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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

(Mark One)

 

x       QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended September 30, 2012

 

OR

 

o          TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from            to           

 

Commission file number 001-10865

 

AMAG Pharmaceuticals, Inc.

(Exact Name of Registrant as Specified in Its Charter)

 

Delaware		04-2742593
(State or Other Jurisdiction of		(I.R.S. Employer
Incorporation or Organization)		Identification No.)
100 Hayden Avenue
Lexington, Massachusetts		02421
(Address of Principal Executive Offices)		(Zip Code)

 

(617) 498-3300

(Registrant’s Telephone Number, Including Area Code)

 

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 x No o

 

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 during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes x No o

 

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 definition of “accelerated filer,” “large accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer o		Accelerated filer x
Non-accelerated filer o		Smaller Reporting Company o
(Do not check if a smaller reporting company)

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).  Yes o No x

 

As of October 31, 2012, there were 21,415,340 shares of the registrant’s common stock, par value $0.01 per share, outstanding.

 

 

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AMAG PHARMACEUTICALS, INC.
FORM 10-Q

 

TABLE OF CONTENTS

 

PART I.	FINANCIAL INFORMATION (Unaudited)
Item 1.	Financial Statements
	Condensed Consolidated Balance Sheets as of September 30, 2012 and December 31, 2011		3
	Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2012 and 2011		4
	Condensed Consolidated Statements of Comprehensive Loss for the three and nine months ended September 30, 2012 and 2011		5
	Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2012 and 2011		6
	Notes to Condensed Consolidated Financial Statements		7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		26
Item 3.	Quantitative and Qualitative Disclosures About Market Risk		49
Item 4.	Controls and Procedures		49
PART II.	OTHER INFORMATION
Item 1.	Legal Proceedings		50
Item 1A.	Risk Factors		50
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		77
Item 6.	Exhibits		78
SIGNATURES			79
CERTIFICATIONS

 

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PART I.                           FINANCIAL INFORMATION

 

Item 1.  Financial Statements

 

AMAG PHARMACEUTICALS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS

(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

(Unaudited)

 

		September 30, 2012			December 31, 2011
ASSETS
Current assets:
Cash and cash equivalents		$	42,900		$	63,474
Short-term investments		167,943			148,703
Accounts receivable, net		7,363			5,932
Inventories		12,227			15,206
Receivable from collaboration		777			428
Assets held for sale		2,300			—
Prepaid and other current assets		7,627			6,288
Total current assets		241,137			240,031
Property, plant and equipment, net		3,411			9,206
Long-term investments		—			17,527
Restricted cash		460			460
Total assets		$	245,008		$	267,224
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable		$	3,620		$	3,732
Accrued expenses		16,674			28,916
Deferred revenues		7,250			6,346
Total current liabilities		27,544			38,994
Long-term liabilities:
Deferred revenues		40,624			45,196
Other long-term liabilities		2,136			2,438
Total liabilities		70,304			86,628
Commitments and contingencies (Notes J & K)
Stockholders’ equity:
Preferred stock, par value $0.01 per share, 2,000,000 shares authorized; none issued		—			—
Common stock, par value $0.01 per share, 58,750,000 shares authorized; 21,414,251 and 21,306,413 shares issued and outstanding at September 30, 2012 and December 31, 2011, respectively		214			213
Additional paid-in capital		630,613			625,133
Accumulated other comprehensive loss		(3,151		)	(4,842		)
Accumulated deficit		(452,972		)	(439,908		)
Total stockholders’ equity		174,704			180,596
Total liabilities and stockholders’ equity		$	245,008		$	267,224

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

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AMAG PHARMACEUTICALS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(IN THOUSANDS, EXCEPT PER SHARE DATA)

(Unaudited)

 

		Three Months Ended September 30,						Nine Months Ended September 30,
		2012			2011			2012			2011
Revenues:
Product sales, net		$	16,176		$	15,802		$	44,304		$	39,905
License fee and other collaboration revenues		1,566			1,707			19,911			6,322
Royalties		—			46			19			115
Total revenues		17,742			17,555			64,234			46,342
Costs and expenses:
Cost of product sales		4,323			2,669			10,193			7,792
Research and development expenses		5,260			14,894			25,393			45,155
Selling, general and administrative expenses		12,160			17,230			40,442			53,690
Restructuring expenses		562			—			1,620			—
Total costs and expenses		22,305			34,793			77,648			106,637
Other income (expense):
Interest and dividend income, net		295			378			1,026			1,390
Gains (losses) on investments, net		2			14			(1,469		)	(194		)
Total other income (expense)		297			392			(443		)	1,196
Net loss before income taxes		(4,266		)	(16,846		)	(13,857		)	(59,099		)
Income tax benefit		299			215			793			611
Net loss		$	(3,967	)	$	(16,631	)	$	(13,064	)	$	(58,488	)
Net loss per share:
Basic and diluted		$	(0.19	)	$	(0.78	)	$	(0.61	)	$	(2.76	)
Weighted average shares outstanding used to compute net loss per share:
Basic and diluted		21,403			21,194			21,374			21,169

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

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AMAG PHARMACEUTICALS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(IN THOUSANDS)

(Unaudited)

 

		Three Months Ended September 30,						Nine Months Ended Septmber 30,
		2012			2011			2012			2011
Net loss		$	(3,967	)	$	(16,631	)	$	(13,064	)	$	(58,488	)
Other comprehensive income (loss):
Unrealized gains (losses) on securities:
Holding gains (losses) arising during period, net of tax		176			45			222			1,314
Reclassification adjustment for (gains) losses included in net loss		(2		)	(2		)	1,469			208
Net unrealized gains (losses) on securities		174			43			1,691			1,522
Total comprehensive loss		$	(3,793	)	$	(16,588	)	$	(11,373	)	$	(56,966	)

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

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AMAG PHARMACEUTICALS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(IN THOUSANDS)

(Unaudited)

 

		Nine Months Ended September 30,
		2012			2011
Cash flows from operating activities:
Net loss		$	(13,064	)	$	(58,488	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation		2,742			1,966
Impairment loss on assets held for sale		800			—
Non-cash equity-based compensation expense		5,312			8,798
Non-cash income tax benefit		(793		)	(611		)
Amortization of premium/discount on purchased securities		2,181			2,778
Gains (losses) on investments, net		1,469			194
Changes in operating assets and liabilities:
Accounts receivable, net		(1,431		)	(1,284		)
Inventories		3,860			2,094
Receivable from collaboration		(349		)	249
Prepaid and other current assets		(1,339		)	2,163
Accounts payable and accrued expenses		(13,386		)	5,083
Deferred revenues		(3,668		)	(4,829		)
Other long-term liabilities		(302		)	(260		)
Total adjustments		(4,904		)	16,341
Net cash used in operating activities		(17,968		)	(42,147		)
Cash flows from investing activities:
Proceeds from sales or maturities of investments		102,540			99,096
Purchase of investments		(105,305		)	(93,707		)
Capital expenditures		(47		)	(415		)
Net cash (used in) provided by investing activities		(2,812		)	4,974
Cash flows from financing activities:
Proceeds from the exercise of stock options		56			10
Proceeds from the issuance of common stock under ESPP		150			294
Net cash provided by financing activities		206			304
Net decrease in cash and cash equivalents		(20,574		)	(36,869		)
Cash and cash equivalents at beginning of the period		63,474			112,646
Cash and cash equivalents at end of the period		$	42,900		$	75,777

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

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AMAG PHARMACEUTICALS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2012

(Unaudