.23(b)
|
|
Alkermes, Inc. 2008 Stock Option and Incentive Plan, Stock
Option Award Certificate
(Non-Qualified
Option) (Incorporated by reference to Exhibit 10.3 to the
Registrants Current Report on Form 8-K filed on October 7,
2008.)+
|
|
10
|
.23(c)
|
|
Alkermes, Inc. 2008 Stock Option and Incentive Plan, Stock
Option Award Certificate
(Non-Employee
Director) (Incorporated by reference to Exhibit 10.4 to the
Registrants Current Report on Form 8-K filed on October 7,
2008.)+
|
|
10
|
.23(d)
|
|
Alkermes, Inc. 2008 Stock Option and Incentive Plan, Restricted
Stock Unit Award Certificate (Time Vesting Only). (Incorporated
by reference to Exhibit 10.1 to the Registrants Current
Report on Form 8-K filed on May 22, 2009.)+
|
|
10
|
.23(e)
|
|
Alkermes, Inc. 2008 Stock Option and Incentive Plan, Restricted
Stock Unit Award Certificate (Performance Vesting Only).
(Incorporated by reference to Exhibit 10.2 to the
Registrants Current Report on Form 8-K filed on May 22,
2009.)+
|
|
21
|
.1
|
|
Subsidiaries of the Registrant.#
|
|
23
|
.1
|
|
Consent of Independent Registered Public Accounting Firm
PricewaterhouseCoopers LLP.#
|
|
23
|
.2
|
|
Consent of Independent Registered Public Accounting Firm
Deloitte & Touche LLP.#
|
|
24
|
.1
|
|
Power of Attorney (included on signature pages).#
|
|
31
|
.1
|
|
Rule 13a-14(a)/15d-14(a) Certification.#
|
|
31
|
.2
|
|
Rule 13a-14(a)/15d-14(a) Certification.#
|
|
32
|
.1
|
|
Certification pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.#
|
|
|
|
*
|
|
Confidential status has been granted for certain portions
thereof pursuant to a Commission Order granted September 3,
1996. Such provisions have been filed separately with the
Commission.
|
|
**
|
|
Confidential status has been granted for certain portions
thereof pursuant to a Commission Order granted August 19,
1999. Such provisions have been filed separately with the
Commission.
|
|
***
|
|
Confidential status has been granted for certain portions
thereof pursuant to a Commission Order granted
September 16, 2002. Such provisions have been separately
filed with the Commission.
|
|
****
|
|
Confidential status has been granted for certain portions
thereof pursuant to a Commission Order granted
September 26, 2005. Such provisions have been filed
separately with the Commission.
|
|
*****
|
|
Confidential status has been granted for certain portions
thereof pursuant to a Commission Order granted July 31,
2006. Such provisions have been filed separately with the
Commission.
|
|
******
|
|
Confidential status has been granted for certain portions
thereof pursuant to a Commission Order granted April 15,
2008. Such provisions have been filed separately with the
Commission.
|
|
+
|
|
Indicates a management contract or any compensatory plan,
contract or arrangement.
|
|
#
|
|
Filed herewith.
|
Exhibit 10.5
EXECUTION COPY
#42352696v5
LEASE
BETWEEN
PDM UNIT 850, LLC
AND
ALKERMES, INC.
FOR PREMISES LOCATED AT
850 AND 852 WINTER STREET
RESERVOIR WOODS, WALTHAM, MASSACHUSETTS
TABLE OF CONTENTS
|
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Page
|
|
Article 1. Premises Term of Lease
|
|
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1
|
|
|
Section 1.01. Premises
|
|
|
1
|
|
|
Section 1.02. Special Appurtenant Rights
|
|
|
2
|
|
|
Section 1.03. Term Commencement
|
|
|
3
|
|
|
Article 2. Rent
|
|
|
5
|
|
|
Section 2.01. Base Rent
|
|
|
5
|
|
|
Section 2.02. Additional Rent for Operating Expenses and Taxes
|
|
|
6
|
|
|
Section 2.03. Payment of Rent
|
|
|
14
|
|
|
Section 2.04. Rent from Real Property
|
|
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14
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|
|
Section 2.05. Security Deposit
|
|
|
15
|
|
|
Article 3. Utility Services
|
|
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17
|
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|
Section 3.01. Electricity
|
|
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17
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|
Section 3.02. Other Landlord Services
|
|
|
17
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|
|
Section 3.03. Facilities Management Rights
|
|
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18
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|
|
Article 4. Insurance
|
|
|
20
|
|
|
Section 4.01. Compliance with Property Insurance
|
|
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20
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|
|
Section 4.02. Tenants Required Insurance
|
|
|
20
|
|
|
Section 4.03. Landlords Required Insurance
|
|
|
22
|
|
|
Section 4.04. Tenant Work Insurance
|
|
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22
|
|
|
Section 4.05. Waiver of Subrogation
|
|
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22
|
|
|
Section 4.06. Certificates of Insurance
|
|
|
22
|
|
|
Article 5. Use of Premises
|
|
|
23
|
|
|
Section 5.01. Permitted Use
|
|
|
23
|
|
|
Section 5.02. Tenants Conduct; Hazardous Materials
|
|
|
23
|
|
|
Section 5.03. Hazardous Materials Indemnity
|
|
|
27
|
|
|
Section 5.04. Rules and Regulations
|
|
|
27
|
|
|
Article 6. Compliance with Legal Requirements
|
|
|
28
|
|
|
Section 6.01. Compliance with Legal Requirements
|
|
|
28
|
|
|
Article 7. Construction, Condition, Repairs and Maintenance of Premises
|
|
|
28
|
|
|
Section 7.01. Base Building Work
|
|
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28
|
|
|
-i-
TABLE OF CONTENTS
(continued)
|
|
|
|
|
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Page
|
|
Section 7.02. Finish Work
|
|
|
29
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|
|
Section 7.03. Landlord Maintenance Obligations
|
|
|
29
|
|
|
Section 7.04. Tenant Maintenance Obligations
|
|
|
30
|
|
|
Section 7.05. Landlords Right of Entry
|
|
|
30
|
|
|
Section 7.06. Service Interruptions
|
|
|
30
|
|
|
Article 8. Alterations and Additions
|
|
|
31
|
|
|
Section 8.01. Tenant Work
|
|
|
31
|
|
|
Article 9. Discharge of Liens
|
|
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33
|
|
|
Section 9.01. No Liens
|
|
|
33
|
|
|
Article 10. Subordination
|
|
|
33
|
|
|
Section 10.01. Lease Subordinate to Mortgages
|
|
|
33
|
|
|
Section 10.02. Estoppel Certificates
|
|
|
35
|
|
|
Section 10.03. Notices to Mortgagees
|
|
|
36
|
|
|
Section 10.04. Assignment of Rents
|
|
|
36
|
|
|
Article 11. Fire, Casualty and Eminent Domain
|
|
|
37
|
|
|
Section 11.01. Rights to Terminate the Lease
|
|
|
37
|
|
|
Section 11.02. Restoration Obligations
|
|
|
38
|
|
|
Article 12. Indemnification
|
|
|
38
|
|
|
Section 12.01. General Indemnity
|
|
|
38
|
|
|
Section 12.02. Defense Obligations
|
|
|
39
|
|
|
Article 13. Mortgages, Assignments and Subleases by Tenant
|
|
|
39
|
|
|
Section 13.01. Right to Transfer
|
|
|
39
|
|
|
Section 13.02. Tenant Remains Bound
|
|
|
42
|
|
|
Article 14. Default
|
|
|
42
|
|
|
Section 14.01. Events of Default
|
|
|
42
|
|
|
Section 14.02. Landlords Right to Cure
|
|
|
44
|
|
|
Section 14.03. No Waiver
|
|
|
44
|
|
|
Section 14.04. Late Payments
|
|
|
45
|
|
|
Section 14.05. Remedies Cumulative
|
|
|
45
|
|
|
Section 14.06. Landlords Obligation to Make Payments
|
|
|
45
|
|
|
Section 14.07. Landlord Defaults
|
|
|
45
|
|
-ii-
TABLE OF CONTENTS
(continued)
|
|
|
|
|
|
|
Page
|
|
Article 15. Surrender
|
|
|
47
|
|
|
Section 15.01. Obligation to Surrender
|
|
|
47
|
|
|
Section 15.02. Holdover Remedies
|
|
|
47
|
|
|
Section 15.03. Decommissioning
|
|
|
47
|
|
|
Section 15.04. Failure to Decommission
|
|
|
48
|
|
|
Article 16. Quiet Enjoyment
|
|
|
49
|
|
|
Section 16.01. Covenant of Quiet Enjoyment
|
|
|
49
|
|
|
Article 17. Acceptance of Surrender
|
|
|
49
|
|
|
Section 17.01. Acceptance of Surrender
|
|
|
49
|
|
|
Article 18. Notices
|
|
|
49
|
|
|
Section 18.01. Means of Giving Notice
|
|
|
49
|
|
|
Article 19. Separability of Provisions
|
|
|
50
|
|
|
Section 19.01. Severability
|
|
|
50
|
|
|
Article 20. Miscellaneous
|
|
|
50
|
|
|
Section 20.01. Amendments
|
|
|
50
|
|
|
Section 20.02. Governing Law
|
|
|
50
|
|
|
Section 20.03. Counterparts
|
|
|
50
|
|
|
Section 20.04. Successors and Assigns
|
|
|
51
|
|
|
Section 20.05. Merger Clause
|
|
|
51
|
|
|
Section 20.06. Notice of Lease
|
|
|
51
|
|
|
Section 20.07. No Lease
|
|
|
51
|
|
|
Section 20.08. Reimbursements
|
|
|
51
|
|
|
Section 20.09. Financial Statements
|
|
|
51
|
|
|
Section 20.10. Parking
|
|
|
52
|
|
|
Section 20.11. Future Development
|
|
|
52
|
|
|
Section 20.12. Signage
|
|
|
53
|
|
|
Section 20.13. Brokers
|
|
|
54
|
|
|
Section 20.14. Force Majeure
|
|
|
54
|
|
|
Section 20.15. Limitations on Liability
|
|
|
54
|
|
|
Section 20.16. Certain Definitions
|
|
|
54
|
|
|
Section 20.17. Prevailing Parties
|
|
|
54
|
|
-iii-
TABLE OF CONTENTS
(continued)
|
|
|
|
|
|
|
Page
|
|
Section 20.18. Waiver of Trial by Jury
|
|
|
55
|
|
|
Section 20.19. Landlords Reserved Rights
|
|
|
55
|
|
|
Section 20.20. Tenant as non-Specially Designated National or Blocked Person
|
|
|
55
|
|
|
Section 20.21. Authority
|
|
|
56
|
|
|
Section 20.22. Environmental Representation
|
|
|
56
|
|
|
Article 21. Rooftop License
|
|
|
56
|
|
|
Section 21.01. Rooftop License
|
|
|
56
|
|
|
Section 21.02. Installation and Maintenance of Rooftop Equipment
|
|
|
57
|
|
|
Section 21.03. Indemnification
|
|
|
57
|
|
|
Section 21.04. Removal of Rooftop Equipment
|
|
|
58
|
|
|
Section 21.05. Interference by Rooftop Equipment
|
|
|
58
|
|
|
Section 21.06. Relocation of Rooftop Equipment
|
|
|
59
|
|
|
Article 22. Extension Options
|
|
|
59
|
|
|
Section 22.01. Option to Extend
|
|
|
59
|
|
|
Section 22.02. Extension Rent
|
|
|
60
|
|
|
Section 22.03. Market Rent
|
|
|
60
|
|
|
Section 22.04. Tenants Right to Dispute Market Rent
|
|
|
60
|
|
|
Section 22.05. Arbitration of Market Rent
|
|
|
61
|
|
|
Article 23. Right of First Refusal
|
|
|
62
|
|
|
Section 23.01. Right of First Refusal
|
|
|
62
|
|
|
Article 24. Right of First Offer
|
|
|
64
|
|
|
Section 24.01. Right of First Offer
|
|
|
64
|
|
|
Article 25. Expansion Option
|
|
|
65
|
|
|
Section 25.01. Expansion Option
|
|
|
65
|
|
-iv-
TABLE OF CONTENTS
Page
LEASE
LEASE dated as of April 22, 2009, by and between PDM 850 Unit, LLC, a Delaware limited
liability company (hereinafter called
Landlord
), and Alkermes, Inc., a Pennsylvania
corporation (hereinafter called
Tenant
).
Article 1.
Premises Term of Lease
Section 1.01.
Premises
. Upon and subject to the conditions and limitations
hereinafter set forth, Landlord does hereby lease and demise unto Tenant on an as is basis
(except as otherwise expressly set forth herein) a portion of each of the lower level, first
(including the main lobby and entryway serving the Premises), second, and third floors of a
building with an address of 850 and 852 Winter Street, Waltham, Massachusetts and constructed
substantially in accordance with the specifications attached as
Exhibit 1.01-3
, subject to
reasonably equivalent substitutions for materials described therein (such building being referred
to herein as the
Building
), as such demised premises is more particularly described on
Exhibit 1.01-1
(the
Premises
), together with the right to use, in common with
others, the walkways, driveways, parking areas, loading areas, and utility lines (including
telecommunications lines) serving the Premises. The parties agree that the rentable area for the
Premises is 100,235 rentable square feet, as measured in accordance with the measurement standard
described on
Exhibit 1.01-4
, attached.
The Building is a condominium unit within the Reservoir Woods Primary Condominium (the
Condominium
), a condominium created by Master Deed dated February 26, 2007, recorded in
Book 49037, Page 229 of the Middlesex South Registry of Deeds, as amended. The Building and its
undivided interest in the common elements of the Condominium are referred to herein as the
Property
and are more particularly described on
Exhibit 1.01-2
. This Lease, and
Tenants leasehold interest in the Premises, are subject to the terms, covenants and conditions of
agreements, easements and restrictions of record applicable to the Property, all of which Tenant
shall perform and observe insofar as the same are applicable to the Premises; provided, however,
that Tenant shall not be bound by any easements or restrictions made after the date of this Lease
that materially and adversely affect Tenants rights and obligations under this Lease unless and
until Landlord has obtained Tenants prior written consent. Landlord hereby represents and
warrants that none of the existing agreements, easements and restrictions of record prohibit or
restrict use of the Premises for the Permitted Uses.
The Premises exclude common areas and facilities of the Building, including without limitation
exterior walls, roofs, the common stairways and stairwells, the parking garage, elevators and
elevator wells, fan rooms, electric and telephone closets (other
- 1 -
than those exclusively serving the Premises, if any), janitor closets, freight elevators, and
pipes, ducts, conduits, wires and appurtenant fixtures serving other parts of the Property
(exclusively or in common) and other common areas and facilities from time to time designated as
such by Landlord; provided that, in any event, the designation of such common areas and facilities
does not adversely affect the Premises, Tenants use of the Premises, or access to the Premises in
more than a de minimis manner. If the Premises include less than the entire rentable area of any
floor, then the Premises also exclude the common corridors, common elevator lobby and common
toilets located on such floor.
Section 1.02.
Special Appurtenant Rights
.
(a) Tenant shall, subject to reasonable closures for repairs and the like, casualty, and
condemnation, have the appurtenant, non-exclusive right, in common with others, to use the common
fitness center (subject only to nominal charges for use of basic services) and cafeteria (with
associated patio area) located at the Building, in each case subject to reasonable rules
established by Landlord from time to time pursuant to Section 5.04 of this Lease, and which
services shall, subject to the matters set forth above, be available throughout the term of this
Lease (the facilities referred to in this paragraph, collectively, the
Amenities
).
Landlord and Tenant acknowledge that Landlord intends to retain a third-party vendor for the
operation of the cafeteria in the Building. If the service provided by any third-party vendor
operating the cafeteria from time to time is inconsistent with first-class standards for a suburban
office, laboratory and research and development park in more than a de minimus manner, Tenant shall
have the right to give Landlord written notice of such event with sufficient detail for Landlord to
investigate the complaint. At the written request of Tenant, Landlord shall exercise its right to
terminate the contract of such vendor, in which event Landlord shall use reasonable efforts to
replace the applicable vendor with a substitute vendor experienced in operating similar facilities
in first class suburban office, laboratory and research and development buildings, subject to
Tenants rights under the immediately preceding paragraph. Landlord shall consult with Tenant in
the process of making menu selections for the cafeteria.
(b) So long as Landlord or an entity controlled by, under common control with, or controlling
Landlord is the owner of the property known as 840 Winter Street, Waltham, Massachusetts (also
known as
Healthpoint
), Tenant shall be entitled to the benefit of any discounted rates
for the fitness facilities located at Healthpoint, if any, that are negotiated between Landlord and
the owner of Healthpoint for the benefit of tenants at the Building.
(c) Tenant shall have the appurtenant, non-exclusive right, in common with others, to
reasonably access any Building communication system serving the Premises (which access shall be
reasonably coordinated and facilitated by Landlord) and the exclusive right and obligation to use
and maintain the heating, ventilation and air-conditioning units installed on the roof and
exclusively serving the second and third floors of the Premises, together with the rights to use
the roof further described in Article 21, below.
- 2 -
(d) Landlord shall cooperate with Tenant during Tenants design of the Finish Work to identify
an appropriate portion or portions of the parking garage beneath the Building in which Tenant may
install a pH neutralization system and other lab equipment and systems serving the Premises (such
areas collectively being referred to as the
PH Rooms
). In no event shall the PH Rooms
exceed 750 square feet in gross floor area in the aggregate. Landlord and Tenant shall enter into
a written instrument identifying the location of the PH Rooms upon determining their location, in
which event such areas shall be deemed to be appurtenant to the Premises and available for Tenants
exclusive use. If the location of the PH Rooms, as agreed to by Landlord, results in the loss of
one or more parking spaces serving the Building, then such eliminated parking space(s) shall be
counted towards Tenants parking allocation under Section 20.10 of this Lease.
(e) Tenant shall, subject to reasonable closures for maintenance and repairs (for which
Landlord shall provide Tenant with reasonable prior notice where feasible), casualty, and
condemnation, have the appurtenant, exclusive right to use the two (2) elevators identified as
Tenant Exclusive Elevators
on
Exhibit 1.01-1
for access and egress to the
Premises. Notwithstanding the foregoing, except for casualty or condemnation and subject to the
provisions of Section 3.02, at least one of the Tenant Exclusive Elevators shall be available 24
hours per day, 365 days per year during the Term.
Section 1.03.
Term Commencement
. Tenant and Landlord acknowledge and agree that the
Premises shall be delivered by Landlord in two phases: the first and third floor of the Premises
and associated basement areas (the
Office Portion
) shall be delivered first, and the
second floor of the Premises and associated basement areas shall be delivered second (the
Lab
Portion
; either the Office Portion or the Lab Portion being referred to herein as a
Portion
).
(a) The term of this Lease for each Portion of the Premises shall commence on the earlier of
(i) the Delivery Date (as defined below), or (ii) the date Tenant enters into possession of all or
any substantial portion of such Portion for the conduct of its business (for the purposes of this
Section 1.03, conduct of its business shall not include installation of furniture, fixtures,
equipment, or the like). The date of commencement for each Portion as so determined is hereinafter
referred to as the
Commencement Date
. The term shall expire at 11:59 p.m. on the date
(the
Expiration Date
) that is the last day of the calendar month in which the 10th
anniversary of the initial Rent Commencement Date (as defined in Section 2.01) occurs, unless
extended or sooner terminated as hereinafter provided and shall include the period between the
Commencement Date and the initial Rent Commencement Date. Landlord will provide Tenant with at
least fourteen (14) days prior notice of each Delivery Date. If the Delivery Date designated in
such notice does not occur on the initially designated date, Landlord shall keep Tenant informed of
the anticipated Delivery Date and shall be required to give Tenant at least two (2) business days
prior notice of the applicable Delivery Date as so extended.
The
Delivery Date
shall mean the date on which Landlord Substantially Completes the
Landlord Work (as defined in
Exhibit 7.02
) for a Portion of the Premises and delivers such
Portion to Tenant. The
Estimated Delivery Date
means December 1, 2009, with respect to
the Office Portion and February 1, 2010, with respect to the Lab Portion, as such dates are
extended for Tenant Delay
- 3 -
and matters described in Section 20.14. Landlords failure to Substantially Complete the
Finish Work and deliver the Premises on or before the applicable Estimated Delivery Date, for any
reason, shall not give rise to any liability of Landlord hereunder, shall not constitute a
Landlords default, shall not affect the validity of this Lease, and shall have no effect on the
beginning or end of the term of this Lease as otherwise determined hereunder or on Tenants
obligations associated therewith except that:
(i) if the Commencement Date for the Office Portion occurs more than 30 days after the
Estimated Delivery Date for the Office Portion as it may be extended, then, as liquidated damages
Tenant shall receive an abatement of Base Rent allocable to the Office Portion equal to (x) one day
for each day following such 30-day period through the 60th day following the Estimated Delivery
Date with respect to the Office Portion, and (y) two days for each day thereafter until the
Commencement Date for the Office Portion occurs.
(ii) if the Commencement Date for the Lab Portion occurs more than 60 days after the Estimated
Delivery Date for the Lab Portion as it may be extended, then, as liquidated damages Tenant shall
receive an abatement of Base Rent allocable to the Lab Portion equal to (i) one day for each day
following such sixty-day period through the 90th day following the Estimated Delivery Date with
respect to the Lab Portion, and (ii) two days for each day thereafter until the Commencement Date
for the Lab Portion occurs; and
(iii) Notwithstanding the foregoing, in the event that the Commencement Date for the Office
Portion fails to occur within 135 days after the Estimated Delivery Date for the Office Portion,
then Tenant shall have the one-time option to elect either to (A) terminate this Lease or (B)
complete all of the Landlord Work at its sole cost and expense (except as set forth below) and in
compliance with Article 8 hereof, in either case upon thirty (30) days prior written notice to
Landlord; provided, however, that if the Commencement Date for the Office Portion occurs within
such thirty (30) day period, then such election shall be of no force or effect. Notwithstanding
anything to the contrary herein, if Tenant makes the election set forth in clause (B), above, then
Tenant may apply any unused Finish Work Allowance towards any work undertaken pursuant to clause
(B) pursuant to (and subject to the provisions of)
Exhibit 7.02
and shall, to the extent
not reimbursed through use of the Finish Work Allowance, have the right to reimbursement by
Landlord (on 30 days prior notice) for Tenants reasonable third party costs and expenses to
complete such Landlord Work to the extent exceeding the amount of Excess Finish Work costs that
Tenant would otherwise have incurred in the completion of such Landlord Work by Landlord; and
(iv) Notwithstanding the foregoing, in the event that the Commencement Date for the Lab
Portion fails to occur within 135 days after the Estimated Delivery Date for the Lab Portion, then
Tenant shall have the one time option to elect either to (A) terminate this Lease solely with
respect to the Lab Portion of the Premises, or (B) complete the Landlord Work for the Lab Portion
at its sole cost and expense (except as set forth below) and in compliance with Article 8 hereof,
in either case upon thirty (30) days prior written notice to Landlord; provided, however, that if
the Commencement Date for the Lab Portion occurs within such thirty (30) day
- 4 -
period, then such election shall be of no force or effect. In the event that Tenant makes the
election set forth in (A), above, then the Lab Portion (which the parties agree consists of 33,443
rentable square feet) shall be deemed to be removed from the Premises and the Base Rent, Tenants
Pro Rata Share, Finish Work Allowance and any other rights under this Lease that are expressly
derived on a per-square-foot basis shall be adjusted accordingly. Notwithstanding anything to the
contrary herein, if Tenant makes the election set forth in clause (B), above, then Tenant may apply
any unused Finish Work Allowance towards any work undertaken pursuant to clause (B) to the extent
elected by Tenant pursuant to (and subject to the provisions of)
Exhibit 7.02
and shall, to
the extent not reimbursed through use of the Finish Work Allowance, have the right to reimbursement
by Landlord (on 30 days prior notice) for Tenants reasonable third party costs and expenses to
complete such Landlord Work to the extent exceeding the amount of Excess Finish Work costs that
Tenant would otherwise have incurred in the completion of such Landlord Work by Landlord.
(v) In connection with the exercise of this Lease, Landlord has provided Tenant with a
guaranty from The Prudential Insurance Company of America, acting solely on behalf of or for the
benefit of its insurance company separate account PRISA II, in the form attached as Exhibit 1.03.
The remedies set forth in this Section 1.03(a) are Tenants sole and exclusive remedies, at
law or in equity, with respect to Landlords timely delivery of the Premises and timely Substantial
Completion of the Landlord Work.
(b) Tenant and Landlord agree to execute an agreement in recordable form identifying the
actual Commencement Dates, the Rent Commencement Dates, and the Expiration Date, but a failure to
execute such an agreement shall not affect the commencement or expiration of the term of this
Lease.
THIS LEASE IS MADE UPON THE COVENANTS, AGREEMENTS, TERMS, PROVISIONS, CONDITIONS AND
LIMITATIONS SET FORTH HEREIN, ALL OF WHICH TENANT AND LANDLORD EACH COVENANT AND AGREE TO PERFORM
AND COMPLY WITH, EXCEPTING ONLY AS TO THE COVENANTS OF THE OTHER:
Article 2.
Rent
Section 2.01.
Base Rent
. (a) The
Rent Commencement Date
shall mean,
respectively, (x) the date that is six months after the Commencement Date for the Office Portion
and (y) the date that is five months month after the Commencement Date for the Lab Portion
.
Beginning on the Rent Commencement Date for the applicable Portion, and on the first day of each
month thereafter, the Tenant shall pay the Landlord base rent (
Base Rent
) in equal
monthly installments, in advance, pursuant to the following schedule:
- 5 -
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Annual Base Rent
|
|
Annual Base Rent
|
|
Monthly Base Rent
|
|
|
for the entire
|
|
Per Rentable Square
|
|
for the entire
|
Period
|
|
Premises*
|
|
Foot
|
|
Premises*
|
From the Rent
Commencement Date
through the last
day of the 42nd
calendar month
|
|
$
|
2,505,875.00
|
|
|
$
|
25.00
|
|
|
$
|
208,822.92
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
From the first day
of the 43rd
calendar month
through the last
day of the 78th
calendar month
|
|
$
|
2,706,345.00
|
|
|
$
|
27.00
|
|
|
$
|
225,528.75
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
From the first day
of the 79th
calendar month
through the
expiration of the
term of this Lease
|
|
$
|
2,936,885.50
|
|
|
$
|
29.30
|
|
|
$
|
244,740.46
|
|
|
|
|
*
|
|
In the event that the Office Portion and Lab Portion Rent Commencement Dates do not occur on
the same day, the Annual Base Rent and Monthly Base Rent shall be apportioned accordingly (e.g.
66.6% of the Annual Base Rent is allocable to the Office Portion and 33.4% is allocable to the Lab
Portion).
|
If any Rent Commencement Date is other than the first day of the month, then, with respect to
the partial month following such Rent Commencement Date, Tenant shall pay to Landlord on the
applicable Rent Commencement Date a pro-rated share of the Base Rent that would have otherwise been
payable for such month (based on the number of days remaining in such month) had such Rent
Commencement Date occurred on the first day of such month.
Section 2.02.
Additional Rent for Operating Expenses and Taxes
.
- 6 -
(a) Commencing on the Commencement Date for each Portion of the Premises, Tenant shall pay as
Additional Rent to Landlord Tenants Pro Rata Share of Taxes (as defined below) and Tenants Pro
Rata Share of all Operating Expenses (as defined below). If at any time within any calendar year,
less than 95% of the rentable space of the Building or Property is leased and occupied under
agreements for which the lease term has commenced, Operating Expenses that vary with such occupancy
for that calendar year during the term of this Lease shall be computed and adjusted upward so that
Operating Expenses shall at all times equal the greater of (i) actual Operating Expenses or (ii) an
amount extrapolated as if the Building or Property, as applicable, were ninety-five (95%) leased.
Additional Rent computed under this Section 2.02 shall be prorated should this Lease commence
or terminate before: (i) the end of any fiscal tax year for that portion related to Taxes; or (ii)
the end of any calendar year for that portion related to Operating Expenses. Tenant shall make
monthly payments of Additional Rent, in advance, on the applicable Commencement Date and the first
of each month thereafter equal to one-twelfth (1/12) of the annual amount of such Additional Rent
reasonably projected by Landlord to be due from Tenant (pro-rated for any partial month at the
beginning or end of the term) from time to time. Tenants monthly payments may be reasonably
revised by Landlord from time to time so that Tenants aggregate monthly payments shall equal the
Additional Rent then projected to be due for the year in question. A final accounting and payment
for each real estate tax and operating period shall be made within thirty (30) days after written
notice from Landlord of the exact amount of such Additional Rent for the fiscal tax year or
calendar year in question (each, a
Reconciliation Notice
), which notice Landlord shall
endeavor to deliver to Tenant within ninety (90) days after the end of each fiscal tax year or
calendar year, as applicable, and, in any event, Landlord shall deliver within 270 days after the
end of each fiscal tax year or calendar year, as applicable. Landlords statements of Additional
Rent for Operating Expenses and Taxes shall be conclusive and binding on Tenant unless disputed
within six months after the respective year-end statements are issued. In the event that the
Additional Rent due with respect such period is finally determined to be less than the Additional
Rent paid by Tenant on account of Landlords projection of Additional Rent, Landlord shall credit
the difference against the next installment of Rent coming due under this Lease or, if no such
installment is coming due, then Landlord shall promptly refund such difference. In the event Taxes
for the Premises, based upon which Tenant shall have paid Additional Rent, are subsequently reduced
or abated, Tenant shall be entitled to receive its allocable share of the amount abated, provided
that the amount of the rebate allocable to Tenant shall in no event exceed the amount of Additional
Rent paid by Tenant for such fiscal year on account of Taxes under this Section 2.02, and further
provided the rebate allocable to Tenant shall be reduced by its allocable share of the reasonable
cost of obtaining such reduction or abatement not otherwise paid by Tenant. The obligations of
this paragraph shall survive the expiration of the Lease.
Tenants Pro Rata Share
is calculated by dividing the rentable square foot area of
the Premises by the rentable square foot area of the Building, as of the date of the computation.
Tenants Pro Rata Share is initially 37.1% for the Office Portion and 55.7% for the entire Premises
and is subject to adjustment if the rentable square footages of the Premises changes on account of
any
- 7 -
amendment to the Lease or the Building changes on account of any remeasurement, reconstruction
or expansion by Landlord. The Building consists of 180,039 rentable square feet, subject to
adjustment pursuant to the immediately preceding sentence.
(b)
Operating Expenses
for the purpose of this Section shall mean:
(1) All expenses incurred by the Landlord or its agents which shall be directly related to
employment of day and night supervisors, janitors, handymen, engineers, mechanics, electricians,
plumbers, porters, cleaners, accounting and management personnel, and other personnel (including
amounts incurred for wages, salaries and other compensation for services, payroll, social security,
unemployment and similar taxes, workmens compensation, insurance, disability benefits, pensions,
hospitalization, retirement plans and group insurance, uniforms and working clothes and the
cleaning thereof, and expenses imposed on the Landlord or its agents pursuant to any collective
bargaining agreement), for services in connection with the operation, management, repair,
maintenance, cleaning and protection of the Property and appurtenant common areas and facilities
serving the Premises in a manner customarily provided to first class suburban mixed use office,
laboratory and research and development parks in the suburban Boston area including without
limitation repair and maintenance and providing the services required by this Lease, and, subject
to clause (c)(1) below, personnel engaged in supervision of any of the persons mentioned above
(collectively the
Operation of the Property
);
(2) The cost of services, materials and supplies furnished or used in the Operation of the
Property;
(3) The cost of replacements for tools and equipment used in the Operation of the Property;
(4) Commercially reasonable management fees paid to managing agents and for reasonable legal
and other professional fees relating to the Operation of the Property, but excluding legal and
other professional fees paid in connection with negotiation, administration or enforcement of
leases; provided, however, that so long as an affiliate of the Landlord manages the Property,
management fees for the Property shall not exceed the greater of $75,000 or three percent (3%) of
the gross income from tenants of the Property (including Base Rent and all Additional Rent)
computed on an annual basis plus reimbursements;
(5) Insurance premiums in connection with the Operation of the Property, including without
limitation for such insurance coverages and amounts as Landlord or its mortgagees may require from
time to time;
(6) The costs of plowing and snow removal, maintaining landscaping and storm water drainage
systems, maintaining parking garages, other parking areas, driveways, roadways, light poles, entry
areas, and loading docks in good repair reasonably free of snow and ice (costs for shared
facilities shall be allocated as set forth in clause 8 below), and the cost to provide the shuttle
services described in
Exhibit 3.02
;
- 8 -
(7) Amounts paid to independent contractors for services, materials and supplies furnished for
the Operation of the Property;
(8) Condominium assessments and charges;
(9) All other expenses incurred in connection with the Operation of the Property, including
expenditures for maintenance and repairs that are classified as capital expenditures in accordance
with generally accepted accounting principles, consistently applied, and for capital improvements
and replacements that (A) will, in Landlords reasonable estimate, result in a reduction in
Operating Expenses payable by Tenant (but only to the extent of such reduction) or (B) are required
by changes in law occurring after the first Delivery Date to occur or enforcement of laws not
generally occurring on such Delivery Date) to the extent not otherwise excluded as Operating
Expenses, phone charges, travel (to the extent related to the performance of services included in
Operating Expenses), costs of customary waste and recyclables removal, security and life safety
systems testing, common area electricity and cleaning, and utilities, any expenses in the nature of
common area charges for operation, maintenance and repair of driveways, parking garages, if any,
and other facilities or services shared with other buildings or premises, and any condominium
common expenses assessed against a condominium unit comprising the Premises. Any capital
expenditures included in Operating Expenses pursuant to this paragraph shall be amortized on a
straight line basis over the useful life of the item in question, as determined by Landlord using
generally accepted accounting principles, consistently applied, together with interest at
Landlords actual interest rate incurred in financing such capital improvements, or, if no part of
such expenditure is financed, at an imputed interest rate equal to the prime rate of interest as
reported by Bank of America, N.A., plus three (3%) percent; and
(10) Costs incurred in connection with the operation of the common fitness room and cafeteria,
except to the extent covered by fees for use of such facilities.
(c) Operating Expenses shall be computed on an accrual basis and shall be determined in
accordance with generally accepted accounting principles consistently applied. They must be
actually incurred, but may be incurred directly or by way of reimbursement, and shall include taxes
applicable thereto. The following shall be excluded from Operating Expenses:
(1) Salaries and related benefits or any portion thereof for officers and executives of the
Landlord or Landlords managing agent above the level of property manager.
(2) Depreciation of the Premises or any improvements thereon.
(3) Interest and amortization on indebtedness (except as expressly provided above).
- 9 -
(4) Expenses for which the Landlord, by the terms of this Lease or otherwise, makes a separate
charge.
(5) The cost of any electric current or other utilities or services paid for by the Tenant or
by other tenants as a separate charge.
(6) Leasing fees or commissions.
(7) Repairs or other work occasioned by the exercise of right of eminent domain.
(8) Renovating or otherwise improving or decorating, painting or redecorating space for
tenants or other occupants or vacant tenant space, other than maintenance and repairs required by
this Lease and work in common areas.
(9) Landlords costs of utilities and other services sold separately to tenants for which
Landlord is entitled to be reimbursed by such tenants as a separate charge over and not as part of
the base rent, operating expense, or other rental amounts payable under the lease with such tenant.
(10) Expenses in connection with services or other benefits of a type which Tenant is not
entitled to receive under the Lease but which are provided to another tenant or occupant.
(11) Expenses, including rental, created under any ground or underlying leases.
(12) Any particular items and services for which a tenant otherwise reimburses Landlord by
direct payment over and above the base rent, operating expenses and other rental amounts payable
under the applicable lease.
(13) Any expense for which Landlord is compensated through proceeds of insurance, condemnation
or otherwise.
(14) Expenses for periods of time not included within the term of this Lease.
(15) Expenses that are considered capital improvements and replacements under generally
accepted accounting principles, except to the extent expressly permitted pursuant to clause (b)(9),
above.
(16) Cost of rebuilding after casualty or taking, other than insurance deductibles.
- 10 -
(17) All Operating Expenses shall be reduced by the amount (net of collection costs) of any
insurance reimbursement, discount or allowance received by the Landlord in connection with such
costs.
(18) Costs incurred in the acquisition and development of the Property including the
correction of any defective Base Building Work.
(19) Environmental testing, and the cost of complying with applicable federal, state and local
laws, regulations and rules dealing with handling, storage and disposal of Hazardous Materials
(other than those ordinarily found or used in the customary operation of first class office
buildings), including clean up costs, and any related matters, except in each case to the extent
caused by Tenant or any party for whom Tenant is legally responsible.
(20) That portion of employee expenses allocable to work that is not for the benefit of the
Property or common areas and facilities serving the same; if employees work at more than one
location, their compensation and other labor costs shall be properly allocated.
(21) Administrative fees and compensation for Landlords and managing agents general
administrative staff, to the extent not directly attributable to the management, operation,
maintenance and repair of the Property or common areas and facilities serving the Property (other
than the management fee referred to in subsection (b)(4), above).
(22) Franchise or income taxes imposed on Landlord.
(23) Costs incurred by Landlord as a result of any violation by Landlord or any other tenant
of the terms and conditions of any lease of space.
(24) Costs related to maintaining Landlords existence, either as a corporation, partnership,
or other entity, or costs incurred by Landlord relative to any debt that encumbers the Property (by
example these costs shall include, but not be limited to income tax return preparation, filing
costs, legal costs, etc.).
(25) Costs arising from Landlords charitable contributions not to exceed $500 per year (such
amount to be increased, but never decreased, annually in proportion to any increase in the Consumer
Price Index All Urban Consumers for the Boston Metropolitan area published by the U.S. Department
of Labor or a comparable index reasonably selected by Landlord (such index being referred to herein
as the
CPI
)).
(26) Costs for reserves of any kind.
- 11 -
(27) Costs incurred in connection with Building events for tenants, including, but not limited
to, tenant parties, holiday gifts and tenant welcoming gifts.
(28) Costs for any services to the Premises that are assumed by Tenant pursuant to Section
3.03 of this Lease, whether provided to Tenant or to other tenants of the Building in their
premises.
(29) Costs of audited financial statements, but only to the extent the same is in excess of
$15,000 in any single lease year (such amount to be increased, but never decreased, annually in
proportion to any increase in the CPI).
(d)
Taxes
means all taxes, assessments, betterments, excises, user fees imposed by
governmental authorities, and all other governmental charges and fees of any kind or nature, or
impositions or agreed payments in lieu thereof or voluntary payments made in connection with the
provision of governmental services or improvements of benefit to the Building or the Property),
assessed or imposed against the Building or the Property (including without limitation any personal
property taxes levied on such property or on fixtures or equipment used in connection therewith),
other than a federal or state income tax of general application. Notwithstanding anything to the
contrary herein, Taxes shall exclude (a) any land acquisition costs, and any other fee, cost or tax
(other than increases in real property taxes resulting from reassessments of the Property)
associated with the development or construction of the Property and (b) any interest or penalties
for late payments to the extent relating to a period in which Tenant was not in default of its
obligations to pay Tenants Pro Rata Share of Taxes, and (c) any income, capital levy, transfer,
capital stock, gift, estate or inheritance tax. The amount of any special taxes, special
assessments and agreed or governmentally imposed in lieu of tax or similar charges shall be
included in Taxes for any year but shall be limited to the amount of the installment (plus any
interest, other than penalty interest, payable thereon) of such special tax, special assessment or
such charge required to be paid during or with respect to the year in question. Betterments and
assessments, whether or not paid in installments, shall be included in Taxes in any tax year as if
the betterment or assessment were paid in installments over the longest period permitted by law,
together with the interest thereon charged by the assessing authority for the payment of such
betterment or assessment in installments.
If during the term of this Lease the present system of ad valorem taxation of property shall
be changed so that, in lieu of or in addition to the whole or any part of such ad valorem tax there
shall be assessed, levied or imposed on such property or on Landlord any kind or nature of federal,
state, county, municipal or other governmental capital levy, income, sales, franchise, excise or
similar tax, assessment, levy, charge or fee (as distinct from the federal and state income tax in
effect on the date of this Lease) measured by or based in whole or in part upon building valuation,
mortgage valuation, rents, services or any other incidents, benefits or measures of real property
or real property operations, then any and all of such taxes, assessments, levies, charges and fees
shall be included within the term of Taxes, but only to the extent that the same would be payable
if the Property were the only property of Landlord. Taxes shall also include expenses, including
reasonable fees of attorneys, appraisers and other consultants, incurred in connection with any
efforts to obtain abatements or reduction or to assure maintenance of Taxes for any year wholly or
partially included in the term of this
- 12 -
Lease, whether or not successful and whether or not such efforts involved filing of actual
abatement applications or initiation of formal proceedings.
(e) Tenant shall have the right for a period of ninety (90) days (the
Audit Period
)
following its receipt of Landlords statement of Additional Rent due on account of Operating
Expenses to examine and copy Landlords books and records concerning Operating Expenses for the
calendar year covered by such statement in the offices of the property manager or another location
reasonably designated by Landlord in the greater Boston area, so long as Tenant pays any amount
billed by Landlord on account of Additional Rent without protest (but subject to Tenants right to
recover any overpayments pursuant to this paragraph). Tenants audit may be conducted by its
employees or its designated accountants, provided that the accountants must be employed on a
regular fee for services basis and not on a contingency fee basis. If, by notice to Landlord given
after such examination but during the Audit Period (which notice shall be accompanied by
documentation evidencing the results of Tenants audit to Landlords reasonable satisfaction),
Tenant disputes the amount of Additional Rent for Operating Expenses shown on the statement, then
Tenant may request that the amount of Additional Rent for Operating Expenses for the year in
question be determined by an audit conducted by a certified public accountant reasonably selected
by both parties, provided that if the parties are unable so to agree on an accountant within ten
(10) days after receipt of Tenants notice, then within twenty (20) days after Tenants notice is
given Tenant may submit the dispute for determination by an arbitration conducted by a single
arbitrator in the Boston Office of the American Arbitration Association (
AAA
) in
accordance with the AAAs Commercial Arbitration Rules. The arbitrator shall be selected by the
AAA and shall be a certified public accountant with at least ten (10) years of experience in
auditing mixed use office, laboratory and research and development buildings in the suburban Boston
area. The cost of the accountant selected by both parties, and the arbitrator, if applicable,
shall be shared equally by the parties. Tenant and each person reviewing Landlords books and
records or participating in the arbitration shall agree in an instrument prepared by Landlord that
all information obtained from Landlords books and records shall be kept confidential and used only
for the purpose of determining amounts properly due under this Lease. If the Additional Rent due
is finally determined to be less than the Additional Rent paid by Tenant on account of Landlords
calculation of Operating Expenses, Landlord shall either promptly refund to Tenant the difference
or credit same against Rent next due from Tenant. If the Additional Rent due was less than
ninety-five percent (95%) of the Additional Rent paid by Tenant on account of Landlords
calculation of Operating Expenses, Landlord shall reimburse Tenant for the reasonable third-party
costs of reviewing Landlords books and records, but in any event not to exceed $4,000 (such amount
to be increased, but never decreased, annually in proportion to any increase in the CPI).
(f) Operating Expenses which are incurred jointly for the benefit of the Building and another
building or premises shall be allocated between the Building and the other building or premises in
accordance with the ratio of their respective rentable areas calculated using a consistent
methodology, unless Landlord reasonably determines that the other building or premises is used for
a purpose materially different than the Building or that the Operating Expense in question results
from a service provided or used in a materially disproportionate manner, in which case the affected
cost items shall be allocated on a reasonable basis by
- 13 -
Landlord. Landlord may elect to allocate Operating Expenses separately among tenants with
different use categories in the Building from time to time based on such factors as the Landlord
reasonably determines (rather than on a proportionate basis based on square feet) if Landlord
reasonably determines it is necessary to fairly allocate the Operating Expenses. If the Building
and the land appurtenant thereto are not assessed as a separate tax parcel, then real estate taxes
shall be allocated between the Building and the balance of the tax parcel based on the factors
taken into account by the municipal tax assessor or such other reasonable method as Landlord may
elect, which may be based on the relative square footages of the buildings and their use or may be
in accordance with the ratio of their respective fair market values
.
In the event of a dispute
concerning the allocation of Operating Expenses or Taxes, then the matter shall be submitted by
Landlord and Tenant for resolution by arbitration in accordance with the procedures set forth in
Section 2.02(e).
Section 2.03.
Payment of Rent
. The term
Additional Rent
shall mean all
amounts due under Section 2.02 for Operating Expenses and Taxes, and all other amounts (except Base
Rent) to be paid by Tenant to Landlord in accordance with the terms of this Lease, including
without limitation payments to Landlord for reimbursement of any costs expended upon an Event of
Default by Tenant. The term
Rent
shall mean Base Rent and Additional Rent. All payments
of Rent shall be made without set-off, deduction or offset except as expressly provided in this
Lease. All payments of Rent shall be made to the Landlord at c/o Davis Marcus Management, One
Appleton Street, Boston, Massachusetts 02116, Attn: Larry Lenrow, or as may be otherwise directed
by the Landlord in writing, which may include a direction to pay by wire transfer to an account
specified by Landlord. Without limiting the foregoing, Tenants obligation to pay Rent shall be
absolute, unconditional, and independent and shall not be discharged or otherwise affected by any
law or regulation now or hereafter applicable to the Premises, or any other restriction on Tenants
use, or, except as provided in Article 11, any casualty or taking, or any failure by Landlord to
perform or other occurrence; and, except as expressly provided in this Lease, Tenant assumes the
risk of the foregoing and waives all rights now or hereafter existing to quit or surrender the
Premises or any part thereof, to terminate or cancel this Lease, or to assert any defense in the
nature of constructive eviction to any action seeking to recover rent. Subject to the provisions
of this Lease, however, Tenant shall have the right to injunctive relief or to seek judgments for
direct money damages occasioned by Landlords breach of its Lease covenants.
Section 2.04.
Rent from Real Property.
It is intended that all Rent payable by Tenant
to Landlord, which includes all sums, charges, or amounts of whatever nature to be paid by Tenant
to Landlord in accordance with the provisions of this Lease, shall qualify as rents from real
property within the meaning of both Sections 512(b)(3) and 856(d) of the Internal Revenue Code of
1986, as amended (the
Code
) and the U.S. Department of Treasury Regulations promulgated
thereunder (the
Regulations
). If Landlord, in its sole discretion, determines that there
is any risk that all or part of any Rent shall not qualify as rents from real property for the
purposes of Sections 512(b)(3) or 856(d) of the Code and the Regulations, Tenant agrees (i) to
cooperate with Landlord by entering into such amendment or amendments to this Lease as Landlord
reasonably deems necessary to qualify all Rent as rents from real property, and (ii) to permit an
assignment of this Lease; provided, however, that any adjustments required under this section shall
be made so as to produce the equivalent (in economic terms) Rent as payable before the adjustment.
- 14 -
Section 2.05.
Security Deposit
. On or before April 27, 2009, Tenant shall deliver to
Landlord as security for the performance of the obligations of Tenant hereunder a letter of credit
in the initial amount of $1,000,000 (the
Letter of Credit Amount
) in accordance with this
Section 2.05 (as renewed, replaced, increased and/or reduced pursuant to this Section 2.05, the
Letter of Credit
). Tenants failure to timely deliver the Letter of Credit to Landlord,
or increase the amount of the Letter of Credit as required under this Section 2.05, at any time
pursuant to this Section 2.05 shall constitute an Event of Default under this Lease, without any
notice or cure period under Article 14. The Letter of Credit (i) shall be irrevocable and shall be
issued by a commercial bank reasonably acceptable to Landlord that has an office for presentment in
the City of Waltham or City of Boston, in the form attached as
Exhibit 2.05
or such other
substantially similar form as is reasonably acceptable to Landlord, (ii) shall require only the
presentation to the issuer of a certificate of the holder of the Letter of Credit stating that
Landlord is entitled to draw on the Letter of Credit pursuant to the terms of this Lease,
(iii) shall be payable to Landlord or its successors in interest as the Landlord and shall be
freely transferable without cost to Landlord, any such successor or any lender holding a collateral
assignment of Landlords interest in the Lease, (iv) shall be for an initial term of not less than
one year and contain a provision that such term shall be automatically renewed for successive
one-year periods unless the issuer shall, at least 45 days prior to the scheduled expiration date,
give Landlord notice of such non-renewal, and (v) shall otherwise be in form and substance
reasonably acceptable to Landlord. Landlord acknowledges that, as of the date of this Lease, Bank
of America is an approved issuer of the Letter of Credit. Notwithstanding the foregoing, the term
of the Letter of Credit for the final period shall be for a term ending not earlier than the date
sixty (60) days after the last day of the Term. Tenant acknowledges that Landlord may be required
to pledge the proceeds of the Letter of Credit to any lender holding a collateral assignment of
Landlords interest in the Lease and agrees to provide Landlord with such documentation as Landlord
may reasonably request, and to cooperate with Landlord as is necessary, to evidence the consent to
such pledge by the issuer of the Letter of Credit.
(a) The Letter of Credit Amount shall be increased by Tenant (via amendment to the
then-existing Letter of Credit or by supplying Landlord with a replacement Letter of Credit) by the
amount of $1,500,000 if Tenant fails, at any time during the term of this Lease, to meet the
Financial Test (as hereinafter defined). The
Financial Test
shall mean that Tenant has
unrestricted cash and cash equivalents, as determined in accordance with generally accepted
accounting principles, consistently applied, equal to at least $50,000,000 in United States
dollars. If, at any time after the Letter of Credit is increased pursuant to the foregoing, Tenant
subsequently meets the Financial Test for three complete calendar quarters in a row and reasonably
evidences the same to Landlord, then, provided that Tenant is not then in default beyond applicable
notice or cure periods and no Bankruptcy Event (as defined below) is then in effect, Tenant shall
be entitled to reduce the Letter of Credit by the amount of $1,500,000 (but to an amount equal to
no less than $1,000,000) until such time, if any, that Tenant subsequently fails to meet the
Financial Test. A
Bankruptcy Event
shall mean that Tenant files a voluntary petition in
bankruptcy or shall be adjudicated a bankrupt or insolvent, shall file any petition or answer
seeking any reorganization, arrangement, composition, dissolution or similar relief under any
present or future federal, state or other statute, law or regulation relating to bankruptcy,
insolvency or other relief for debtors, or shall seek, or consent, or acquiesce in the appointment
of any trustee, receiver or liquidator of Tenant of all or any substantial part of their respective
- 15 -
properties, or of the Premises, or shall make any general assignment for the benefit of
creditors; or any court enters an order, judgment or decree approving a petition filed against
Tenant seeking any reorganization, arrangement, composition, dissolution or similar relief under
any present or future federal, state or other statute, law or regulation relating to bankruptcy,
insolvency or other relief for debtors.
Landlord shall be entitled to draw upon the Letter of Credit in part or for its full amount,
as Landlord may elect (i) if an Event of Default is then continuing (or if Tenant has failed to
timely pay rent or perform any of its other obligations under the Lease and transmittal of a
default notice or running of any cure period is barred or tolled by applicable law), (ii) if, not
less than 30 days before the scheduled expiration of the Letter of Credit, Tenant has not delivered
to Landlord a new Letter of Credit in accordance with this Section 2.05 (which failure shall be
deemed a default without notice or cure period) or (iii) if the credit rating of the long-term debt
of the issuer of the Letter of Credit (according to Moodys or similar national rating agency) is
downgraded to a grade below investment rate), or if the issuer of the Letter of Credit shall enter
into any supervisory agreement with any governmental authority, or if the issuer of the Letter of
Credit shall fail to meet any capital requirements imposed by applicable law. Landlord may, but
shall not be obligated to, apply the amount so drawn to the extent necessary to cure an Event of
Default under the Lease and/or make any payments due to Landlord hereunder on account of such Event
of Default including without limitation any unpaid Rent, any damages arising from a termination of
this Lease in accordance with its terms, and for any damages arising from any rejection of this
Lease in a bankruptcy proceeding commenced by or against Tenant. Any amount drawn in excess of the
amount applied by Landlord pursuant to the immediately preceding sentence shall be held by Landlord
as a security deposit for the performance by Tenant of its obligations hereunder. Said security
deposit may be mingled with other funds of Landlord, and no fiduciary relationship shall be created
with respect to such deposit, nor shall Landlord be liable to pay Tenant interest thereon. If
Tenant shall fail to perform any of its obligations under this Lease, Landlord may, but shall not
be obliged to, apply the security deposit to the extent necessary to cure the Event of Default
and/or make any payments due to Landlord hereunder on account of such Event of Default. After any
such application by Landlord of the Letter of Credit or security deposit, Tenant shall reinstate
the Letter of Credit to the amount then required to be maintained hereunder, upon demand (and, upon
such reinstatement, Landlord shall return any cash security deposit then being held by Landlord to
Tenant). Within forty-five (45) days after the expiration or sooner termination of the Term the
Letter of Credit and any security deposit, to the extent not applied, shall be returned to the
Tenant, without interest. For purposes of this Section 2.05, an Event of Default shall also include
any default that is prevented or delayed from ripening into an Event of Default due to Landlords
inability to give any required notice or the tolling of any grace or cure period caused by any stay
or injunction arising from the bankruptcy of Tenant.
In the event of a sale of the Property or lease, conveyance or transfer of the Property,
Landlord shall have the right to transfer the security to the transferee (New Landlord) and
Landlord shall thereupon be released by Tenant from all liability for the return of such security;
and Tenant agrees to look to the New Landlord solely for the return of said security. The
provisions hereof shall apply to every transfer or assignment made of the security to a New
Landlord. Tenant further covenants that it will not assign or encumber
- 16 -
or attempt to assign or encumber the Letter of Credit or the monies deposited herein as
security, and that neither Landlord nor its successors or assigns shall be bound by any assignment,
encumbrance, attempted assignment or attempted encumbrance
Article 3.
Utility Services
Section 3.01.
Electricity
. From and after the Commencement Date for each Portion of
the Premises, Tenant agrees to pay, or cause to be paid, as Additional Rent, all charges for
electricity consumed in the applicable Portion of the Premises (or by any special facilities
serving the Premises). Tenant will comply with all contracts relating to any such services.
Tenants charges for such utility usage shall be based upon Tenants actual usage as determined by
Landlords reading of check-meters serving the Premises provided as part of the Finish Work.
Tenant shall make monthly payments of Additional Rent on account of electricity, in advance, on the
applicable Commencement Date and the first of each month thereafter equal to one-twelfth (1/12) of
the annual amount of such Additional Rent reasonably projected by Landlord, based upon prior usage
at the relevant building or as projected by Landlords engineer, to be due from Tenant (pro-rated
for any partial month at the beginning or end of the term) from time to time. Tenants monthly
payments may be reasonably revised by Landlord from time to time so that Tenants aggregate monthly
payments shall equal the Additional Rent then projected to be due for the year in question.
Landlord shall provide Tenant with a statement showing Tenants actual usage of electricity based
on the reading of Tenants check-meters no less often than annually. If the Additional Rent due
for electricity is less than the Additional Rent for electricity paid by Tenant on account of
Landlords calculation of estimated electrical charges, Landlord shall either promptly refund to
Tenant the difference or credit same against Rent next due from Tenant. If the Additional Rent due
for electricity is more than Landlords calculation of estimated electrical charges, Tenant shall
pay such amount to Landlord within 30 days following receipt of the bill therefor. If such usage
is not separately or check-metered from time to time, such usage and billing shall be based upon
the reasonable estimate of Landlords consulting engineer. If Tenant is directed by Landlord to
make payments directly to the utility company for separately metered electricity, then Tenant shall
pay such bills directly to the utility company, Tenant shall contract directly for electric
service, and shall pay all bills for such utility service as and when due. Tenant shall pay all
costs associated with obtaining the electricity service, including costs for equipment
installation, maintenance and repair; exit fees, stranded cost charges, and the like.
Section 3.02.
Other Landlord Services
. Landlord shall provide Tenant with access to
the Premises, the Building and the parking areas serving the Building 24 hours per day, 365 days
per year, subject to matters described in Section 20.14 and Landlords reasonable security
measures, and subject to Landlords right to prohibit, restrict or limit access to the Building or
the Premises in emergency situations if Landlord determines, in its reasonable discretion, that it
is necessary or advisable to do so in order to prevent or protect against death or injury to
persons or damage to property. Landlord agrees to furnish to the Premises the services, and for
the
- 17 -
periods, set forth on
Exhibit 3.02
(Tenant paying for such services as Operating
Expenses). All other services necessary for the use, occupancy or operation of the Premises, or to
maintain the same in good condition and repair (except to the extent set forth in Section 7.01,
below), shall be provided by Tenant. In the event of an unanticipated maintenance or repair cost
that is incurred by Landlord as an Operating Expense, Landlord may notify Tenant upon determining
the maintenance or repair is needed and, if requested by Landlord, Tenant shall pay the reasonable
cost thereof to Landlord within thirty (30) days after request in addition to the estimated monthly
payments for Operating Expenses under Section 2.02 and the additional payment shall be credited
against the total amount of Operating Expenses due under Section 2.02 for the year in question.
Landlord shall not be required to provide services which exceed the capacity of the building
systems serving the Premises and shall not be required to act (or prevented from acting) in any
manner which might create unsafe conditions, violate applicable legal requirements, or be
inconsistent with standards for the operation of comparable institutionally-financed mixed use
office, laboratory and research and development buildings. In any event, subject to Section 7.06
below, Landlords obligation to provide such services shall be subject to interruption due to any
act or omission of Tenant (including a failure to pay for utilities), accident, to the making of
repairs, alterations or improvements (other than those due to the willful misconduct of Landlord),
to labor difficulties, to trouble in obtaining fuel, electricity, service or supplies from the
sources from which they are usually obtained for such building, governmental restraints, or to any
cause beyond the Landlords reasonable control. In the event of any such disruption or
interruption (other than an act or omission of Tenant) prior to the time when Tenant is responsible
for providing such services, Landlord will use diligent efforts to restore the services, or to
cause the services to be restored, as promptly as reasonably possible. In no event shall Landlord
be liable for any interruption or delay in any of the above services for any of such causes except
as provided in Section 7.06.
Normal Building hours of operation are Monday through Friday, 8 a.m. to 6 p.m., and Saturday 8
a.m. to 1 p.m., exclusive of state and federal holidays and such other days as Landlord may
reasonably designate as Building holidays (e.g. the day after Thanksgiving).
Section 3.03.
Facilities Management Rights
.
(a) So long as an Event of Default does not then exist, Tenant shall have the right to assume
all or any portion of the on-site management services with respect to the Building systems serving
the Premises described on
Exhibit 3.03-1
commencing on a date no earlier than the initial
Commencement Date. If Tenant desires to assume all or any portion of such on-site management
responsibilities pursuant to this Section 3.03, Tenant shall notify Landlord in writing (a
Facilities Management Notice
) at least sixty (60) days prior to the first day of the
month in which Tenant intends to assume such management responsibilities and identify by reference
to
Exhibit 3.03-1
the responsibilities to be assumed. In connection with any such change
in management, the parties shall cooperate and coordinate with each other so as to effect a smooth
transition and transfer of information and responsibility. During any period that Tenant is
exercising its facilities management rights pursuant to this Section 3.03, the provisions of
Exhibit 3.03-2
shall apply.
- 18 -
Tenant shall have the right voluntarily to terminate any portion of its management services
under this Section 3.03 and to relinquish all or any portion of such services under this
Section 3.03 upon sixty (60) days notice and may subsequently again exercise its management rights
hereunder (in whole or in part) provided that the conditions set forth in this Section 3.03 are
then satisfied and more than twelve (12) months have elapsed following the effective date of the
termination of the applicable portion of its management services. If Landlord terminates Tenants
management services pursuant to the provisions of
Exhibit 3.03-2
, then Tenant shall have no
further right to manage any portion of the Building under this Section 3.03. In no event shall
Tenant, in the exercise of its rights under this Section 3.03, be permitted to assume the
management of areas or facilities of the Building serving tenants other than Tenant.
(b) During such time as Tenant is exercising its facilities management rights pursuant to this
Section 3.03, Tenant will cooperate and work with Landlord to manage the same cooperatively with
the remainder of the Property. In all events, Tenant shall be fully responsible for all costs and
expenses of facilities management under this Section, subject to reimbursement for capital
expenditures as set forth below. Tenants rights under this Section 3.03 shall be personal to the
Tenant originally named hereunder. In no event may Tenants facilities management rights pursuant
to this Section 3.03 be transferred to or exercised by any other transferee.
Notwithstanding anything in this Lease to the contrary, so long as Tenant is exercising its
facilities management rights pursuant to this Section 3.03, Tenant will maintain, repair and
replace, at its sole cost and expense (subject to reimbursement with respect to capital
expenditures as set forth below) portions of the Building as further described on
Exhibit
3.03-1
and designated in Tenants Facilities Management Notice (the
Self-Managed
Components
) and Landlord shall, during such period, have no obligation to maintain, repair, or
replace the Self-Managed Components. If any element of the Self-Managed Components cannot be fully
repaired or restored, and Landlord authorizes replacement of such item or replacement, or such
replacement item is included in an Approved Budget (as defined in
Exhibit 3.03-2
) Tenant
shall replace it at Tenants cost even if the benefit or useful life of such replacement extends
beyond the term of this Lease and Landlord shall reimburse Tenant for such costs to the extent that
such costs are capital expenditures that would not have been includable in Operating Expenses
payable by Tenant under this Lease. Landlord shall reimburse Tenant for the costs set forth in the
preceding sentence by paying such costs within 30 days after receiving Tenants invoice therefor.
If Landlord pays costs for capital expenditures when invoiced under this paragraph and Tenant
subsequently exercises an option to extend the term in accordance with this Lease, Tenant shall
reimburse Landlord for all such costs allocable to the extension term or terms (to the extent that
such costs would have been includable in Operating Expenses payable by Tenant) within 30 days after
written request by Landlord made at any time after Tenant exercises the applicable extension
option. Landlords and Tenants obligations under the prior two sentences shall survive the
expiration of the term.
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Article 4.
Insurance
Section 4.01.
Compliance with Property Insurance
. The Tenant shall not permit any use
of the Premises which will make voidable any insurance on the Property, or on the contents of said
property, or which shall be contrary to any law or regulation from time to time established by the
Insurance Services Office, or any similar body succeeding to its powers. The Tenant shall, on
demand, reimburse the Landlord in full for its allocable share of any extra insurance premiums
caused by the particular use or manner of use of the Premises by Tenant.
Section 4.02.
Tenants Required Insurance
. The Tenant shall maintain with respect to
the Premises and the property of which the Premises are a part, the following insurance:
(a) Commercial general liability insurance, including Broad Form Project Damage and
Contractual Liability, with respect to the Premises, their use, occupancy and operation, under
which Tenant is the named insured and Landlord, Landlords managing agent, any mortgagee, the
association of unit owners under the Reservoir Woods Primary Condominium, The Prudential Insurance
Company of America, and any Landlord agents or contractors (provided that Landlord has identified
such mortgagee, agents and/or contractors by notice to Tenant) are named as additional insureds
with respect to their vicarious liability for covered claims arising from Tenants use or occupancy
of the Premises or the Property. Such coverage shall be written on an occurrence basis, with the
following minimum limits: General Aggregate $2,000,000.00; Products/Completed Operations Aggregate
$2,000,000.00; Each Occurrence $1,000,000.00; Personal and Advertising Injury $1,000,000.00;
Medical Payments $5,000.00 per person. In addition, Tenant shall maintain Umbrella/Excess
Liability insurance on a following form basis with the following minimum limits: General Aggregate
$5,000,000.00; Each Occurrence $5,000,000.00;
(b) Commercial property insurance on an all risk basis, and specifically including sprinkler
leakages, vandalism, and malicious mischief and plate glass damage covering all property of every
description owned or brought into the Premises by Tenant, its employees, agents, contractors,
subtenants, or assignees including stock-in-trade, furniture, fittings, installations, alterations,
additions, partitions and fixtures or anything in the nature of a leasehold improvement made or
installed by or on behalf of the Tenant, including without limitation any Tenant Work and the
Finish Work, in an amount of not less than one hundred percent (100%) of the full replacement cost
thereof as shall from time to time be reasonably approved by Landlord in form satisfactory to
Landlord in its reasonable discretion and plate glass insurance coverage covering all plate glass
within the Premises. Landlord shall be named as loss payee on such property insurance to the
extent of its interest;
- 20 -
(c) Policies of insurance against loss or damage arising from incidents relating to the
air-conditioning and/or heating system, electrical systems, steam pipes, steam turbines, steam
engines, steam boilers, other pressure vessels, high pressure piping and machinery, if any,
installed in, or serving, the Premises in an amount satisfactory to Landlord in its reasonable
discretion;
(d) Workers compensation and occupational disease insurance with statutory limits and
Employers Liability insurance with the following limits: Bodily injury by disease per person
$1,000,000.00; Bodily injury by accident policy limit $1,000,000.00; Bodily injury by disease
policy limit $1,000,000.00;
(e) Business automobile liability insurance including owned, hired and non-owned automobiles,
in an amount not less than One Million Dollars ($1,000,000) combined single limit per occurrence,
with such commercially reasonable increases as Landlord may require from time to time;
(f) Business interruption insurance insuring interruption or stoppage of Tenants business at
the Premises for a period of not less than twelve (12) months; and
(g) with increases in the foregoing limits, and any other form or forms of insurance as
Landlord may reasonably require from time to time, with any other form(s) of insurance in amounts
and for insurable risks (on commercially reasonable terms) against which a prudent tenant would
protect itself to the extent landlords of comparable buildings in the vicinity of the Property
require their tenants to carry such other form(s) of insurance.
Each policy of insurance required under this Section 4.02 shall be issued by companies rated
not less than A-/X by Bests Rating Service (or its successor) or otherwise acceptable to Landlord
in the Landlords reasonable discretion and licensed to do business in The Commonwealth of
Massachusetts, and shall be noncancellable with respect to Landlord and any mortgagee (provided
that Landlord has identified such mortgagee by notice to Tenant), without thirty (30) days prior
notice to Landlord and such mortgagee. Tenant shall deliver to Landlord and any mortgagee
(provided that Landlord has identified such mortgagee by notice to Tenant) certificate(s) of
insurance evidencing the coverage required hereunder upon commencement of the term of this Lease
and no later than thirty (30) days prior to the expiration of the coverage evidenced by a prior
certificate. All such insurance certificates shall provide that such policy shall not be canceled
or reduced as to coverage or amount without at least thirty (30) days prior written notice to each
insured named therein. Tenants liability insurance policy shall be primary with respect to all
claims for which Tenant is to indemnify Landlord under Article 12. All furnishings, fixtures,
equipment, effects and property of Tenant and of all persons claiming through Tenant which from
time to time may be on the Premises or Property or in transit thereto or therefrom (
Tenant
Property
) shall be at the sole risk of Tenant, and if the whole or any part thereof shall be
destroyed or damaged by fire, water or otherwise, or by the leakage or bursting of water pipes, or
other pipes, by theft or from any other cause, no part of said loss or damage is to be charged to
or be borne by Landlord.
- 21 -
Section 4.03.
Landlords Required Insurance
. The Landlord shall maintain at least
Seven Million ($7,000,000.00) Dollars of commercial general liability insurance (including
so-called umbrella coverage) covering the Building. Landlord shall maintain physical damage and
casualty insurance on an all risk basis on the Building (excluding furnishings, fixtures,
equipment and other personal property of Tenant) in the amount of the full replacement cost of the
Premises (other than Tenant Work and any Finish Work) as reasonably determined by Landlord, and
shall also maintain boiler and rent loss insurance in amounts required by Landlords mortgage
lender or otherwise reasonably determined by Landlord. Landlords insurance shall be issued by
companies rated not less than A-/X by Bests Rating Service (or its successor) and licensed to do
business in The Commonwealth of Massachusetts. Landlord shall cause the casualty insurance
replacement cost coverage to be updated as reasonably necessary. Any or all of Landlords
insurance may be provided by blanket coverage maintained by Landlord or any affiliate of Landlord
under its insurance program for its portfolio of properties. Landlord may maintain other coverages
in such amounts as are required by Landlords mortgage lender or otherwise as reasonably determined
by Landlord.
Section 4.04.
Tenant Work Insurance
. In addition, during the performance of any
Tenant Work, in addition to the above coverage required to be maintained by Tenant, Tenant shall
cause the general contractor performing any work in the Premises (and the general contractor shall
cause its subcontractors) to carry: (a) workers compensation and occupational disease insurance in
statutory amounts; (b) employers liability insurance with a limit of not less than One Million
Dollars ($1,000,000); (c) commercial general liability insurance, including personal injury and
property damage, on an occurrence basis in the amount of a combined single limit of not less than
One Million Dollars ($1,000,000.00) for each occurrence, such limit to be increased to Five Million
Dollars ($5,000,000.00) if the cost of the work exceeds One Million Dollars ($1,000,000.00); and
(d) all risk installation floater insurance (on the complete value/full coverage form) to protect
Landlords interest and that of Tenant, contractors and subcontractors during the course of the
construction, with limits of not less than the total replacement cost of the completed improvements
under construction. Such contractor insurance policies shall be endorsed to include Landlord, The
Prudential Insurance Company of America, the condominium association, Landlords managing agent,
any mortgagee, and any other third party providing services to the Building (provided that Landlord
has identified such mortgagee and/or third parties by notice to Tenant) as additional insureds.
Section 4.05.
Waiver of Subrogation
. Any property insurance carried by either party
under Sections 4.02(b), 4.02(c) or 4.03 shall, if it can be so written without additional premium
or with an additional premium which the other party agrees to pay, include a clause or endorsement
denying to the insurer rights of subrogation against the other party to the extent rights have been
waived by the insured hereunder prior to occurrence of injury or loss. Each party, notwithstanding
any provisions of this Lease to the contrary, hereby waives any rights of recovery against the
other for injury or loss due to hazards covered by property insurance carried (or required to be
carried) by the party suffering the injury or loss to the extent of the coverage provided (or to be
provided) thereunder.
Section 4.06.
Certificates of Insurance
. Within fifteen (15) days of request, each
party shall provide the other with certificates of all insurance maintained or required to be
maintained under this Lease.
- 22 -
Article 5.
Use of Premises
Section 5.01.
Permitted Use
. The Tenant covenants and agrees to use the Premises only
for the purposes of business and professional offices, research labs, and ancillary and subordinate
uses customarily undertaken as accessory uses in connection therewith including without limitation
an animal care facility not to exceed Tenants ACF Share (as defined below) of the Premises
(measured in rentable square feet), and for no other purpose (the
Permitted Use
).
Tenants ACF Share
shall mean the percentage of the Premises that is proportionate
to the percentage of accessory animal care facility space permitted in the Building from time to
time under applicable laws, codes and ordinances, which, as of the date hereof, is 20%. If Tenant
is then utilizing all or substantially all of Tenants ACF Share, and provided that no Event of
Default is then continuing, then, following the initial lease-up of the entire Building, upon
Tenants reasonable request from time to time Landlord shall allocate any then-excess animal care
facility rights at the Building (i.e. rights in excess of Tenants ACF Share not then allocated to
other tenants) to Tenant as an increase in the foregoing limit so long as such use, as increased,
remains an accessory use ancillary and subordinate to Tenants other activities in the Premises.
Section 5.02.
Tenants Conduct; Hazardous Materials
.
(a) Tenant will not make or permit any occupancy or use of any part of the Premises for any
hazardous, offensive, dangerous, noxious or unlawful occupation, trade, business or purpose or any
occupancy or use thereof which is contrary to any law, by-law, ordinance, rule, permit or license,
and will not cause, maintain or permit any nuisance in, at or on the Premises; provided, however,
that the Permitted Use, if conducted in conformance with the terms of this Lease, all applicable
legal requirements, and customary standards for first class office, laboratory and research and
development space, shall not be deemed to be a hazardous, offensive, dangerous, or noxious
occupation, trade, business or purpose or a nuisance unless it adversely affects tenants or
occupants outside the Premises. Tenant shall not conduct or permit any foreclosure or going out of
business auctions, or sheriffs sales, at the Property. Tenant shall not place any loads upon the
floors, walls, or ceiling which endanger the structure, or place any Hazardous Materials in the
drainage system of the Premises or Property (other than Hazardous Materials in compliance with
Environmental Laws applicable to the drainage system of the Premises) or overload existing
electrical or other mechanical systems. Tenant shall not use any machinery or equipment in the
Premises that causes excessive noise or vibration perceptible from the exterior of the Premises, as
reasonably determined by Landlord, or that unreasonably interferes with the use or enjoyment of the
Property by other tenants or lawful occupants. No waste materials or refuse shall be dumped upon
or permitted to remain outside of the Premises except in trash containers placed inside exterior
enclosures designated by Landlord for that purpose. No sign, antenna or other structure or thing
shall be erected or placed on the Premises or any part of the exterior of any building or on the
land comprising the Property or erected so as
- 23 -
to be visible from the exterior of the building containing the Premises except as expressly
permitted pursuant to Section 20.12 of this Lease. Tenant will not cause or permit any waste,
overloading, stripping, damage, disfigurement or injury of or to the Property, the Premises, or any
part thereof.
(b) Tenant agrees not to generate, store or use any Hazardous Materials (as hereinafter
defined) on or about the Premises, except (a) those used by Tenant in its general office operations
and janitorial services, in both cases limited to such Hazardous Materials in such amounts as are
customarily used in general office uses and for janitorial service provided to general office uses,
and (b) those used in connection the Permitted Uses, and in each case only in compliance with any
and all Environmental Laws (as defined below) and, in each of (a) and (b), in a manner consistent
with the use and operation of a biotechnology laboratory below a so-called BL-3 level (or such
lower level as is required pursuant to applicable Environmental Laws) in a mixed-use setting.
Tenant shall provide Landlord, upon Landlords written request, with copies of all Material Safety
Data Sheets (
MSDS
) for Hazardous Materials used or stored in the Premises. Following the
initial occupancy of the Premises, Tenant agrees to notify Landlord prior to introducing any
Hazardous Materials into the Premises that require special precautions or facilities materially
different from Tenants initial operations in the Premises. In all events, Tenant agrees not to
release or permit Tenant or Tenants contractors, subtenants, licensees, invitees, agents, servants
or employees or others for whom Tenant is legally responsible (collectively, with Tenant,
Tenant Responsible Parties
) to release any Hazardous Materials on the Premises in
violation of or that requires reporting under any Environmental Law, and not to dispose of
Hazardous Materials (a) on the Premises or (b) from the Property to any other location except a
properly approved disposal facility and then only in compliance with any and all Environmental Laws
regulating such activity, nor permit any occupant of the Premises to do so. In all events Tenant
shall comply with all applicable provisions of the standards of the U.S. Department of Health and
Human Services as further described in the USDHHS publication Biosafety in Microbiological and
Biomedical Laboratories as it may be further revised, or such nationally recognized new or
replacement standards as may be reasonably selected by Landlord.
(c) For purposes of this Lease,
Hazardous Materials
shall mean any substance
regulated under any Environmental Law, including those substances defined in 42 U.S.C. Sec.
9601(14) or any related or applicable federal, state or local statute, law, regulation, or
ordinance, pollutants or contaminants (as defined in 42 U.S.C. Sec. 9601(33), petroleum (including
crude oil or any fraction thereof), any form of natural or synthetic gas, sludge (as defined in 42
U.S.C. Sec. 6903(26A), radioactive substances, hazardous waste (as defined in 42 U.S.C. Sec.
6903(27)) and any other hazardous wastes, hazardous substances, contaminants, pollutants or
materials as defined, regulated or described in any of the Environmental Laws. As used in this
Lease,
Environmental Laws
means all federal, state and local laws relating to the
protection of the environment or health and safety, and any rule or regulation promulgated
thereunder and any order, standard, interim regulation, moratorium, policy or guideline of or
pertaining to any federal, state or local government, department or agency, including but not
limited to the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as
amended, the Superfund Amendments and Reauthorization Act of 1986, the Clean Water Act, the Clean
Air Act, the Toxic Substances Control Act, the Occupational Safety and Health Act, the
- 24 -
Federal Insecticide, Fungicide and Rodenticide Act, the Marine Protection, Research, and
Sanctuaries Act, the National Environmental Policy Act, the Noise Control Act, the Safe Drinking
Water Act, the Resource Conservation and Recovery Act, as amended, the Hazardous Material
Transportation Act, the Refuse Act, the Uranium Mill Tailings Radiation Control Act and the Atomic
Energy Act and regulations of the Nuclear Regulatory Agency, Massachusetts General Laws Chapters
21C and 21E, and any other state and local counterparts or related statutes, laws, regulations, and
order and treaties of the United States.
(d) Tenant shall permit Landlord and Landlords agents, representatives and employees,
including, without limitation, legal counsel and environmental consultants and engineers, access to
the Premises during the term upon at least twenty-four (24) hours prior notice (which may be
verbal, and no such prior notice is necessary in the event of an emergency threatening life or
property) to Don Reitano (Director of Corporate Operations) or such other employee of Tenant as
Tenant may designate to Landlord from time to time for purposes of conducting environmental
assessments; provided, however, that such assessments may only be conducted if (i) Landlord has
reason to believe that there has been a release or threat of release of Hazardous Materials in a
reportable quantity at the Premises or arising from Tenants activities at the Property or (ii)
requested by an actual or prospective mortgage lender, purchaser or equity investor. Landlord
shall permit Tenant or Tenants representatives to be present during any such assessment, and any
investigation, testing or sampling. In making any such entry, Landlord shall avoid materially
interfering with Tenants use of the Premises, and upon completion of Landlords assessment,
investigation, and sampling, shall substantially repair and restore the affected areas of the
Premises from any damage caused by the assessment. Such assessment shall be at Landlords expense,
provided that if the assessment shows that a release of Hazardous Materials in violation of this
Lease has occurred, then Landlords actual, reasonable, out-of-pocket costs relating to such
assessment shall be reimbursed by Tenant. Tenant shall pay for all costs reasonably incurred by
Landlord, for independent consultants or otherwise, in connection with inspections, investigations,
and/or response actions concerning a release or threat of release of Hazardous Materials at the
Premises.
(e) Tenant covenants to use best industry practices in the conduct of all laboratory
operations and the storage, use, treatment, and disposal of Environmental Substances at the
Premises. Tenant shall prepare a written environmental contingency plan sufficient to comply with
applicable laws, regulations, codes and ordinances and good practice for first class laboratory
space (
Tenants Environmental Contingency Program
) and shall revise the same from time to
time as reasonably necessary because of changes in operations within the Premises, changes in
applicable legal requirements, and changes in customary practice for environmental contingencies in
first class laboratory space. Tenant shall implement the Environmental Contingency Program as
necessary in accordance with the approved plan (as it may be revised) and shall, within 14 days
after Landlords written request, provide Landlord with copies of all reports and documentation
prepared in connection therewith. Within 14 days after Landlords written request, Tenant shall
provide Landlord with copies of any routine safety audits conducted by Tenant in the ordinary
course of Tenants business. Landlord may from time-to-time undertake an environmental audit to
assess the compliance of Tenant with applicable Environmental Laws if Landlord reasonably believes
that Tenant is not then in material compliance with such Environmental Laws or if there is any
release of Hazardous Materials required to be reported under any Environmental Law that arises
- 25 -
out of the use, operation, or occupancy of the Premises or Premises by Tenant or any Tenant
Responsible Parties during the term of this Lease and any further period during which Tenant or any
Tenant Responsible Party retains use, operation or occupancy of the Premises (a
Tenants
Release
). Any such audit shall be at Tenants cost and expense if the results of such audit
identify any such material non-compliance by Tenant or any Tenants Release. In addition, Tenant
shall investigate, assess, monitor and report as required by applicable Environmental Law, at
Tenants sole cost and expense, any Tenants Release. Further, Tenant shall remediate, in
compliance with applicable Environmental Laws, at Tenants sole cost and expense, any Tenants
Release requiring Response Action (as defined in 310 C.M.R. 40.0000). Tenant shall submit to
Landlord for Landlords prior approval a work plan outlining in reasonable detail any Remedial Work
to be performed by Tenant hereunder (the Remedial Work Plan). Landlord shall not unreasonably
withhold or delay its approval of such Remedial Work Plan if (i) it complies with all applicable
Environmental Laws; and (ii) the Remedial Work outlined therein reasonably appears sufficient to
remediate the releases to the level provided for in this Section 5.02(d). If Tenant is obligated
to remediate a Tenants Release under this Lease, Tenant shall be obligated to remediate the
Tenants Release to a level that will permit the portion of the Property to be used for first class
office, laboratory, and research and development uses under applicable laws, statutes, codes, and
ordinances, whether now existing or hereafter enacted. Tenant shall make available to Landlord
copies of drafts of any submittals to governmental authorities in connection with the Remedial Work
for Landlords review and comment at least three (3) business days prior to such submittal, and
Tenant shall consider in good faith and incorporate as Tenant reasonably deems appropriate
Landlords comments thereon. Tenant shall sign any manifests or other documents as the waste
generator for any Hazardous Materials it disposes of or sends off site or otherwise arising from a
Tenants Release. This Subsection shall survive the term of this Lease and shall be subject to the
provisions of Section 5.03. Tenants remediation obligation set forth in this Subsection shall not
limit Landlords right to damages, if any, which Landlord may incur due to any unremediated
Hazardous Materials resulting from a Tenants Release.
(f) Tenant shall pay for all costs reasonably incurred by Landlord, for independent
consultants or otherwise, in connection with inspections, investigations, and/or response actions
concerning a release of Hazardous Materials at the Premises (to the extent caused by Tenant, Tenant
s agents, contractors or employees, or persons acting by, through or under Tenant ).
(g) Tenant may require that any representative of Landlord entering into a secured portion of
the Premises identified by Tenant to Landlord in advance as containing proprietary information for
the purposes set forth in this Section 5.02 execute a confidentiality agreement with respect to
Tenants proprietary information, provided, however, that such agreement is subject to Landlords
prior approval (not to be unreasonably withheld). Landlord agrees to hold any proprietary
information identified by Tenant and supplied to Landlord pursuant to this Section 5.02(b)-(f)
(Confidential Information) in confidence, subject to disclosures to the extent that such
disclosure is required by law or court order or by discovery rules in any legal proceeding.
Notwithstanding the foregoing, Landlord may disclose such Confidential Information to its lenders,
attorneys, and consultants in connection with the financing or sale of the Property or Landlords
review of such information provided that such lenders, attorneys
- 26 -
and consultants are informed of Landlords obligations hereunder and do not disclose such
Confidential Information in a manner that would not be permitted hereunder.
(h) Tenant shall have no right to use the area identified on
Exhibit 1.01-1
as Second
Floor Common Lobby for any purpose other than (x) code-required emergency access and egress to the
Premises or (y) if a portion of the second floor of the Premises is subleased by Tenant as
permitted by this Lease and requires use of the Second Floor Common Lobby as a primary entry for
such subleased premises.
Section 5.03.
Hazardous Materials Indemnity
. Tenant shall indemnify, defend with
counsel reasonably acceptable to Landlord and hold Landlord, Landlords managing agent and any
mortgagee of the Premises, and any other Indemnitees (as defined in Section 12.01) fully harmless
from and against any and all liability, loss, suits, claims, actions, causes of action,
proceedings, demands, costs, penalties, damages, fines and expenses, including, without limitation,
attorneys fees, consultants fees, laboratory fees and clean up costs, and the costs and expenses
of investigating and defending any claims or proceedings, resulting from, or attributable to
(i) the presence of any Hazardous Materials on the Property or the Premises arising from the action
or negligence of Tenant, its officers, employees, contractors, and agents, or arising out of the
generation, storage, treatment, handling, transportation, disposal or release by such party (or
their respective officers, employees, contractors, agents or invitees) of any Hazardous Materials
at or near the Property or the Premises, (ii) any violation(s) by Tenant or its officers,
employees, contractors, agents or invitees of any applicable law regarding Hazardous Materials, and
(iii) any breach by Tenant of the obligations set forth in Sections 5.02(b) and (d) of this Lease.
The provisions of this Section 5.03 shall survive the expiration or earlier termination of
this Lease.
Section 5.04.
Rules and Regulations
. Rules and regulations delivered to Tenant in
writing, provided the same are not inconsistent with or in limitation of the provisions of this
Lease, which in the judgment of the Landlord are reasonable, shall be observed by the Tenant and
its employees, and Tenant shall use reasonable efforts to cause its agents, contractors, customers
and business invitees to comply therewith. Tenant acknowledges that the rules and regulations may
include provisions necessary to comply with requirements of governmental approvals. Landlord
agrees that the rules and regulations shall not be applied against Tenant in a discriminatory
manner. Tenant agrees that Landlord shall not be liable to Tenant for the failure of other tenants
to comply with the rules and regulations.
- 27 -
Article 6.
Compliance with Legal Requirements
Section 6.01.
Compliance with Legal Requirements
. Throughout the term of this Lease,
Tenant, at its sole cost and expense, will promptly comply with all requirements of law, code,
regulation or ordinance related in any way to its use and occupancy of the Premises, including
without limitation any Tenant Work, and will procure and maintain all permits, licenses and other
authorizations required with respect to the Premises, or any part thereof, for the lawful and
proper operation, use and maintenance of the Premises or any part thereof. Notwithstanding the
foregoing to the contrary, Tenant shall have no obligation to bring elements of the foundations,
exterior walls, structural floors, and roof of the Building, and the portions of the electrical,
heating, ventilation and air conditioning systems of the Building that serve other tenants,
(collectively, the
Base Building
) into compliance with applicable laws, codes,
regulations or ordinances except to the extent such compliance is required as a result of Tenant
Work, Tenants particular use of the Premises, as opposed to the Permitted Use, generally, the
exercise of Tenants facilities management rights pursuant to Section 3.03 of this Lease, Tenants
negligence or willful misconduct (subject to the provisions of Section 4.05), or Tenants default
under this Lease. Landlord shall have the obligation to bring elements of the Base Building into
compliance with applicable laws (including, without limitation, Environmental Laws as hereinafter
defined, but subject to the other provisions of this lease governing Tenants use of Hazardous
Materials) except to the extent such compliance is required as a result of Tenant Work, Tenants
particular use of the Premises, as opposed to the Permitted Use, generally, Tenants negligence or
willful misconduct (subject to the provisions of Section 4.05), or Tenants default under this
Lease.
Article 7.
Construction, Condition, Repairs and Maintenance of Premises
Section 7.01.
Base Building Work
. Landlord shall perform certain base building
modifications to accommodate the demising of the Premises, as further described below, in a good
and workmanlike manner, using new materials of first quality, and shall comply with applicable laws
and all applicable ordinances, orders and regulations of governmental authorities. The work
described in the immediately preceding sentence shall be performed in all material respects in
accordance with the scope of work and schematic plan attached as
Exhibit 7.01
(the
Base Building Work
)
,
provided that Landlord may modify the design of the Base Building
Work from time to time (subject to the provisions of the immediately following paragraph) so long
as the modification (i) does not affect the utility, quality, or appearance of the Base Building
Work in any material respect, (ii) does not materially increase the cost of the Finish Work (except
as provided below), (iii) will not materially interfere with Tenants use of the Premises, (iv)
does not involve a material reduction in the quality of materials to be incorporated in the Base
Building Work, (v) will not result in any material diminution of the rentable area of the Premises,
and (vi) will not materially and adversely affect the building service systems
- 28 -
and equipment serving the Premises (collectively, the
Tenant Approval Not Required
Standards
). In addition to the requirements described in
Exhibit 7.01
, Landlords
Base Building Work shall be further described in final construction documents that shall be
consistent with a first class suburban office building and the initial scope of work and schematic
plan for the Base Building Work pursuant to the schedule for Landlords Deadlines set forth on
Schedule 2
to
Exhibit 7.02
, attached. Landlord shall provide Tenant with copies of
the construction documents for Tenants review and comment. Tenant shall review and comment on
such plans within five (5) business days following the delivery of such plans to Tenant. If Tenant
fails to review and comment on such plans within such five (5) business day period, then Tenant
shall be deemed to have waived its right to comment.
From time to time during the construction of the Base Building Work directly affecting the
Building and the Finish Work, Landlord shall allow Tenants authorized representatives to review
and make copies of plans and specifications including all changes thereto and generally to review
the progress of Landlord Work. Such reviews shall be scheduled so as not to interfere with the
conduct of Landlord Work. Tenant shall be provided with copies of all changes or supplements to
the construction plans for the Base Building Work when the same are given to Landlords contractor.
Section 7.02.
Finish Work
. Landlord shall construct Tenants initial improvements to
prepare the Premises for Tenants occupancy in accordance with
Exhibit 7.02
, attached.
Section 7.03.
Landlord Maintenance Obligations
.
(a) Except as otherwise provided in this Lease, including without limitation if Tenant has
assumed responsibility for such services pursuant to a Facilities Management Notice, throughout the
term of this Lease, but subject to the terms of Article 11, Landlord shall make such repairs to the
Base Building and the common areas of the Property, including all elevators (even the Tenant
Exclusive Elevators), as may be necessary to keep them in good condition in accordance with
standards for a first class office, laboratory and research and development building in the
suburban Boston area, reasonable wear and tear excepted.
(b) Landlord shall prepare, or cause to be prepared, a written operations and maintenance plan
for any heating, ventilation and air-conditioning systems serving the Premises in common with other
parts of the Building from time-to-time and shall provide Tenant with a copy of such O&M Plan.
Landlord may amend or modify the O&M Plan from time to time in consultation with Tenant. If, in
Tenants good faith determination, the O&M Plan does not comply with standards for first class
office, laboratory and research and development buildings in the suburban Boston area, Tenant may
object to such O&M Plan with specific comments and suggestions for revisions given within 20 days
following receipt of such plan from Landlord. If the parties are unable to resolve any disputes
regarding whether the O&M Plan meets the applicable standard within 60 days thereafter, despite
good faith efforts to do so, then either party may submit such dispute to arbitration in accordance
with the last paragraph of Section 14.07(b) of this Lease (except that the arbitrator shall be a
mechanical, engineering and plumbing engineer with at least 20 years experience in the design and
- 29 -
operation of HVAC systems in first class office and laboratory buildings in the greater Boston
area). In connection with the operation and repair of such systems, Tenant shall have the
appurtenant right to monitor, access and inspect such systems to confirm that they are being
operated and maintained as required hereunder.
Section 7.04.
Tenant Maintenance Obligations
. Throughout the term of this Lease, and
except as provided in Section 7.01, but subject to the terms of Article 11, Tenant shall clean,
maintain and repair the Premises, and any Tenant Work (including the Finish Work), the utility
meters serving only the Premises, the heating ventilation and air-conditioning units located on the
roof of the Building as of the date of this Lease and serving exclusively the second and third
floors of the Premises, and any other Building systems to the extent exclusively serving the
Premises, all in accordance with standards for a first class office, laboratory and research and
development building in the suburban Boston area, reasonable wear and tear excepted
.
Section 7.05.
Landlords Right of Entry
. Landlord, or agents or prospective
investors, lenders or purchasers of Landlord, at reasonable times, reserves the right to enter upon
the Premises to examine the condition thereof, to make repairs, alterations and additions as
Landlord is required or permitted under the terms of this Lease, and at any reasonable time within
twelve (12) months before the expiration of the term to show the Premises to prospective tenants.
In connection with such access, Landlord shall not unreasonably interfere with the operation or
work at the Premises and shall give Tenant reasonable prior written notice where practicable
(except in the event of an emergency, in which event such notice shall be as prompt as possible
under the circumstances and may be oral) of Landlords intent to access the Premises.
Section 7.06.
Service Interruptions
. In the event that there shall be an
interruption, curtailment or suspension of any service required to be provided by Landlord pursuant
to
Exhibit 3.02
(and no reasonably equivalent alternative service or supply is provided by
Landlord) (but not including any services that are then subject to Tenants facilities management
rights pursuant to the exercise of Tenants rights under Section 3.03), or if Landlord fails to
commence and diligently prosecute to completion any repair or maintenance required by Landlord
under this Lease within applicable notice and cure periods, that shall materially interfere with
Tenants use and enjoyment of a material portion of the Premises, and Tenant actually ceases to use
the affected portion of the Premises (any such event, a
Service Interruption
), and if
(i) such Service Interruption shall continue for five (5) consecutive business days following
receipt by Landlord of written notice from Tenant describing such Service Interruption (the
Service Interruption Notice
), (ii) such Service Interruption shall not have been caused,
in whole or in part, by matters described by Article 11 or by an act or omission in violation of
this Lease by Tenant or by any negligence of Tenant, or Tenants agents, employees, contractors or
invitees, and (iii) the cure of the condition giving rise to the Material Service Interruption is
within Landlords reasonable control (a Service Interruption that satisfies the foregoing
conditions being referred to hereinafter as a
Material Service Interruption
) then, as
liquidated damages and Tenants sole remedy at law or equity, Tenant shall be entitled to an
equitable abatement of Rent, based on the nature and duration of the Material Service Interruption,
the area of the Premises affected, and the then current Rent amounts, for the
- 30 -
period that shall begin on the commencement of such Service Interruption and that shall end on
the day such Material Service Interruption shall cease.
Notwithstanding the foregoing, if (w) a Material Service Interruption continues for 180 days
(provided that such 180 day period shall be extended for a period of up to an additional 90 days so
long as Landlord is diligently prosecuting to cure such Material Services Interruption) following
delivery of the Service Interruption Notice, (x) Tenant simultaneously delivered the Service
Interruption Notice to any then-Mortgagee (as defined in Section 10.1), (y) such Mortgagee has not
cured such Material Service Interruption within the period set forth in Section 10.3, and (z) such
Material Service Interruption adversely interferes with Tenants operations in either (i) at least
25% of the Premises (measured in rentable square feet) or (ii) any portion of the Lab Portion such
that there are material adverse consequences to critical laboratory operations of Tenant in
progress or planned at the time such Material Service Interruption commenced, then following such
period Tenant shall have the option to terminate this Lease upon thirty (30) days prior written
notice to Landlord and such Mortgagee; provided, however, that if such Material Service
Interruption shall cease prior to the expiration of such thirty (30) day period, then such
termination notice shall be of no force or effect.
The provisions of this Section 7.06 shall not apply to matters arising out of any casualty or
taking by eminent domain, which events are addressed by Article 11 of this Lease.
Article 8.
Alterations and Additions
Section 8.01.
Tenant Work
(a) The Tenant shall not make any additional alterations or additions, structural or
non-structural, to the Premises without first obtaining the written consent of Landlord on each
occasion, which consent shall not be unreasonably withheld, conditioned or delayed. Any such
alterations or additions are referred to herein as
Tenant Work
. For non-structural
alterations or additions valued at less than $100,000 which do not affect any of the exterior,
lobbies, elevator, roof, structure, or building systems in or at the Building, Landlords consent
shall not be required (
Minor Alterations
) provided, however, that (i) if such Minor
Alteration requires a building permit from the applicable municipal authority, Landlords consent
shall be required, provided that such consent shall not be unreasonably withheld, conditioned or
delayed, and (ii) if Landlords consent was not obtained therefor, upon the expiration or
termination of this Lease, Tenant shall readapt, repair and restore the affected portion of the
Premises to substantially the condition the same were in prior to such Minor Alteration.
Additionally, Tenant shall give prior written notice to Landlord of any Minor Alteration regardless
of whether Landlords consent is required. Wherever consent is required, it shall include
reasonable approval of plans and contractors and the insurance required under Section 4.04. Unless
otherwise approved by Landlord, Tenant
- 31 -
shall use the structural engineer employed by Landlord for the Building where Alterations affect
Building structure. Tenant shall notify Landlord of all alterations or additions and provide
Landlord with copies of any construction plans therefor whether or not Landlords consent is
required. All such allowed alterations, including reasonable third-party costs of review in
seeking Landlords approval, shall be made at Tenants expense by an Approved Contractor (as
defined below), in compliance with all laws, and be of first class quality. Prior to
commencing any work at the Property other than Minor Alterations or Alterations costing less
than $1,000,000 (such amount decreasing to $250,000 at any time that Tenant fails to meet the
Financial Test) in the aggregate, Tenant shall provide and record bonds or such other security
as is reasonably satisfactory to Landlord sufficient to protect the interests of both Tenant
and Landlord in the Property from any lien arising out of a failure to pay for work performed
for Tenant, and all alterations and additions performed by Tenant, (but excluding Minor
Alterations), shall be performed by an Approved Contractor. Upon the expiration or earlier
termination of this Lease, Tenant shall assign to Landlord (without recourse) all warranties
and guaranties then in effect for all work performed by Tenant at the Premises.
For purposes of this Section 8.01(a), an
Approved Contractor
shall mean a contractor
or mechanic identified by Tenant in writing, who has been approved by Landlord (such approval not
to be unreasonably withheld, conditioned or delayed).
(b) Except as set forth below, any alterations or additions made by, for or on behalf of the
Tenant which are permanently affixed to the Premises or affixed in a manner so that they cannot be
removed without defacing or damaging the Premises shall, except as expressly provided in this
paragraph, become property of the Landlord at the termination of occupancy as provided herein. If
Landlord notifies Tenant, in connection with any consent to alterations or additions requested by
Tenant, or in connection with the review and approval of the plans for the Finish Work under
Exhibit 7.02
that Tenant shall be required to remove such alterations or additions or
Finish Work at the expiration of the term of the Lease, or if any such alterations or additions did
not require Landlords consent pursuant to the terms hereof, then such alterations or additions or
Finish Work, as applicable, shall be removed by Tenant, at its expense, with minimal disturbance to
the Premises prior to the expiration of the term of the Lease. Notwithstanding the immediately
preceding sentence to the contrary, Landlord may only require Tenant to remove items of Tenant Work
or Finish Work that are above or otherwise inconsistent with the first class nature of the
Building. Tenants trade fixtures and personal property and equipment, which are not affixed or
that may be removed with minimal disturbance or repairable damage, may be removed by Tenant during
the term of this Lease, and shall be removed prior to the expiration of the term of the Lease,
provided such disturbance or damage is restored and repaired so that the Premises are left in at
least as good a condition as they were in at the commencement of the term, reasonable wear and tear
excepted. In no event shall any Finish Work funded by the Finish Work Allowance be deemed to be
Tenants trade fixtures, personal property or equipment. The Premises shall otherwise be left in
the same condition as at the commencement of the term or such better condition as it may thereafter
be put, reasonable wear, tear and, to the extent Landlord is required to restore the same, damage
by fire or other casualty or taking or condemnation by public authority excepted. Notwithstanding
anything herein or otherwise in this Lease to the contrary, the Tenant emergency generators and
nitrogen tanks paid for directly by Tenant, together with such other items that may be agreed upon
by mutual written agreement of the parties from time to
- 32 -
time, shall be and remain the personal property of Tenant, shall not be deemed to be Tenant
Work, and Tenant shall have the right to remove the foregoing from the Premises at any time and
from time to time during the term of this Lease.
Article 9.
Discharge of Liens
Section 9.01.
No Liens.
Tenant will not create or permit to be created or to remain,
and within ten (10) days after notice from Landlord will discharge or bond off, at its sole cost
and expense and to the reasonable satisfaction of Landlord and any mortgagee, any lien, encumbrance
or charge (on account of any mechanics, laborers, materialmens or vendors lien, or any
mortgage, or otherwise) made or suffered by Tenant which is or might be or become a lien,
encumbrance or charge upon the Premises (including Tenants leasehold interest therein), Property
or any part thereof, or the rents, issues, income or profits accruing to Landlord therefrom, and
Tenant will not suffer any other matter or thing within its control whereby the estate, rights and
interest of Landlord in the Property or Premises or any part thereof might be materially impaired.
Notice is hereby given that Landlord shall not be liable for any labor or materials furnished or to
be furnished to Tenant in connection with any Tenant Work and that no mechanics or other lien for
any such labor or materials shall attach to or affect the estate or interest of Landlord in and to
the Premises or the Property, and, upon Landlords request, to the maximum extent permitted by law,
Tenant shall cause any contractor of Tenant to execute and deliver an acknowledgement confirming
the same in such form as Landlord may from time to time reasonably prescribe.
Article 10.
Subordination
Section 10.01. Lease Subordinate to Mortgages.
(a) The interest of the Tenant hereunder shall be subordinate to the rights of any holder of a
mortgage or holder of a ground lease of property which includes the Premises (any such holder, a
Mortgagee), and executed and recorded subsequent to the date of this Lease, unless such Mortgagee
shall otherwise so elect, subject to the provisions of Section 10.01(f), below; or
(b) If any Mortgagee shall so elect, this Lease, and the rights of the Tenant hereunder, shall
be superior in right to the rights of such Mortgagee, with the same force and effect as if this
Lease had been executed and delivered, and recorded, or a statutory notice hereof recorded, prior
to the execution, delivery and recording of any such mortgage.
- 33 -
Any election as to Subsection (b) above shall become effective upon either notice from such
Mortgagee to the Tenant in the same fashion as notices from the Landlord to the Tenant are to be
given hereunder or by the recording in the appropriate registry or recorders office of an
instrument, in which such Mortgagee subordinates its rights under such mortgage or ground lease to
this Lease.
In the event any Mortgagee shall succeed to the interest of Landlord, whether by judicial or
non-judicial foreclosure or otherwise, at the election of such Mortgagee, Tenant shall, and does
hereby agree to attorn to such Mortgagee and to recognize such Mortgagee as its Landlord and Tenant
shall promptly execute and deliver any instrument that such Mortgagee may reasonably request to
evidence such attornment provided such document contains reasonably satisfactory non-disturbance
provisions to allow Tenant to remain in occupancy pursuant to this Lease and exercise all of its
other rights under this Lease as long as no Event of Default exists. The form of instrument
attached as
Exhibit 10.01
shall be deemed acceptable to Tenant. If requested by any such
Mortgagee, Tenant further agrees to enter into a new lease for the balance of the term of this
Lease (and otherwise upon the same terms and conditions of this Lease) in the event of a judicial
or non-judicial foreclosure of a mortgage granted to any Mortgagee. Landlord will reimburse Tenant
for all reasonable third party attorneys fees that Tenant incurs to review such agreement pursuant
to the preceding sentence.
Upon such attornment, the Mortgagee shall not be: (i) liable in any way to the Tenant for any
act or omission, neglect or default on the part of Landlord under this Lease except that the
Mortgagee shall cure any continuing failure to perform maintenance or repair work (but shall not be
liable for any damages arising prior to the attornment) and complete the Landlord Work in
accordance with the Lease (ii) responsible for any monies owing by or on deposit with Landlord to
the credit of Tenant unless received by the Mortgagee, but it shall be liable for payment of any
unpaid portion of the Finish Work Allowance being funded by the loan and to the extent not
previously advanced by such Mortgagee; (iii) subject to any credit, counterclaim or setoff which
theretofore accrued to Tenant against Landlord; (iv) bound by any modification of this Lease
subsequent to such mortgage or by any previous prepayment of regularly scheduled monthly
installments of Base Rent for more than (1) month, which was not approved in writing by the
Mortgagee; (v) liable to the Tenant beyond the Mortgagees interest in the Property and the rents,
income, receipts, revenues, issues and profits issuing from such Property; or (vi) liable for any
portion of a security deposit not actually received by the Mortgagee.
(c) The covenant and agreement contained in this Lease with respect to the rights, powers and
benefits of any such Mortgagee constitute a continuing offer to any person, corporation or other
entity, which by accepting or requiring an assignment of this Lease or by entry of foreclosure
assumes the obligations set forth in this Article 10 with respect to such Mortgagee.
(d) No assignment of this Lease and no agreement to make or accept any surrender, termination
or cancellation of this Lease and no agreement to modify so as to reduce the Rent, change the term,
or otherwise materially change the rights of the Landlord under this Lease, or to relieve the
Tenant of any obligations or liability under this Lease, shall be valid unless consented to in
writing by the Landlords Mortgagees, if any, to the extent that such consent is required pursuant
to the terms of the applicable mortgage or ground lease.
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(e) The Tenant agrees, within ten (10) business days following the request of the Landlord, to
execute and deliver from time to time any agreement, in recordable form, which may reasonably be
deemed necessary to implement the provisions of this Section 10.01, including, without limitation,
the form of agreement attached as
Exhibit 10.01
. Landlord will reimburse Tenant for all
reasonable third party attorneys fees that Tenant incurs to review such agreement under this
subsection (e) if the form provided by Landlord is not substantially similar to
Exhibit
10.01
, provided that Landlord shall have no obligation to reimburse Tenant for any amount in
excess of $4,000 in any one instance (such amount to be increased, but never decreased, annually in
proportion to any increase in the CPI).
(f) Landlord agrees that any subordination of this Lease to any mortgage now or hereafter
encumbering the Premises shall be conditioned upon Landlord delivering to Tenant a written,
recordable Subordination, Non-Disturbance and Attornment Agreement from the ground lessor or
mortgagee seeking to have this Lease subordinated to its interest substantially in the form
attached as
Exhibit 10.01
or in such other customary form as is required by Landlords
mortgagee. Landlord shall provide Tenant with a non-disturbance agreement from Landlords current
first mortgage lender, Bank of America, N.A., simultaneously with the execution and delivery of
this Lease.
Section 10.02.
Estoppel Certificates
. Each party agrees to furnish to the other,
within ten (10) business days after request therefor (or, with respect to Tenant, if requested of
Tenant by any Mortgagee) from time to time, a written statement setting forth the following
information:
(a) Whether and when Tenant accepted possession of the Premises, and the commencement and
expiration dates of the term of this Lease,
(b) The applicable Rent then being paid, including all Additional Rent based upon the
Additional Rent most recently established;
(c) That, if true, the Lease is current and the party providing the statement is not aware of
any uncured breach of this Lease or specifying any breach;
(d) That, if true, the party providing the statement is not aware of any current claims or
offsets against the other party, or specifically listing any such claims;
(e) The date through which Base Rent and Additional Rent has then been paid;
(f) Whether Tenant then meets the Financial Test;
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(g) Such other information relevant to the Lease as the requesting party may reasonably
request;
(h) A statement that any prospective Mortgagee and/or purchaser may rely on all such
information.
Without limiting the generality of the foregoing, Tenant has approved the statement form attached
as
Exhibit 10.02
.
Section 10.03.
Notices to Mortgagees
. After receiving notice from any person, firm or
other entity that it holds a mortgage which includes the Premises as part of the mortgaged
premises, or that it is the ground lessor under a lease with the Landlord, as ground Tenant, which
includes the Premises as a part of the mortgaged premises, no notice from the Tenant to the
Landlord shall be effective against such Mortgagee unless and until a copy of the same is given to
such Mortgagee, and the curing of any of the Landlords defaults by such Mortgagee shall be treated
as performance by the Landlord. Accordingly, no act or failure to act on the part of the Landlord
which would entitle the Tenant under the terms of this Lease, or by law, to be relieved of the
Tenants obligations hereunder, to exercise any right of self-help or to terminate this Lease,
shall result in a release or termination of such obligations or a termination of this Lease unless
(i) the Tenant shall have first given written notice to such Mortgagee of the Landlords act or
failure to act which could or would give basis for the Tenants rights; and (ii) such Mortgagee,
after receipt of such notice, has failed or refused to correct or cure the condition complained of
within the applicable cure period afforded Landlord under this Lease or such longer period of time
as may be reasonably required by Mortgagee to cure such default with due diligence (including such
time as may be necessary for Mortgagee to obtain possession or title to the Property, if required
to cure the default, but in no event shall such longer period of time exceed, in the aggregate, 180
days).
Section 10.04.
Assignment of Rents
. With reference to any assignment by the Landlord
of the Landlords interest in this Lease, or the rents payable hereunder, conditional in nature or
otherwise, which assignment is made to the a Mortgagee, the Tenant agrees:
(a) That the execution thereof by the Landlord, and the acceptance thereof by the Mortgagee,
shall never be treated as an assumption by such Mortgagee of any of the obligations of the Landlord
hereunder, unless such Mortgagee shall, by notice sent to the Tenant, specifically make such
election; and
(b) That, except as aforesaid, such Mortgagee shall be treated as having assumed the
Landlords obligations hereunder only upon foreclosure of such Mortgagees mortgage or the taking
of possession of the Property, or, in the case of a ground lessor, the termination of the ground
lease.
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Article 11.
Fire, Casualty and Eminent Domain
Section 11.01.
Rights to Terminate the Lease
. The Landlord, at its sole option, may
elect to terminate this Lease, provided that Landlord is then also terminating the lease of any
other tenant that is similarly affected in the Building, if (i) all or substantially all of the
Premises or at least 50 percent of the Building (not including the Premises) is damaged by a
casualty not insured by the coverage required to be carried hereunder (whether or not such
insurance is actually carried), or is taken by eminent domain, (ii) the Building is damaged by an
fire or other casualty (whether or not insured) such that the same cannot, in ordinary course,
reasonably be expected to be restored within 270 days from the time that such restoration work
would commence, or (iii) the Premises or Building is damaged by a fire or other casualty, or is
taken by eminent domain, at a time when no more than 18 months then remain in the term of this
Lease, and the time reasonably estimated by Landlords general contractor pursuant to Section
11.01(b), below, to restore the Premises or Building, as applicable, will take longer than 50% of
the then-remaining term of the Lease (unless, within 21 days after receipt of Landlords
termination notice, Tenant exercises any then-remaining right to extend the term of this Lease
pursuant to Article 22 hereof). When fire or other unavoidable casualty or taking renders any
portion of the Premises substantially unsuitable for its intended use (including, without
limitation, by causing damage to such portions of the common areas and facilities of the Building
as are necessary to provide reasonably safe access to the Premises and to provide those building
services, such as utilities and HVAC service, that Landlord is required to provide hereunder), a
just and proportionate abatement of rent shall be made for so long as such interference shall
continue, and the Tenant may elect to terminate this Lease if:
(a) The Landlord fails, within ten (10) days following written notice from Tenant of such
failure, to give written notice sixty (60) days after such casualty of its intention to restore the
Premises (and such portions of the common areas and facilities of the Building as are necessary to
provide reasonably safe access to the Premises and to provide those building services, such as
utilities and HVAC service, that Landlord is required to provide hereunder) or provide alternate
access, if access has been taken or destroyed; or
(b) If Landlord gives notice of its intention to restore and, in the reasonable estimate of
Landlords general contractor, such restoration of the Premises (and such portions of the common
areas and facilities of the Building as are necessary to provide reasonably safe access to the
Premises and to provide those building services, such as utilities and HVAC service, that Landlord
is required to provide hereunder) will take greater than nine (9) months to complete (or, if less
than eighteen (18) months remain in the term of this Lease, greater than one-half of the
then-remaining length of the term), provided that Tenant gives such notice within 30 days after
receiving Landlords notice that it intends to restore the Premises; or
- 37 -
(c) If Landlord gives notice of its intention to restore and the Landlord fails to restore the
Premises (together with such portions of the common areas and facilities of the Building as are
necessary to provide reasonably safe access to the Premises and to provide those building services,
such as utilities and HVAC service, that Landlord is required to provide hereunder) to a condition
substantially suitable for their intended use within the longer of nine (9) months or such longer
period as Landlords general contractor has estimated for restoration pursuant to clause (b),
above, plus a contingency period equal to 10% of such period estimated by the general contractor,
of such fire or other unavoidable casualty, or taking; provided however, that (x) in the event
Landlord has diligently commenced repairs to the damaged property and such repair takes more than
such period to complete due to causes beyond Landlords reasonable control, Landlord shall have the
right to complete such repairs within a reasonable time period thereafter (the
Additional
Time
) but in no event shall such Additional Time be longer than the shorter of (i) ninety (90
) days; or (ii) the length of such delays beyond Landlords reasonable control and (y) if Landlord
completes such restoration within 30 days following receipt of Tenants notice of termination, then
such notice of termination shall be deemed null and void and of no further force and effect.
The Landlord reserves, and the Tenant grants to the Landlord, all rights which the Tenant may
have for damages or injury to the Premises for any taking by eminent domain, except for damages
specifically awarded on account of the Tenants trade fixtures, property or equipment, and moving
expenses.
Section 11.02.
Restoration Obligations
. If the Lease has not terminated pursuant to
Section 11.01, then, following any casualty or taking by eminent domain, Landlord shall proceed
with diligence, subject to then applicable statutes, building codes, zoning ordinances and
regulations of any governmental authority, and the receipt of insurance proceeds, to repair or
cause to be repaired such damage (excluding any Tenant Work and Finish Work). All repairs to and
replacements of Tenants Tenant Work, Finish Work, trade fixtures, equipment and personal property
shall be made by and at the expense of Tenant.
Article 12.
Indemnification
Section 12.01.
General Indemnity
. Subject to the waiver of claims set forth in
Section 4.05, except to the extent arising from a breach of this Lease by Landlord or the
negligent acts or willful misconduct of Landlord or Landlords agents, contractors or employees,
Tenant shall defend, indemnify and hold harmless Landlord, Landlords lenders, Landlords managing
agent, The Prudential Life Insurance Company of America, the association of unit owners of the
Reservoir Woods Primary Condominium and their respective partners, members, managers, officers,
directors, and employees (the
Indemnitee
s) from and against any and all claims, demands,
liabilities, damages, judgments, orders, decrees, actions, proceedings, fines, penalties, costs and
expenses, including without limitation, court costs and attorneys fees, (x) arising from or
relating to any third party claim for loss of life, or damage or injury to a person or property
(i) occurring in the Premises or arising out of the use of the common areas of the Property by
Tenant, or
- 38 -
its agents, employees, or contractors or anyone claiming by or through Tenant, (ii) caused by
any negligent act or omission or violation of this Lease by Tenant, or its agents, employees, or
contractors or anyone claiming by or through Tenant, or (y) arising out the exercise of Tenants
rights under
Section 14.07(b)
(including without limitation any claim by another tenant in
the Building that such exercise resulted in a default under its lease).
Subject to the waiver of claims set forth in Section 4.05, except to the extent arising from a
breach of this Lease by Tenant or the negligent acts or willful misconduct of Tenant or Tenants
agents, contractors or employees, Landlord shall defend, indemnify and hold harmless Tenant from
and against any and all claims, demands, liabilities, damages, judgments, orders, decrees, actions,
proceedings, fines, penalties, costs and expenses, including without limitation, court costs and
attorneys fees, arising from or relating to any third party claim for loss of life, or damage or
injury to a person or property caused by any negligent act or omission or violation of this Lease
by Landlord, its agents, employees, or contractors.
Section 12.02.
Defense Obligations
. In case any action or proceeding is brought
against either party by reason of any such occurrence, the party required to provide
indemnification, upon written notice from the party entitled to indemnification, will, at the sole
cost and expense of the party required to provide indemnification, resist and defend such action or
proceeding or cause the same to be resisted and defended, by counsel designated by the party
required to provide indemnification and approved in writing by the party to be defended, which
approval shall not be unreasonably withheld.
Article 13.
Mortgages, Assignments and Subleases by Tenant
Section 13.01.
Right to Transfer
.
(a) Tenants interest in this Lease may not be mortgaged, encumbered, assigned or otherwise
transferred, or made the subject of any license or other privilege, by Tenant or by operation of
law or otherwise, and the Premises may not be sublet, as a whole or in part, (any of the foregoing
events, a
Transfer
) without in each case having obtained the prior written consent of
Landlord, and the execution and delivery to Landlord by the assignee or transferee (in either case,
a
Transferee
) of a good and sufficient instrument whereby such Transferee assumes (with
respect to any sublease, to the extent of the subtenants obligations under the applicable
sublease) all obligations of Tenant under this Lease. The provisions of this Article 13 shall
apply to a transfer (by one or more Transfers) of a controlling portion of or interest in the stock
or partnership or membership interests or other evidences of equity interests of Tenant or sale of
all or substantially all of the assets of Tenant as if such Transfer were an assignment of this
Lease; provided, that, so long as equity interests in Tenant are traded on a nationally recognized
public stock exchange, the transfer of equity
- 39 -
interests in Tenant on such public stock exchange shall not be deemed an assignment within the
meaning of this Article. Subject to the provisions of this Article 13, Landlord shall not
unreasonably withhold, condition or delay its consent to any sublet of all or any portion of the
Premises or any assignment of Tenants interest in this Lease. It shall be reasonable for Landlord
to withhold its consent with respect to any proposed Transfer if the Transferee is not sufficiently
creditworthy to meet its obligations under such assignment or sublease, as demonstrated by audited
financial statements or equivalent evidence. It shall be reasonable for Landlord to deny its
consent to any Transfer to any of the following so long as Landlord has competitive space in the
Building (e.g. similar type and size of space, offered for a similar term) available for lease
prior to the earlier to occur of the date that is 24 months following the initial Commencement Date
to occur or the date that Building is first fully leased to unrelated third parties: (i) a tenant
at the Property or in the office park known as Reservoir Woods; (ii) any party with whom Landlord
has negotiated in the previous six (6) months with respect to space in the Building; (iii) any
affiliates controlled by, controlling, or under common control with any tenant or party described
in clauses (i) and (ii) hereof and it shall be reasonable for Landlord to withhold its consent to
any Transfer in violation of the provisions of this sentence. It shall be reasonable for Landlord
to withhold its consent to a Transfer to any party which would be of such type, character or
condition as to be inappropriate, in Landlords reasonable judgment, as a tenant for a first class
suburban office building.
Nothing herein contained shall be construed as requiring Tenant to obtain any consent on the
part of Landlord (i) as a condition to or any assignment resulting from any merger, consolidation,
or sale of all or substantially all of the assets of Tenant, or acquisition of all or substantially
all of the issued and outstanding capital stock of Tenant or (ii) as a condition to any assignment
or sublease to any affiliates controlled by, controlling, or under common control with Tenant;
provided that (a) Tenant gives Landlord at least twenty (20) days prior written notice of such
event or Transfer (except that no prior notice need be given with respect to any Transfer referred
to in clause (b) below to the extent that such notice is prohibited by law or by confidentiality
agreement, in which case Tenant shall provide Landlord with notice of such Transfer within ten (10)
business days following such Transfer) with evidence reasonably satisfactory to Landlord that the
conditions of this paragraph have been satisfied, (b) in the case of an assignment, merger,
consolidation or asset sale the Transferee shall be at least as creditworthy as the then Tenant as
of the date that is three months prior to such Transfer, as demonstrated by audited financial
statements or equivalent evidence (the determination of creditworthiness shall take into account
all of the considerations which an institutional investor in real estate would consider in
evaluating the credit of a proposed tenant), (c) the Transferees comply with the provisions of this
Lease, and (d) with respect to a Transfer to any affiliate of Tenant pursuant to clause (ii),
above, the provisions of this Article 13 shall apply to such Transfer if, as and when such
affiliate ceases to be an affiliate of Tenant. Any Transferee referred to in the immediately
preceding sentence is referred to herein as a
Permitted Transferee
. Any such Permitted
Transferee, however, shall be subject to the terms and conditions set forth in Section 13.02 below.
For purposes of this Lease, control shall mean possession of more than 50 percent ownership of the
shares of beneficial interest of the entity in question together with the power to control and
manage the affairs thereof either directly or by election of directors and/or officers.
- 40 -
In connection with any request by Tenant for any consent to Transfer, Tenant shall provide
Landlord with all relevant information requested by Landlord concerning the proposed Transferees
financial responsibility, credit worthiness and business experience to enable Landlord to make an
informed decision. Tenant shall reimburse Landlord promptly for all reasonable out-of-pocket
expenses incurred by Landlord including reasonable attorneys fees in connection with the review of
Tenants request for consent to any Transfer.
Any purported Transfer under this Article 13 without Landlords prior written consent or prior
notice (as applicable) to the extent such consent or notice is required, shall be void and of no
effect. No acceptance of Rent by Landlord from or recognition in any way of the occupancy of the
Premises by a Transferee shall be deemed consent to such Transfer. Without limiting Landlords
right to withhold its consent to any Transfer by Tenant, and regardless of whether Landlord shall
have consented to any such Transfer, neither Tenant nor any other person having an interest in the
possession, use, or occupancy of any portion of the Premises shall enter into any lease, sublease,
license, concession, assignment, or other transfer or agreement for possession, use, or occupancy
of all or any portion of the Premises which provides for rental or other payment for such use,
occupancy, or utilization based, in whole or in part, on the net income or profits derived by any
person or entity from the space so leased, used, or occupied, and any such purported lease,
sublease, license, concession, assignment, or other transfer or agreement shall be absolutely void
and ineffective as a conveyance of any right or interest in the Premises. Furthermore, Tenant
agrees that in the event Landlord determines, in its sole discretion, that there is any risk that
all or part of any amount payable under or in connection with any Transfer shall cause any amounts
to be received by Landlord to fail to qualify as rents from real property within the meaning of
Code Sections 512(b)(3) and 856(d) and the Treasury Regulations thereunder, Tenant shall amend or
modify the terms of such Transfer.
(b) In the event Tenant Transfers the Premises or any part thereof for consideration in excess
of the obligations of Tenant to Landlord hereunder, other than with respect to a Permitted
Transferee, Tenant shall from time to time within fifteen (15) days of receipt pay over to Landlord
an amount equal to fifty percent (50%) of the excess, if any, of (1) any consideration, rent, or
other amounts received by Tenant from such Transferee, over (2) the sum of the rents and other
expenses payable by Tenant to Landlord hereunder, after such excess is applied to reimburse Tenant
for the actual and reasonable third-party costs for legal fees, brokerage costs, leasehold
improvements, free rent or other out-of-pocket rent concession payments incurred by Tenant in
procuring the Transfer, and the amount of any unamortized costs incurred by Tenant for Excess
Finish Work pursuant to
Exhibit 7.02
. (Tenants reimbursement for the costs of the Excess
Finish Work shall be in monthly amounts to amortize such costs on a straight-line basis without
interest over the term of the Transfer in question). Within ten (10) days after request by
Landlord from time to time, Tenant shall provide Landlord with an itemized statement of all such
costs, together with reasonable third party back-up documentation for the same. Without limiting
the generality of the first sentence of this subparagraph, any lump-sum payment or series of
payments actually or reasonably allocated to Tenants interest in the Premises (including the
purchase or use of so-called leasehold improvements), as opposed to other assets of Tenant, on
account of any Transfer shall be deemed to be in excess of rent and other charges to the extent
such payments, if amortized at a market interest rate over the period to which such charges relate,
exceeds rent or
- 41 -
other charges allocable to the period to which such payments relate (i.e. if it is a single
lump sum payment for an assignment of the entire lease, the period to which they would relate is
the entire then-remaining term). In the event of any dispute regarding the allocation referenced
in the immediately preceding sentence, either party may submit such matter to arbitration pursuant
to the provisions of the last paragraph of Section 14.07(b) of this Lease.
Section 13.02.
Tenant Remains Bound
. No Transfer of any interest in this Lease, and
no execution and delivery of any instrument of assumption pursuant to Section 13.01 hereof, shall
in any way affect or reduce any of the obligations of Tenant under this Lease, but this Lease and
all of the obligations of Tenant under this Lease shall continue in full force and effect as the
obligations of a principal (and not as the obligations of a guarantor or surety). From and after
any such Transfer, the obligations of each such Transferee and of the original Tenant named as such
in this Lease to fulfill all of the obligations of Tenant under this Lease shall be joint and
several (but, with respect to any sublease, solely with respect to the obligations assumed by the
subtenant thereunder). Each violation of any of the covenants, agreements, terms or conditions of
this Lease, whether by act or omission, by any of Tenants permitted encumbrances, assignees,
employees, transferees, licensees, grantees of a privilege, sub-tenants or occupancy, shall
constitute a violation thereof by Tenant. The consent by Landlord to any Transfer shall not
relieve Tenant or any Transferee from the obligation of obtaining the express consent of Landlord
to any modification of such Transfer or a further Transfer by Tenant or such transferee.
Article 14.
Default
Section 14.01.
Events of Default
. It shall be an
Event of Default
in the
event that:
(a) the Tenant shall default in the due and punctual payment of any installment of Base Rent,
or any part hereof, when and as the same shall become due and payable and such default shall
continue for more than five (5) business days after notice that such payment is due;
(b) the Tenant shall default in the payment of any Additional Rent, or any part thereof, when
and as the same shall become due and payable, and such default shall continue for a period of ten
(10) days, with respect to Tenants regular monthly payments of Operating Expenses and Taxes, and
(20) days otherwise, after notice that such payment is due; or
(c) the Tenant shall default in the observance or performance of any of the Tenants
covenants, agreements or obligations under Sections 10.01 and 10.02 of the Lease within the time
periods set forth therein or default in the observance or performance of any of the Tenants
covenants, agreements or obligations under Section 20.06;
- 42 -
(d) the Tenant shall default in the observance or performance of any of the Tenants
covenants, agreements or obligations hereunder, other than those referred to in the foregoing
clauses (a) (c), and such default shall not be corrected within thirty (30) days after written
notice; provided, however, if Tenant promptly commenced to cure the default and diligently pursued
the cure, but such default was not capable of being cured by Tenant within the said thirty (30) day
period and Tenant so notified Landlord promptly (but in any event within thirty (30) days after
notice of such default was given) together with an estimate of the reasonable time required for
such cure, Tenant shall be allowed such longer period, but in no event longer than 180 days; or
(e) the Tenant shall file a voluntary petition in bankruptcy or shall be adjudicated bankrupt
or insolvent, shall file any petition or answer seeking any reorganization, arrangement,
composition, dissolution or similar relief under any present or future federal, state or other
statute, law or regulation relating to bankruptcy, insolvency or other relief for debtors, or shall
seek, or consent, or acquiesce in the appointment of any trustee, receiver or liquidator of Tenant
of all or any substantial part of their respective properties, or of the Premises, or shall make
any general assignment for the benefit of creditors; or
(f) a petition is filed against Tenant seeking any reorganization, arrangement, composition,
dissolution or similar relief under any present or future federal, state or other statute, law or
regulation relating to bankruptcy, insolvency or other relief for debtors, and such petition is not
dismissed within sixty (60) days;
then, unless and until Landlord accepts a full cure of the default giving rise to the Event of
Default, Landlord shall have the right thereafter to re-enter and take complete possession of the
Premises, to declare this Lease terminated by written notice to Tenant and to remove the Tenants
effects without prejudice to any remedies which might be otherwise used for arrears of Rent or
other Event of Default. Any written notice of termination by Landlord may, at Landlords express
election, serve as any statutory demand or notice that is a prerequisite to Landlords commencement
of eviction proceedings against Tenant, and may, at Landlords express election, be included in any
notice of default (provided, however, that any such notice included in a notice of default shall
not be effective unless and until the expiration of applicable notice and cure periods).
The Tenant shall indemnify the Landlord against all loss of Rent and other payments which the
Landlord may incur by reason of such termination during the residue of the term. Without limiting
the generality of the foregoing, Landlord may elect by written notice to Tenant following such
termination to be indemnified for loss of Rent by a lump sum payment representing the present value
of the amount of Base Rent and Additional Rent which would have been paid in accordance with this
Lease for the remainder of the term minus the present value of the aggregate fair market rent and
Additional Rent for the Premises on an as-is basis during such time period, estimated as of the
date of termination, and taking into account reasonable projections of vacancy and time required to
re-let the Premises. (For purposes of the lump sum calculation, Additional Rent for the last
12 months prior to termination shall be deemed to increase for each year thereafter by the average
annual increase during the immediately preceding 5 years in the Consumer Price Index - All Urban
Consumers for the Boston Metropolitan area published by the U.S. Department of Labor or a
comparable
- 43 -
index reasonably selected by Landlord. The Federal Reserve discount rate, or equivalent, plus
2% shall be used in calculating present values.) In the absence of such election, Tenant shall
indemnify Landlord for the loss of Rent by a payment at the end of each month which would have been
included in the term equal to the difference between the Base Rent and Additional Rent which would
have been paid in accordance with this Lease and the Rent actually derived from the Premises by
Landlord for such month.
In addition to the payment(s) due under the prior paragraph, Tenant shall reimburse Landlord
for all reasonable expenses arising out of the termination, including without limitation, all costs
incurred by Landlord in attempting to re-let the Premises or parts thereof such as advertising,
brokerage commissions, tenant fit-up costs, and legal expenses. The reimbursement from Tenant
shall be due and payable immediately from time to time upon notice from Landlord of the expense so
incurred. Landlord shall use reasonable efforts re-let the Premises in the event the Lease is
terminated pursuant to this Article 14, however, Landlords obligation shall be subject to the
reasonable requirements of Landlord to lease other available space for comparable use prior to
reletting the Premises and to lease to high quality tenants in a harmonious manner with an
appropriate mix of uses, tenants, floor areas and terms of tenancies. The provisions of this
Section 14.01, and Tenants obligations to Landlord hereunder, shall survive the termination of
this Lease.
Section 14.02.
Landlords Right to Cure
. If an Event of Default occurs or Landlord
reasonably determines that an emergency posing imminent threat of injury or damage to persons or
property exists, the Landlord, without being under any obligation to do so and without thereby
waiving its rights with regard to any Event of Default, may, after prior written notice to Tenant
(prior written notice shall not be required if not practical in the case of an emergency posing
imminent threat of injury or damage to persons or property ) remedy the default giving rise to the
Event of Default , or the imminent threat, for the account and at the expense of the Tenant. If
the Landlord makes any reasonable expenditures or incurs any reasonable obligations for the payment
of money in connection therewith, including but not limited to reasonable attorneys fees in
instituting, prosecuting or defending any action or proceeding, such sums paid or obligation
incurred and costs, shall be paid upon demand to the Landlord by the Tenant as Additional Rent and,
if not paid within five (5) business days following notice that such amount is past due (provided
that no such notice shall be required following the first two such notices in any 12 month period)
with interest at the rate of eighteen (18%) percent per annum for the purposes of late payments of
Base Rent or regular monthly payments of Operating Expenses and Taxes, and otherwise at the Prime
Rate plus six percent (6%) per annum, (the applicable such rate, the
Default Rate
)
calculated as of the date such payments were due.
Section 14.03.
No Waiver
. No failure by either party to insist upon strict
performance of any covenant, agreement, term or condition of this Lease, or to exercise any right
or remedy consequent upon breach thereof, and no acceptance by Landlord of full or partial Rent
during the continuance of any breach, shall constitute a waiver of any such breach or of any
covenant, agreement, term or condition. No covenant, agreement, term or condition of this Lease to
be performed or complied with by either party, and no breach thereof, shall be waived, altered or
modified except by written instrument executed by the other party. No waiver of any breach shall
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affect or alter this Lease, but each and every covenant, agreement, term and condition of this
Lease shall continue in full force and effect with respect to any other then existing or subsequent
breach thereof.
Section 14.04.
Late Payments
. In the event (i) any payment of Rent is not paid within
five (5) business days of the due date, or (ii) a check received by Landlord from Tenant shall be
dishonored, then because actual damages for a late payment or for a dishonored check are extremely
difficult to fix or ascertain, but recognizing that damage and injury result therefrom, Tenant
agrees to pay 5% of the amount due in (i) as liquidated damages for each late payment and 2.5% of
the amount due in (ii) as liquidated damages for each time a check is dishonored. Notwithstanding
the foregoing, no payment shall be due under the foregoing sentence for the first late payment of
Rent in any twelve (12) month period if such Rent payment is made within five (5) business days
after written notice from Landlord to Tenant. Furthermore, if any payment of Rent shall not be
paid when due, the same shall bear interest, from the date when the same was due until the date
paid, at the Default Rate; provided, however, that no interest shall be due with respect to late
payments of Rent on the first occasion in any 12 month period unless Tenant fails to make such
payment within five (5) business days after Landlord gives Tenant notice of such delinquency. (The
grace periods herein provided are strictly related to the liquidated damages for, and interest on,
a late payment and shall in no way modify or stay Tenants obligation to pay Rent when it is due,
nor shall the same preclude Landlord from pursuing its remedies under this Article 14, or as
otherwise allowed by law.)
Section 14.05.
Remedies Cumulative
. Each right and remedy of Landlord provided for in
this Lease shall be cumulative and concurrent and shall be in addition to every other right or
remedy provided for in this Lease now or hereafter existing at law or in equity or by statute or
otherwise, and the exercise or beginning of the exercise by Landlord of any one or more of the
rights or remedies provided for in this Lease now or hereafter existing at law or in equity or by
statute or otherwise shall not preclude the simultaneous exercise by Landlord of any or all other
rights or remedies provided for in this Lease or now or hereafter existing at law or in equity or
by statute or otherwise.
Section 14.06.
Landlords Obligation to Make Payments
. Tenant shall not be entitled
to offset against Rent any payments due from Landlord to Tenant except as expressly set forth
herein.
Section 14.07.
Landlord Defaults
.
(a) Landlord shall in no event be in default in the performance of any of Landlords
obligations under the terms of this Lease unless and until Landlord shall have failed to perform
such obligation within thirty (30) days after notice by Tenant to Landlord (
Tenant Default
Notice
) specifying the manner in which Landlord has failed to perform any such obligations
(provided, however, if Landlord promptly commences to cure the default and diligently pursues the
cure, but such default is not capable of being cured by Landlord within the said thirty (30) day
period and Landlord so notifies Tenant promptly (but in any event within thirty (30) days after
such Tenant Default Notice is given) together with an estimate of the reasonable time required for
such cure, Landlord shall
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be allowed such longer period, , but in no event longer than 180 days). The provisions of
this Section 14.07 shall not apply to Landlords obligations to complete the Landlord Work, the
sole and exclusive remedies for which are set forth in Section 1.03 of this Lease.
(b)
Tenants Self-Help Right
. If Landlord is in default in the performance of any of
its obligations hereunder beyond applicable notice and cure periods, then Tenant shall have the
right to remedy such default on Landlords behalf (provided that Tenant uses reasonable efforts to
avoid violating or rendering void any warranties maintained by Landlord) after ten (10) business
days prior notice to Landlord, in which event Landlord shall reimburse Tenant within 30 days after
invoice for all reasonable costs and expenses incurred by Tenant in connection therewith to the
extent in excess of Tenants Pro Rata Share of the Operating Expenses that Tenant would have been
obligated to pay had Landlord performed such obligations within applicable notice and cure periods,
together with interest at the Default Rate, and if not so paid then Tenant shall have the right to
recover the same by an abatement of Base Rent, provided that such abatement shall cease at such
time as and to the extent that payment of the full amount then due Tenant hereunder is tendered to
Tenant. Notwithstanding the foregoing, if Landlord disputes Tenants right to abate Base Rent, or
the amount of the abatement, such dispute shall be resolved in an arbitration proceeding pursuant
to the immediately following paragraph prior to any abatement of disputed amounts by Tenant and if
the amount of the abatement is more than 20% of the aggregate amount of Base Rent due in any month,
then the amount abated in any one month shall not exceed 20% of the Base Rent and the excess amount
of the abatement shall be carried forward with interest at the Default Rate. Tenants self-help
rights under this paragraph shall be exercised by Tenant only (i) with respect to conditions
actually existing within the Premises or, in the event of an emergency, in common areas of the
Building, and (ii) with respect to conditions that materially affect Tenants ability to use and
enjoy the Premises and to conduct Tenants operations therein. Tenant is not precluded from
entering into other tenant spaces in the exercise of the foregoing self-help rights to the extent
reasonably necessary to access common areas of the Building; provided, however, that (x) any such
entry by Tenants shall be at its own risk and expense and (y) Tenant obtains, in advance, an
agreement from the other tenant allowing such entry. The provisions of this paragraph may not be
exercised by any subtenants of Tenant.
Any arbitration decision under this paragraph shall be enforceable in accordance with
applicable law in any court of proper jurisdiction. Within fifteen (15) days after Landlord
requests arbitration by notice to Tenant, the parties shall direct the Boston office of the AAA to
appoint an arbitrator who shall have a minimum of ten (10) years experience in commercial real
estate disputes and who shall not be affiliated with either Landlord or Tenant. Both Landlord and
Tenant shall have the opportunity to present evidence and outside consultants to the arbitrator.
The arbitration shall be conducted in accordance with the Commercial Arbitration Rules of the AAA
insofar as such rules are not inconsistent with the provisions of this Lease (in which case the
provisions of this Lease shall govern). The cost of the arbitration (exclusive of each partys
witness and attorneys fees, which shall be paid by such party) shall be borne equally by the
parties. The decision of the arbitrator(s) shall be final and binding on the parties. The parties
shall comply with any orders of the arbitrator(s) establishing deadlines for any such proceeding.
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Article 15.
Surrender
Section 15.01.
Obligation to Surrender
. Tenant shall, upon any expiration or earlier
termination of the term of this Lease, remove all of Tenants Property from the Premises unless
otherwise approved by Landlord in writing. Tenant shall peaceably vacate and surrender to the
Landlord the Premises and deliver all keys, locks thereto, and subject to Section 8.01 all
alterations and additions made to or upon the Premises, in the same condition as they were at the
commencement of the term, or as they were put in during the term hereof, reasonable wear and tear
and, to the extent Landlord is required to restore the same, damage by fire or other casualty or
taking or condemnation by public authority excepted. In the event of the Tenants failure to
remove any of Tenants Property from the Premises, Landlord is hereby authorized, without liability
to Tenant for loss or damage thereto, and at the sole risk of Tenant, to remove and store any of
the property at Tenants expense, or to retain same under Landlords control or to sell at public
or private sale, after thirty (30) days notice to Tenant at its address last known to Landlord, any
or all of the property not so removed and to apply the net proceeds of such sale to the payment of
any sum due hereunder, or to destroy such property.
Section 15.02.
Holdover Remedies
. If Tenant (or anyone claiming by, through, or under
Tenant) shall remain in possession of the Premises or any part thereof after the expiration or
earlier termination of this Lease with respect thereto without any agreement in writing executed
with Landlord, Tenant shall be deemed a tenant at sufferance. After the expiration or earlier
termination of the term of this Lease, Tenant shall pay Base Rent at the higher of (x) 150% of the
Base Rent in effect immediately preceding such expiration or termination or, (y) 150% of the
then-market rate for the Premises, and, in either case, with all Additional Rent payable and
covenants of Tenant in force as otherwise herein provided, and, commencing on the date that is 45
days after the expiration or earlier termination of this Lease, Tenant shall be liable to Landlord
for all damages arising from such failure to surrender and vacate the Premises, including damages
arising from the loss of a replacement lease transaction. Notwithstanding the forgoing to the
contrary, clause (y) of this paragraph, above, shall not apply in the event that the Lease
terminates prior to its scheduled expiration on account of the exercise of termination rights by
either party pursuant to Article 11 or Tenant pursuant to Section 7.06.
Section 15.03.
Decommissioning
. Prior to the expiration of this Lease (or within 30
days after any earlier termination), Tenant shall clean and otherwise decommission all interior
surfaces (including floors, walls, ceilings, and counters), process piping, process supply lines,
process waste lines and process plumbing in the Premises, and all exhaust or other ductwork in the
Premises, in each case which has carried or released or been exposed to any Hazardous Materials
(other than ordinary and customary office supplies and cleaning fluids) from the operations of
Tenant or any person claiming by or through Tenant, and shall otherwise clean the Premises so that:
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(a) the Hazardous Materials from Tenant (or any person claiming by or through Tenant)
operations, to the extent, if any, existing prior to such decommissioning, have been removed as
necessary so that the interior surfaces (including floors, walls, ceilings, and counters), process
piping, process supply lines, process waste lines and process plumbing, and all such exhaust or
other ductwork, may be reused by a subsequent tenant or disposed of in compliance with applicable
Environmental Laws without taking any special precautions for Hazardous Materials, without
incurring special costs or undertaking special procedures for demolition, disposal, investigation,
assessment, cleaning or removal of Hazardous Materials and without incurring regulatory compliance
requirements or giving notice in connection with Hazardous Materials; and
(b) the Premises may be reoccupied for office, laboratory or research and development use,
demolished or renovated without taking any special precautions for Hazardous Materials, without
incurring special costs or undertaking special procedures for disposal, investigation, assessment,
cleaning or removal of Hazardous Materials and without incurring regulatory requirements or giving
notice in connection with Hazardous Materials.
Further, for purposes of clauses (a) and (b): (i) materials previously or hereafter generated
from operations shall not be deemed part of the Premises, and (ii) special costs or special
procedures shall mean costs or procedures, as the case may be, that would not be incurred but for
the nature of the Hazardous Materials as Hazardous Materials instead of non-Hazardous Materials.
Prior to the expiration of this Lease (or within 30 days after any earlier termination), Tenant, at
Tenants expense, shall obtain for Landlord a report addressed to Landlord (and, at Tenants
election, Tenant) by a reputable licensed environmental engineer that is designated by Tenant and
acceptable to Landlord in Landlords reasonable discretion, which report shall be based on the
environmental engineers inspection of the Premises and shall confirm that Tenant has complied with
the requirements of this Section 15.03. The report shall include reasonable detail concerning the
clean-up location, the tests run and the analytic results.
Tenant may, by written request made no earlier than six months prior to the then-scheduled
expiration of the term of this Lease, request that Landlord approve the scope of Tenants
decommissioning activities under this Section 15.03 in writing, which approval shall not be
unreasonably withheld, conditioned or delayed.
Section 15.04.
Failure to Decommission
. If Tenant fails to perform its obligations
under Section 15.03 within ten (10) days after the expiration of the term of this Lease, without
limiting any other right or remedy, Landlord may, on five (5) business days prior written notice to
Tenant perform such obligations at Tenants expense, and Tenant shall promptly reimburse Landlord
upon demand for all out-of-pocket costs and expenses incurred by Landlord in connection with such
work. In addition, any such reimbursement shall include a ten percent (10%) administrative fee
(but in no event less than $1,000) to cover Landlords overhead in undertaking such work and, if
the expiration of the term has occurred on account of a Tenant default or if the Landlord has,
prior to the regularly scheduled expiration of the term, previously approved the scope of Tenants
decommissioning activities under Section 15.03 in writing, then Tenant shall be deemed to be in
occupancy of the Premises as a holdover occupant subject to Section 15.02 until the
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obligations are fully performed. The reimbursement and administrative fee shall be Additional
Rent. Tenants obligations under this Article 15 of this Lease shall survive the termination of
this Lease.
Article 16.
Quiet Enjoyment
Section 16.01.
Covenant of Quiet Enjoyment
. Tenant, subject to any ground leases,
deeds of trust and mortgages to which this Lease is from time to time subordinate in accordance
with Article 10, upon paying the Rent and performing and complying with all covenants, agreements,
terms and conditions of this Lease on its part to be performed or complied with, shall not be
prevented by the Landlord, or anyone claiming by, through or under Landlord, from lawfully and
quietly holding, occupying and enjoying the Premises during the term of this Lease, except as
specifically provided for by the terms hereof. This covenant is in lieu of any other so-called
quiet enjoyment covenant, either express or implied.
Article 17.
Acceptance of Surrender
Section 17.01.
Acceptance of Surrender
. No surrender to Landlord of this Lease or of
the Premises or any part thereof or of any interest therein by Tenant shall be valid or effective
unless required by the provisions of this Lease or unless agreed to and accepted in writing by
Landlord. No act on the part of any representative or agent of Landlord, and no act on the part of
Landlord other than such a written agreement and acceptance by Landlord, shall constitute or be
deemed an acceptance of any such surrender.
Article 18.
Notices
Section 18.01.
Means of Giving Notice
. All notices, demands, requests and other
instruments which may or are required to be given by either party to the other under this Lease
shall be in writing. All notices, demands, requests and other instruments from Landlord to Tenant
shall be deemed to have been properly given if sent by United States certified mail, return receipt
requested, postage prepaid, or if sent by prepaid Federal Express or other similar overnight
delivery service which provides a receipt, addressed to Tenant at the Premises, attn: Kathryn L.
Biberstein, General Counsel (and, until Tenant occupies the Premises, to Tenant at 88 Sidney
Street, Cambridge, Massachusetts, 02139, attn: Kathryn L. Biberstein, General Counsel or at such
other address or addresses as the Tenant from time to time may have designated by written notice to
Landlord, with a copy to Langer & McLaughlin, LLP, 137
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Newbury Street, Suite 700, Boston, Massachusetts 02116, Attn: Doug McLaughlin, Esq. All
notices, demands, requests and other instruments from Tenant to Landlord shall be deemed to have
been properly given if sent by United States certified mail, return receipt requested, postage
prepaid or if sent by prepaid Federal Express or other similar overnight delivery service which
provides a receipt, addressed to Landlord, c/o Davis Marcus Partners, Inc., One Appleton Street,
Boston, Massachusetts 02116, Attn: Jonathan G. Davis, with copies to Marcus Partners, Inc., 75 Park
Plaza, 4th Floor, Boston, Massachusetts 02116, Attn: Paul R. Marcus; The Prudential Insurance
Company of America, c/o Prudential Real Estate Investors, 8 Campus Drive, Parsippany, New Jersey
07054, Attn.: Lynn DeCastro; and Richard D. Rudman, Esq., DLA Piper LLP (US), 33 Arch Street,
Boston, Massachusetts 02110. Any notice shall be deemed to be effective upon receipt by, or
attempted delivery to, the intended recipient. Any notice under this Lease may be given by counsel
to the party giving such notice.
Article 19.
Separability of Provisions
Section 19.01.
Severability
. If any term or provision of this Lease or the
application thereof to any person or circumstance shall, to any extent, be invalid or contrary to
applicable law or unenforceable, the remainder of this Lease, and the application of such term or
provision to persons or circumstances other than those as to which it is held invalid or contrary
to applicable law or unenforceable, as the case may be, shall not be affected thereby, and each
term and provision of this Lease shall be legally valid and enforced to the fullest extent
permitted by law.
Article 20.
Miscellaneous
Section 20.01.
Amendments
. This Lease may not be modified or amended except by
written agreement duly executed by the parties hereto.
Section 20.02.
Governing Law
. This Lease shall be governed by and construed and
enforced in accordance with the laws of the state in which the Property is located.
Section 20.03.
Counterparts
. This Lease may be executed in several counterparts, each
of which shall be an original but all of which shall constitute but one and the same instrument.
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Section 20.04.
Successors and Assigns
. The covenants and agreements herein contained
shall, subject to the provisions of this Lease, bind and inure to the benefit of Landlord, its
successors and assigns, and Tenant, and Tenants permitted successors and assigns, and no
extension, modification or change in the terms of this Lease effected with any successor, assignee
or transferee shall cancel or affect the obligations of the original Tenant hereunder unless agreed
to in writing by Landlord. The term Landlord as used herein and throughout the Lease shall mean
only the owner or owners at the time in question of Landlords interest in this Lease. Upon any
transfer of such interest, from and after the date of such transfer, Landlord herein named (and in
case of any subsequent transfers the then transferor), shall be relieved of all liability for the
performance of any obligations on the part of the Landlord contained in this Lease except for
defaults by Landlord prior to such transfer or monies owed by Landlord to Tenant and which were not
assigned to and repayment or performance thereof assumed by such transferee, provided that if any
monies are in the hands of Landlord or the then transferor at the time of such transfer, and in
which Tenant has an interest, shall be delivered to the transferee, then Tenant shall look only to
such transferee for the return thereof.
Section 20.05.
Merger Clause
. This instrument (including the exhibits) contains the
entire and only agreement between the parties regarding the lease of the Premises, and no oral
statements or representations or prior written matter not contained in this instrument shall have
any force or effect.
Section 20.06.
Notice of Lease
. Upon the mutual execution and delivery of this Lease,
and thereafter, at the request of either Landlord or Tenant in connection with any amendment, the
parties shall execute a document in recordable form containing only such information as is
necessary to constitute a Notice of Lease under Massachusetts law. All recording costs for such
notice shall be borne by Tenant. At the expiration or earlier termination of this Lease, Tenant
shall provide Landlord with an executed termination of the Notice of Lease in recordable form,
which obligation shall survive such expiration or earlier termination.
Section 20.07.
No Lease
. The submission of this Lease for review or comment shall not
constitute an agreement between Landlord and Tenant until both have signed and delivered copies
thereof.
Section 20.08.
Reimbursements
. Whenever Tenant is required to obtain Landlords
approval hereunder, Tenant agrees to reimburse Landlord all reasonable out-of-pocket expenses
incurred by Landlord, including reasonable attorney fees in order to review documentation or
otherwise determine whether to give its consent.
Section 20.09.
Financial Statements
. If, at any time, Tenant ceases to be a publicly
traded company subject to the reporting requirements of the SEC, then Tenant, within 30 days
following the end of each fiscal quarter occurring during the term shall furnish to Landlord an
accurate, up-to-date financial statement of Tenant showing Tenants financial condition for the
immediately preceding fiscal quarter and, with respect to the fourth fiscal quarter, the fiscal
year, such annual statement to be audited if available, together with a certification from Tenants
chief financial officer as to whether Tenant then complies with the Financial Test. Tenant shall
also
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use commercially reasonable efforts to provide the foregoing annual financial statements for
any Transferee of more than 33% of the Premises that is not a publicly traded company subject to
the reporting requirements of the SEC. If any such financial statements are not publicly
available, Landlord shall treat the financial statements confidentially, but shall be permitted to
provide them to prospective and current lenders and prospective purchasers.
Section 20.10.
Parking.
Landlord agrees that, during the term of this Lease, Tenant
shall have the right (at no additional charge, other than to the extent provided as Operating
Expenses) to use 351 (based on a ratio of 3.5 spaces per 1,000 rentable square feet of the
Premises) non-designated parking spaces as may be reasonably necessary to accommodate officers,
employees, guests, invitees and clients, in connection with the operation of its business following
the initial Commencement Date. Included within the foregoing spaces are 35 (based on a ratio of 1
per 2,800 rentable square feet of the Premises) non-designated parking spaces located in the
parking garage on the lower level of the Building, with direct access to the Building lobby serving
the Premises. The balance of Tenants parking spaces shall be located in the areas shown on
Exhibit 20.10
, attached. At Landlords election and at no cost to Tenant, Landlord may
designate parking spaces for exclusive use by Tenant and other tenants of the Property and may
install signage or implement a pass or sticker system to control parking use, and may employ valet
parking to meet the requirements of this Section. To the extent applicable to Tenants use of the
parking spaces, the provisions of the Lease shall apply, including rules and regulations of general
applicability from time to time promulgated by Landlord.
Section 20.11.
Future Development
. (a) Landlord reserves all rights as may be
necessary or desirable to construct additional structured parking at the Property in the location
shown on
Exhibit 20.11
or, if otherwise permitted under this Section 20.11(a), one or more
additions to the Building. In connection with any such additional development, exterior common
areas and facilities at the Property may be eliminated, altered, or relocated and may also be
utilized to serve the Building addition(s) and other new improvements. The rights set forth above
shall include rights to use portions of the Property (other than the Premises) for the purpose of
temporary construction staging and related activities and to implement valet parking for reserved
and unreserved parking spaces for the purpose of facilitating construction during such activities.
Landlord agrees that, so long as no Event of Default is continuing under this Lease, it shall not
construct any material additions to the Building unless such construction is in accordance with the
exercise of Tenants rights pursuant to Article 25 and it shall not construct any additional
structured parking that would inhibit Tenants rights pursuant to Article 25 in any material
manner.
(b) Landlord and its representatives, contractors, agents, employees and licensees shall have
the right during any construction period to enter the Premises to undertake such work; to shore up
the foundations and/or walls of the Premises and other improvements at the Property; to erect
scaffolding and protective barricades around the Premises or in other locations within or adjacent
to the other improvements at the Property; and to do any other act necessary for the safety of the
Premises or other improvements at the Property or the expeditious completion of such construction.
Landlord shall use reasonable efforts not to interfere with the conduct of Tenants business and to
minimize the extent and duration of any inconvenience, annoyance or
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disturbance to Tenant resulting from any work pursuant to this Section in or about the
Premises or Property, consistent with accepted construction practice, and so long as Landlord uses
such reasonable efforts Landlord shall not be liable to Tenant for any compensation or reduction of
Rent by reason of inconvenience or annoyance or for loss of business resulting from any act by
Landlord pursuant to this Section.
(c) In connection with the foregoing or as Landlord may otherwise reasonably determine is
necessary to accommodate the financing or operation of the Building, Landlord may create a
subsidiary condominium or subject the Property to a ground lease. In the event the Building is
submitted to a subsidiary condominium regime, the Property shall be deemed to be the condominium
unit in which the Premises is located and all common areas and facilities serving such unit of the
condominium, and, at the request of either Landlord or Tenant,
Exhibit 1.01-2
shall be
amended accordingly. This Lease shall be subject and subordinate to any such ground lease or
condominium (and covenants and easements granted in connection therewith) so long as the same are
not inconsistent in any material respect with Tenants rights under this Lease. Tenant agrees to
enter into any instruments reasonably requested by Landlord in connection with the foregoing so
long as the same do not decrease the rights or increase the obligations of Tenant under this Lease,
including a subordination of this Lease to a ground lease or documents creating a subsidiary
condominium at the Property. Tenant agrees not to take any action to oppose any application by
Landlord for any permits, consents or approvals from any governmental authorities for any
redevelopment or additional development of all or any part of the Property, and will use all
commercially reasonable efforts to prevent any of Tenants subtenants or assigns (collectively,
Tenant Responsible Parties
) from doing so. For purposes hereof, action to oppose any
such application shall include, without limitation, communications with any governmental
authorities requesting that any such application be limited or altered. Also for purposes hereof,
commercially reasonable efforts shall include, without limitation, commercially reasonable efforts,
upon receiving notice of any such action to oppose any application on the part of any Tenant
Responsible Parties, to obtain injunctive relief, and, in the case of a subtenant, exercising
remedies against the subtenant under its sublease. Landlord will reimburse Tenant for all
reasonable third party attorneys fees that Tenant incurs to review any such documents and
agreements.
Section 20.12.
Signage
. So long as the Tenant originally named herein, or any
successor or assign acquiring Tenants interest in the Lease in a merger or acquisition of all or
substantially all of Tenants business and assets, is the Tenant hereunder, the Premises consist of
at least 80,000 rentable square feet and continues to include the 852 Winter Street entrance and
lobby, and subject to applicable laws, codes and ordinances, Tenant, at Tenants cost, may install
the signage described on
Exhibit 20.12
, attached. Any signage installed by Tenant pursuant
to this paragraph shall be the responsibility of Tenant, and the design of such signage shall be
subject to Landlords prior written approval, which approval shall not be unreasonably withheld,
conditioned, or delayed. All signage described in this Section 20.12 shall be consistent in
quality with similar signage in first class office, laboratory, research and development buildings.
Landlord shall cooperate with Tenant, at Tenants cost, as is reasonably required for Tenant to
obtain the approvals necessary for all such signage.
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Section 20.13.
Brokers
. Landlord and Tenant each represent and warrant that they have
not directly or indirectly dealt with any broker with respect to the leasing of the Premises other
than CB Richard Ellis and Colliers Meredith & Grew (
Brokers
). Each party agrees to
exonerate and save harmless and indemnify the other against any loss, cost, claim or expense
(including reasonable attorneys fees) resulting from its breach of the forgoing representation and
warranty. Brokers are to be paid by Landlord pursuant to the terms of a separate agreement.
Section 20.14.
Force Majeure
. In the event Landlord or Tenant shall be delayed or
hindered in or prevented from the performance of any act (excluding monetary obligations) required
under this Lease to be performed by such party by reason of strikes, lockouts, labor troubles,
inability to procure materials, failure of power, restricted governmental law or regulations,
riots, insurrection, war or other reason of a like nature not the fault of such party, then
performance of such act shall be excused for the period of the delay, and the period for the
performance of any such act shall be extended for a period equivalent to the period of such delay.
Nothing in this Section 20.14 shall excuse Landlord or Tenants failure to make payments under this
Lease when due.
Section 20.15.
Limitations on Liability
. None of the provisions of this Lease shall
cause Landlord to be liable to Tenant, or anyone claiming through or on behalf of Tenant, for any
special, indirect or consequential damages, including, without limitation, lost profits or
revenues. None of the provisions of this Lease shall cause Tenant to be liable to Landlord, or
anyone claiming through or on behalf of Landlord, for any special, indirect or consequential
damages, including, without limitation, lost profits or revenues, except for a breach of Section
5.02(b)-(c) of this Lease or as otherwise provided in Section 15.02 of this Lease, and provided
that no remedy expressly set forth in this Lease shall be deemed special, indirect or
consequential. In no event shall any individual partner, officer, shareholder, trustee,
beneficiary, director, agent or similar party be liable for the performance of or by Landlord or
Tenant under this Lease or any amendment, modification or agreement with respect to this Lease.
Tenant agrees to look solely to Landlords interest in the Property in connection with the
enforcement of Landlords obligations in this Lease.
Section 20.16.
Certain Definitions
. The expression the original term means the
period of years referred to in Article 2. Prior to the exercise by Tenant of any election to
extend the original term, the expression the term of this Lease or any equivalent expression
shall mean the original term; after the exercise by Tenant of the aforesaid election or other
extension of the term, the expression the term of this Lease or any equivalent expression shall
mean the original term as extended. The expression attorneys fees includes reasonable fees of
in-house and external counsel.
Section 20.17.
Prevailing Parties
. Landlord shall pay all reasonable attorneys fees
incurred by Tenant in connection with any legal action concerning an alleged breach of this Lease
to the extent that Tenant is the prevailing party. Tenant shall pay all reasonable attorneys fees
incurred by Landlord in connection with any legal action concerning an alleged breach of this Lease
to the extent that Landlord is the prevailing party.
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Section 20.18.
Waiver of Trial by Jury
. LANDLORD AND TENANT WAIVE TRIAL BY JURY IN
ANY ACTION TO WHICH THEY ARE PARTIES, and further agree that any action arising out of this Lease
(except an action for possession by Landlord, which may be brought in whatever manner or place
provided by law) shall be brought in the Trial Court, Superior Court Department, in the county
where the Premises are located. Tenant expressly submits and consents in advance to such
jurisdiction in any action or proceeding commenced in such court, hereby waiving personal service
of the summons and complaint, or other process or papers issued therein and agreeing that service
of such summons and complaint or other process or papers may be made by registered or certified
mail addressed to Tenant at the address of Tenant set forth in Section 18.01 hereof.
Section 20.19.
Landlords Reserved Rights
. Landlord reserves the right from time to
time, without unreasonable (except in emergency) interruption of Tenants use and access to the
Premises: (i) to make additions to or reconstructions of the Building and to install, use,
maintain, repair, replace and relocate for service to the Premises and other parts of the Building,
or either, pipes, ducts, conduits, wires and appurtenant fixtures, wherever located in the
Premises, the Building, or elsewhere in the Property , provided that (a) no such installations,
replacements or relocations in the Premises shall be placed, to the extent reasonably practicable,
below dropped ceilings, to the inside of interior walls, or above floors and (b) all such work
necessitating entry into the Premises shall be subject to the provisions of Section 7.03; (ii) to
grant easements and other rights with respect to the Property, and (iii) to alter, relocate or
eliminate common areas and facilities in the Building, or on or serving the Property, including
with limitation the alteration or relocation (but not the elimination of) the Amenities, from time
to time so long as is there is no material adverse effect on access to, or use and occupancy of,
the Premises and all such additions, reconstruction and eliminations are consistent with a first
class office building in the suburban Boston area. Landlord shall use reasonable efforts not to
interfere with the conduct of Tenants business and to minimize the extent and duration of any
inconvenience, annoyance or disturbance to Tenant resulting from any work pursuant to this
paragraph in or about the Premises or Building, consistent with accepted construction practice, and
so long as Landlord uses such reasonable efforts Landlord shall not be liable to Tenant for any
compensation or reduction of Rent by reason of inconvenience or annoyance or for loss of business
resulting from any act by Landlord pursuant to this paragraph.
Section 20.20.
Tenant as non-Specially Designated National or Blocked Person
. Tenant
hereby warrants, represents and certifies Tenant is not acting, directly or indirectly, for or on
behalf of any person, group, entity, or nation named by any Executive Order or the United States
Treasury Department as a terrorist, Specially Designated National and Blocked Person, or other
banned or blocked person, group, entity, nation, or transaction pursuant to any law, order, rule,
or regulation that is enforced or administered by the Office of Foreign Assets Control and that it
is not engaged in this transaction, directly or indirectly, on behalf of, or instigating or
facilitating this transaction, directly or indirectly, on behalf of any such person, group, entity,
or nation. Tenant agrees that any breach of the foregoing shall at Landlords election be a
default under this Lease for which there shall be no cure, and Tenant hereby agrees to defend,
indemnify, and hold harmless Landlord from and against any and all claims, damages, losses, risks,
liabilities, and expenses (including attorneys fees and costs) arising from or related to any
breach of the foregoing warranty, representation, and certification. Tenant acknowledges and
agrees that as a condition to the requirement or effectiveness of any consent to any Transfer
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by Landlord pursuant to Section 13.01, Tenant shall cause each Transferee (including any
Permitted Transferee), for the benefit of Landlord, to reaffirm, on behalf of such Transferee, the
representations of, and to otherwise comply with the obligations set forth in, this Section 20.20,
and it shall be reasonable for Landlord to refuse to consent to a Transfer in the absence of such
reaffirmation and compliance. Tenant agrees that breach of the representations and warranties set
forth in this Section 20.20 shall at Landlords election be a default under this Lease for which
there shall be no cure. This Section 20.20 shall survive the termination or earlier expiration of
the Lease.
Section 20.21.
Authority
. Tenant warrants and represents that (a) Tenant is duly
organized, validly existing and in good standing under the laws of Massachusetts; (b) Tenant has
the authority to own its property and to carry on its business as contemplated under this Lease;
(c) Tenant is in compliance in all material respects with all laws and orders of public authorities
applicable to Tenant; (d) Tenant has duly executed and delivered this Lease; (e) the execution,
delivery and performance by Tenant of this Lease (i) are within the powers of Tenant, (ii) have
been duly authorized by all requisite action, (iii) will not violate any provision of law or any
order of any court or agency of government, or any agreement or other instrument to which Tenant is
a party or by which it or any of its property is bound, (iv) will not result in the imposition of
any lien or charge on any of Tenants Property, except by the provisions of this Lease; and (v) the
Lease is a valid and binding obligation of Tenant in accordance with its terms. Tenant agrees that
breach of the foregoing warranty and representation shall at Landlords election be a default under
this Lease for which there shall be no cure. This Section 20.21 shall survive the termination or
earlier expiration of the Lease.
Section 20.22.
Environmental Representation
. Landlord represents and warrants that,
on the Delivery Date for each Portion of the Premises, such Portion of the Premises shall not
contain any Hazardous Materials other than materials customarily used in the construction or
operation of comparable suburban office buildings.
Article 21.
Rooftop License
Section 21.01.
Rooftop License
. Landlord grants Tenants the appurtenant,
non-exclusive, and irrevocable (except upon the expiration or earlier termination of this Lease)
license at no additional charge, but otherwise subject to the terms and conditions of this Lease,
to use a contiguous portion of the roof of the Building approved by Landlord (the
Rooftop
Installation Areas
) to operate, maintain, repair and replace heating, ventilation and
air-conditioning equipment and telecommunications transmission and receiving equipment for Tenants
own use, such as a satellite dish, microwave dish, and the like, in each case appurtenant to the
Permitted Uses installed as part of Finish Work or otherwise as permitted pursuant to Article 8
(
Rooftop Equipment
). The exact location and layout of the Rooftop Installation Areas
shall be approved by Landlord in its reasonable discretion and shall not exceed in area the
Tenants Pro Rata Share of rooftop areas made available to tenants in the Building for similar
purposes.
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Section 21.02.
Installation and Maintenance of Rooftop Equipment
. Tenant shall
install Rooftop Equipment at its sole cost and expense, at such times and in such manner as
Landlord may reasonably designate and in accordance with all of the provisions of this Lease,
including without limitation Article 8. Tenant shall not install or operate Rooftop Equipment
until it receives prior written approval of the plans for such work in accordance with Article 8.
Landlord may withhold approval if the installation or operation of Rooftop Equipment reasonably
would be expected to damage the structural integrity of the Building. Tenant shall cooperate with
Landlord as reasonably required to accommodate any re-roofing of the Building during the Lease term
and Tenant shall be responsible for any costs associated with moving or temporarily relocation
Tenants Roof Equipment to the extent such Rooftop Equipment is not attached to the roof with
permanent flashing or equivalent measures consistent with the permanent installation of such
Rooftop Equipment (as opposed to surface mounting or use of ballasts). Tenants access to the
rooftop for the purposes of exercising its rights and obligations under this Article 21 shall be
limited to Normal Business Hours by prior appointment with the property manager, except in the case
of emergencies threatening life or personal property.
Tenant shall engage Landlords roofer before beginning any rooftop installations or repairs of
Rooftop Equipment, whether under this Article 21 or otherwise, and shall always comply with the
roof warranty governing the protection of the roof and modifications to the roof. Tenant shall
obtain a letter from Landlords roofer following completion of such work stating that the roof
warranty remains in effect. Tenant, at its sole cost and expense, shall cause a qualified
contractor to inspect the Rooftop Installation Areas periodically (and at least two times per year)
and correct any loose bolts, fittings or other appurtenances and shall repair any damage to the
roof caused by the installation or operation of Rooftop Equipment. Tenant shall pay Landlord
following a written request therefor, with the next payment of Rent, (i) all applicable taxes or
governmental charges, fees, or impositions imposed on Landlord because of Tenants use of the
Rooftop Installation Areas and (ii) the amount of any increase in Landlords insurance premiums as
a result of the installation of Rooftop Equipment. All Rooftop Equipment shall be screened or
otherwise designed so that it is not visible from the ground level of the Property.
Section 21.03.
Indemnification
. Indemnification. Tenant agrees that the
installation, operation and removal of Rooftop Equipment shall be at its sole risk. Tenant shall
indemnify and defend Landlord and the other Indemnitees against any liability, claim or cost,
including reasonable attorneys fees, incurred in connection with the loss of life, personal
injury, damage to property or business or any other loss or injury (except to the extent due to the
negligence or willful misconduct of Landlord or its employees, agents, or contractors) arising out
of the installation, use, operation, or removal of Rooftop Equipment by Tenant or its employees,
agents, or contractors, including any liability arising out of Tenants violation of this Article
21. Subject to the provisions of Section 21.05, Landlord assumes no responsibility for
interference in the operation of Rooftop Equipment caused by other tenants equipment, or for
interference in the operation of other tenants equipment caused by Rooftop Equipment; provided,
however, that Landlord shall use commercially reasonable efforts to enforce the rights of Tenant
under this Lease to the extent the same are superior to that of any other tenants of the Property
and shall comply with the provisions of Section 21.05, below. The provisions of this Section 21.03
shall survive the expiration or earlier termination of this Lease.
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Section 21.04.
Removal of Rooftop Equipment
. Upon the expiration or earlier
termination of the Lease, Tenant, at its sole cost and expense, shall (i) remove Rooftop Equipment
from the Rooftop Installation Areas in accordance with the provisions of this Lease and (ii) leave
the Rooftop Installation Areas in good order and repair, reasonable wear and tear excepted. If
Tenant does not remove Rooftop Equipment when so required, Landlord may remove and dispose of it
and charge Tenant for all costs and expenses incurred.
Section 21.05.
Interference by Rooftop Equipment
. Landlord may grant future roof
rights to other parties, and Landlord shall be contractually obligated to cause such other parties
to eliminate and avoid interference with Rooftop Equipment to the same or greater extent as Tenant
is so obligated. If Rooftop Equipment (i) causes physical damage to the structural integrity of
the Building, (ii) materially interferes with any telecommunications, mechanical or other systems
located at or servicing (as of the initial Delivery Date) the Building, or (iii) interferes with
any other service provided to other tenants in the Building by rooftop installations installed
prior to the installation of Rooftop Equipment, in each case in excess of that permissible under
F.C.C. or other regulations (to the extent that such regulations apply and do not require such
tenants or those providing such services to correct such interference or damage), Tenant shall
within five (5) business days of notice of a claim of interference or damage cooperate with
Landlord or any other tenant or third party making such claim to determine the source of the damage
or interference and effect a prompt solution at Tenants expense (if Rooftop Equipment caused such
interference or damage). In the event Tenant disputes Landlords allegation that Rooftop Equipment
is causing a problem with the Building (including, but not limited to, the electrical, HVAC, and
mechanical systems of the Building) and/or any other Building tenants equipment in the Building,
in writing delivered within five (5) business days of receiving Landlords notice claiming such
interference, then Landlord and Tenant shall meet to discuss a solution, and if within seven (7)
days of their initial meeting Landlord and Tenant are unable to resolve the dispute, then the
matter shall be submitted to arbitration in accordance with the provisions set forth below.
The parties shall direct the Boston office of the AAA to appoint an arbitrator who shall have
a minimum of ten (10) years experience in commercial real estate disputes and who shall not be
affiliated with either Landlord or Tenant. Both Landlord and Tenant shall have the opportunity to
present evidence and outside consultants to the arbitrator. The arbitration shall be conducted in
accordance with the commercial real estate arbitration rules of the AAA insofar as such rules are
not inconsistent with the provisions of this Lease (in which case the provisions of this Lease
shall govern). The cost of the arbitration (exclusive of each partys witness and attorneys fees,
which shall be paid by such party) shall be borne equally by the parties. Within ten (10) days of
appointment, the arbitrator shall determine whether or not Rooftop Equipment is causing a problem
with the Building and/or any other Building tenants equipment in the Building, and the appropriate
resolution, if any. The arbitrators decision shall be final and binding on the parties. If
Tenant shall fail to cooperate with Landlord in resolving any such interference or if Tenant shall
fail to implement the arbitrators decision within ten (10) days after it is issued, Landlord may
at any time thereafter (i) declare an Event of Default and/or (ii) relocate the item(s) of Rooftop
Equipment in dispute in a manner consistent with the arbitral decision.
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Section 21.06.
Relocation of Rooftop Equipment
. Based on Landlords good faith
determination that such a relocation is necessary, Landlord reserves the right to cause Tenant to
relocate Rooftop Equipment located on the roof to comparably functional space on the roof by giving
Tenant prior notice of such intention to relocate. If within thirty (30) days after receipt of
such notice Tenant has not agreed with Landlord on the space to which Rooftop Equipment is to be
relocated , the functional utility of such location, the timing of such relocation, and the terms
of such relocation, then either party may submit such dispute to arbitration pursuant to Section
21.05, above (except that the arbitrators determination shall be of the space to which Rooftop
Equipment is to be relocated, the timing of such relocation, and the terms of such relocation).
Landlord agrees to pay the reasonable cost of moving Rooftop Equipment to such other space, taking
such other steps necessary to ensure comparable functionality of Rooftop Equipment, and finishing
such space to a condition comparable to the then condition of the current location of Rooftop
Equipment. Such payment by Landlord shall not constitute an Operating Expense under this Lease.
Tenant shall arrange for the relocation of Rooftop Equipment within sixty (60) days after a
comparable space is agreed upon or determined by arbitration, as the case may be. In the event
Tenant fails to arrange for said relocation within the sixty (60) day period, Landlord shall have
the right to arrange for the relocation of Rooftop Equipment at Landlords expense, all of which
shall be performed in a manner designed to minimize interference with Tenants business.
Article 22.
Extension Options
Section 22.01.
Option to Extend
. Provided that (i) Tenant is not in default
hereunder, after any applicable notice and cure periods have expired, at the time Tenant gives its
Extension Notice or at the time the applicable Option Term would commence, or (ii) no sublets of
more than 50% of the Premises are then in effect that required Landlords consent under Article 13,
Tenant shall have the right, at its election, to extend the original term of this Lease for two (2)
additional periods of five (5) years each (each, an
Option Term
) commencing upon the
expiration of the original term or first Option Term, as applicable, provided that Tenant shall
give Landlord an irrevocable (except as expressly set forth in Section 22.04) written notice (an
Extension Notice
) in the manner provided in Section 18.01 of the exercise of its election
to so extend at least twelve (12) months, and no more than fifteen (15) months prior to the
expiration of the term (as the same may have been extended) of this Lease. Except for this Article
22 with respect to the second such Option Term, the provisions of the Work Letter, and as expressly
otherwise provided in this Lease, all the agreements and conditions in this Lease contained shall
apply to the applicable Option Term, including without limitation the obligation to pay Additional
Rent for Tenants Pro Rata Share of Taxes and Tenants Pro Rata Share of Operating Expenses. If
Tenant shall give written notice as provided in Section 18.01 of the exercise of the election in
the manner and within the time provided aforesaid, the term shall be extended upon the giving of
the notice without the requirement of any action on the part of Landlord.
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Section 22.02.
Extension Rent
. The annual Base Rent payable during any Option Term
shall be the greater of (x) ninety-five percent (95%) of the Market Rent as determined in the
manner set forth in Section 22.03, 22.04 and 22.05, below, or (y) $27.05 per rentable square foot
per annum. If the annual Base Rent for any Option Term has not been determined by the commencement
date of such Option Term, Tenant shall pay Base Rent at the last annual rental rate in effect for
the expiring Term until such time as annual Base Rent for the Option Term has been determined.
Upon such determination, the Base Rent for the Premises shall be retroactively adjusted to the
commencement of the Option Term. If such adjustment results in an underpayment of Base Rent by
Tenant, Tenant shall pay Landlord the amount of such underpayment within 30 days after the
determination thereof. If such adjustment results in an overpayment of Base Rent by Tenant,
Landlord shall credit such overpayment against the next installment of Base Rent due under the
Lease and, to the extent necessary, any subsequent installments, until the entire amount of such
overpayment has been credited against Base Rent.
Section 22.03.
Market Rent
. If Tenant gives Landlord timely notice of its election to
extend the then current term of this Lease, then within thirty (30) days thereafter, Landlord shall
give Tenant written notice of Landlords estimate of the then applicable market rent for Tenants
space, based on the rent for similar space in the Property and rent for similar space in similar
first class suburban office buildings in Waltham area (the
Market Rent
) for the Premises
in its then as-is condition (or such better condition as Tenant shall be required to maintain under
this Lease), taking into account all of the factors that a landlord and tenant would consider in
negotiating an arms-length rent (however, in no event shall the determination of Market Rent treat
any portion of the Premises as being used for research or laboratory purposes, but rather that said
determination of Market Rent shall treat the entire Premises as being used for office purposes for
the purposes of determining such Market Rent). For each year of an Option Term after the first
year of such Option Term, Base Rent shall never be decreased below that paid in the prior lease
year, but may or may not, on account of the determination of Market Rent, increase.
Section 22.04.
Tenants Right to Dispute Market Rent
. In the event that Tenant
disputes the Market Rent estimate provided by Landlord, Tenant may, within 15 days of its receipt
of notice from Landlord estimating such Market Rent, either (i) elect to withdraw its request for
an extension, in which case there shall be no extension of the term of this Lease, or (ii) give
notice to Landlord of such dispute and require that both Landlord and Tenant enter into a 15 day
good faith negotiating period to see if Landlord and Tenant come to a mutual agreement in
establishing the Market Rent. If Landlord and Tenant can come to agreement as to the Market Rent
within such 15 day period, then the Market Rent shall be set for the purposes of the Option Term as
the parties agree. If Landlord and Tenant cannot come to an agreement in establishing Market Rent
within such 15 day period, then Tenant may either (x) elect to withdraw its request for an
extension, in which case there shall be no extensions of the term of this lease, or (y) give notice
to Landlord requiring that the establishment of the Market Rent be submitted to arbitration in
accordance with the terms set forth in Section 22.05 below. If Tenant does not so dispute
Landlords estimated Market Rent within the 15 day period first referenced in this paragraph,
Tenant shall be deemed to have accepted Landlords estimate of Market Rent. In no event shall the
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extension of the term of this Lease be affected by the determination of the Market Rent, such
exercise of extension being fixed at the time at which notice is given (subject to the provisions
of clauses (i) and (x), above).
Section 22.05.
Arbitration of Market Rent.
In the event Landlord and Tenant shall be
unable to agree on the then Market Rent for the purposes of determining the Base Rent for the
applicable Option Term, then Market Rent shall be established in the following manner of
arbitration:
(a) Each of Tenant and Landlord shall choose an arbitrator knowledgeable in the field of
establishing fair rental values in the Waltham Class A office market;
(b) The arbitrators selected in accordance with (a) above shall select a third arbitrator
who is a qualified real estate appraiser with at least ten (10) years experience in the appraisal
of first class office buildings in the Waltham Class A office market;
(c) The selections shall be completed no later than twenty-one (21) days after Tenants notice
requiring the arbitration of Market Rent. If any selection is not made within the 21-day time
period, either party may petition the Boston office of the AAA to make the selection;
(d) Within thirty (30) days after their appointment, the arbitrators shall determine the
Market Rent for the Premises for the Option Term, and shall notify Tenant and Landlord of such
determination within seven (7) days, which determination shall be final and binding upon Tenant and
Landlord. If the arbitrators are unable to agree upon the Market Rent, the Market Rent will be
deemed to be the average of the Market Rents proposed by the arbitrators, except that (i) if the
lowest proposed Market Rent is less than 90% of the second to lowest proposed fair market rent, the
lowest proposed Market Rent will automatically be deemed to be 90% of the second to lowest proposed
Market Rent and (ii) if the highest proposed Market Rent is greater than 110% of the second to
highest proposed Market Rent, the highest proposed Market Rent will automatically be deemed to be
110% of the second to highest proposed Market Rent.
(e) The foregoing arbitration shall be conducted in accordance with the commercial arbitration
rules of the AAA or its successors;
(f) Landlord and Tenant shall each pay all costs of the arbitrator it selected and one-half
(
1
/
2
) of all other costs of the arbitration proceedings.
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For the purpose of determining Market Rent the parties shall use as a guideline the average
rental rates for similar available office space (and shall value the subject space as 100% office
space without regard for any research or laboratory use by Tenant) in similar office buildings in
the Waltham market.
Article 23.
Right of First Refusal
Section 23.01.
Right of First Refusal.
Prior to January 17, 2011 (the
RFR
Termination Date
), before entering into the initial lease for all or any portion of the third
floor of the Building not initially leased to Tenant hereunder or any portion of the first floor of
the Building shown on the attached
Exhibit 23.01
(collectively, the
First Refusal
Space
) with a third party (other than Exempt RFR Transactions, as defined below), and provided
that Landlord has received a written proposal or counter-proposal for the applicable First Refusal
Space that Landlord is willing to accept (or Landlord has received an acceptance of a proposal
initiated by Landlord, whether or not such acceptance is binding), Landlord shall offer the
applicable First Refusal Space to Tenant for lease by written notice to Tenant (
Landlords FR
Notice
). Within five (5) business days after receipt of Landlords FR Notice, Tenant may, by
written notice delivered to Landlord, (i) reject Landlords FR Notice, or (ii) accept Landlords
offer to lease such space for its own use on the terms set forth in this Article 23 (the failure by
Tenant to timely respond as aforesaid being deemed Tenants rejection of Landlords FR Notice
pursuant to clause (i), above).
If Landlords FR Notice is rejected under clause (i) above (or deemed rejected by Tenants
failure to timely respond), then Landlord may enter into any lease for such space on materially the
same terms set forth in such Landlords FR Notice, provided that Landlord shall deliver to Tenant a
new Landlords FR Notice prior to entering into an initial lease for the applicable First Refusal
Space (a) with any third party other than the party (or an affiliate of the party) that previously
made the offer to, or accepted an offer from, Landlord giving rise to such prior Landlords FR
Notice, or (b) on terms materially more favorable to the party (or an affiliate of the party) that
previously made the offer to, or accepted an offer from, Landlord giving rise to such prior
Landlords FR Notice, than those terms set forth in such prior Landlords FR Notice (it being
agreed that a net effective rental rate (after taking into account base rent, tenant improvement
allowances, free rent and other concessions) of at least 95% of the net effective rental rate set
forth in Landlords FR Notice does not constitute materially more favorable terms).
If Tenant timely accepts Landlords offer to lease the space as set forth in clause (ii)
above, the space shall, subject to the following paragraph below and without further action by the
parties, be leased by Tenant in its as is condition, without any obligation to construct tenant
or other improvements (except that Landlord shall be responsible, at Landlords sole cost and
expense, to separately demise the space), and otherwise on the terms and conditions then applicable
to the remainder of the Premises (e.g. the Base Rent shall be at the then-applicable rate,
escalating as otherwise provided in
Section 2.01
) except that (x) the Finish Work
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Allowance shall be reduced with respect to the applicable First Refusal Space on a pro rata
basis for the actual initial lease term for such First Refusal Space (e.g. if the term of the First
Refusal Space is eight years, then the Finish Work Allowance for the First Refusal Space would be
96/126ths of the Finish Work Allowance applicable to the remainder of the Premises on a per square
foot basis), (y) the rent commencement date with respect to the applicable First Refusal Space
shall be no later than the later to occur of (i) the Rent Commencement Date for the Office Portion
of the Premises or (ii) seven (7) months after the execution of the amendment described in the
immediately following sentence, and (z) the estimated delivery date that Landlord shall deliver the
applicable First Refusal Space to Tenant for the commencement of construction of any Tenant Work
shall be no later than the sixty (60) days after the execution of the amendment described in the
immediately following sentence. At the request of either party, Landlord and Tenant shall promptly
execute and deliver an agreement confirming such expansion of the Premises and the estimated date
the Premises are to be expanded pursuant to this Paragraph with a provision for establishing the
effective date of such expansion based on actual delivery. Tenant shall execute any such amendment
within 21 days following tender by Landlord provided that such amendment complies with the terms of
this Article 23. If Landlord fails to deliver the First Refusal Space within 90 days of the
estimated delivery date set forth in Landlords FR Notice, then Tenant, at its option, may either
(x) terminate its obligations with respect to the First Refusal Space upon 30 days prior written
notice to Landlord, whereupon all obligations of the parties hereto with respect to the First
Refusal Space shall be null and void and without recourse to either party unless Landlord delivers
the First Refusal Space within such 30 day period, in which case Tenants termination notice shall
be null and void and of no further force and effect or (y) if such failure results from matters
within Landlords reasonable control and is not cured within 30 days following written notice from
Tenant, pursue any of its equitable remedies to cause Landlord to deliver such First Refusal Space
to Tenant and bring a claim for monetary damages against Landlord, but in no event shall such
failure constitute a default of Landlord, result in a right of Tenant to terminate the Lease with
respect to the remainder of the Premises, or affect the validity of the Lease.
In no event shall the rights under this Section 23.01 apply to (x) leases subsequent to the
initial lease or leases of all or any portion of the First Refusal Space (such leases,
Initial
Leases
), or (y) any space offered to lease for use as a building amenity, such as a cafeteria
or fitness center (collectively,
Exempt RFR Transactions
).
Notwithstanding any provision of this Section to the contrary, Tenants rights under this
Section shall terminate on the RFR Termination Date and shall be void, at Landlords election, if
(i) Tenant is in default hereunder, after any applicable notice and cure periods have expired, at
any time prior to the time Tenant makes any election with respect to the First Refusal Space under
this Section or at the time the First Refusal Space would be added to the Premises, or (ii)
subleases of more than 50% of the Premises are in effect that required Landlords consent under
Article 13 at the time Tenant makes any election with respect to the First Refusal Space under this
Section or at the time the First Refusal Space would be added to the Premises.
In connection with the rights granted under this Article 23, Landlord shall, prior to the RFR
Termination Date, keep Tenant reasonably informed from time to time of the leasing status of any
then-available Right of First Refusal space.
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Article 24.
Right of First Offer
Section 24.01.
Right of First Offer.
Following the RFR Termination Date, before
entering into a lease for all or any portion of the Building (the
First Offer Space
) with
a third party (other than Exempt RFO Transactions, as defined below), Landlord shall notify Tenant
of the terms on which Landlord intends to lease the space (
Landlords FO Notice
). Within
five (5) business days after receipt of Landlords FO Notice, Tenant may, by written notice
delivered to Landlord, (i) reject Landlords FO Notice, or (ii) unconditionally and irrevocably
accept Landlords offer to lease such space for its own use on the terms set forth in Landlords FO
Notice (the failure by Tenant to timely respond as aforesaid being deemed Tenants rejection of
Landlords FO Notice pursuant to clause (i), above).
If Landlords FO Notice is rejected under clause (i) above (or deemed rejected by Tenants
failure to timely respond), then Landlord may enter into any lease for such space on materially the
same net financial terms set forth in such Landlords FO Notice, provided that Landlord shall
deliver to Tenant a new Landlords FO Notice prior to entering into an initial lease for the First
Offer Space providing for a net effective rental rate (taking into account base rent, tenant
improvement allowances, free rent and other concessions) more than five (5) percent less than that
specified in Landlords FO Notice.
If Tenant timely accepts Landlords offer to lease the space as set forth in clause (ii)
above, then the space shall, subject to the following paragraph below and without further action by
the parties, be leased by Tenant on the accepted terms (but in any event for a term not less than
the shorter of three years or the then-remaining term of this Lease) and otherwise on all of the
terms of the Lease in effect immediately prior to such expansion, provided that, at the request of
either party, Landlord and Tenant shall promptly execute and deliver an agreement confirming such
expansion of the Premises and the estimated date the Premises are to be expanded pursuant to this
Paragraph with a provision for establishing the effective date of such expansion based on actual
delivery. Except as otherwise agreed by the parties in writing, Landlords failure to deliver, or
delay in delivering, all or any part of the First Offer Space, for any reason, shall not alter
Tenants obligation to accept such space when delivered, shall not constitute a default of
Landlord, and shall not affect the validity of the Lease, provided, however, that if Landlord fails
to deliver the First Offer Space within 180 days of the date set forth for delivery in Landlords
FO Notice, then Tenant, at its sole option, may terminate its obligations with respect to the First
Offer Space upon 30 days prior written notice to Landlord, whereupon all obligations of the parties
hereto with respect to the First Offer Space shall be null and void and without recourse to either
party unless Landlord delivers the First Offer Space within such 30 day period, in which case
Tenants termination notice shall be null and void and of no further force and effect. Landlord
shall use commercially reasonable efforts to commence and diligently prosecute legal action to
evict any tenant holding over in First Offer Space subject to an accepted offer by Tenant pursuant
to this Section 24.01 commencing no later than the date that is 30 days following the date that
Landlord is anticipated to deliver such First Offer Space to Tenant.
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In no event shall the rights under this Section 24.01 apply to (x) the initial lease for all
or any portion of the First Offer Space and the renewal or extension thereof (such leases,
Initial Leases
), (y) any space offered to lease for use as a building amenity, such as a
cafeteria or fitness center, or (z) solely with respect to the first and second floor portions of
the First Offer Space, the exercise of an expansion right by a then-existing Building tenant or the
renewal or extension of leases by occupants of the first and second floor (collectively,
Exempt RFO Transactions
).
Notwithstanding any provision of this Section to the contrary, Tenants rights under this
Section shall terminate on the date that is one year prior to the Expiration Date and shall be
void, at Landlords election, if (i) Tenant is in default hereunder, after any applicable notice
and cure periods have expired, at any time prior to the time Tenant makes any election with respect
to the First Offer Space under this Section or at the time the First Offer Space would be added to
the Premises, or (ii) subleases of more than 50% of the Premises are in effect that required
Landlords consent under Article 13 at the time Tenant makes any election with respect to the First
Offer Space under this Section or at the time the First Offer Space would be added to the Premises.
Nothing in this Section shall be construed to grant to Tenant any rights or interest in any space
in the Building, and any claims by Tenant alleging a failure of Landlord to comply herewith shall
be limited to claims for monetary damages. Tenant may not assert and hereby waives any rights in
any space nor file any lis pendens or similar notice with respect thereto.
Article 25.
Expansion Option
Section 25.01.
Expansion Option
. Tenant shall have the right to request that Landlord
pursue the expansion of the Building by approximately 45,000 rentable square feet upon at least 30
days prior written notice to Landlord. Following the giving of such written notice, Landlord and
Tenant shall cooperate in good faith to agree upon a schedule and budget for any such expansion,
which shall include a pre-development phase for permitting. Any such expansion shall be
conditioned upon (i) the parties entering into a mutually agreeable lease amendment at market rent
(taking into account the current building financing, financing available in the market, and
allowing a market return to Landlord on its costs to construct such expansion) and for a term of at
least 10 years (which may be achieved by use of any extension options under the Lease then
remaining) and (ii) Landlords ability to obtain the necessary permits for such expansion (using
good faith, commercially reasonable efforts to do so). Tenant shall have no right to request an
expansion under this section at any time that an Event of Default then exists, if Tenant ceases to
occupy at least 66% of the Premises, or if, at the time Tenant gives its notice or at any time
thereafter, there are at least 45,000 rentable square feet available for lease in the Building.
It is intended that this instrument will take effect as a sealed instrument.
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IN WITNESS WHEREOF, the Landlord and Tenant have signed the same as of the date first
appearing above.
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LANDLORD:
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PDM 850 UNIT, LLC
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By:
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PD Winter Street, LLC, its sole member
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By :
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/s/ Paul R. Marcus
Name: Paul R. Marcus
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Title: A Member of Its Executive Committee
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TENANT:
ALKERMES, INC.
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By:
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/s/ Gordon G. Pugh
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Name: Gordon G. Pugh
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Title: Chief Operating Officer
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By:
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/s/ James M. Frates
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Name:
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James M. Frates
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Title:
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Chief Financial Officer
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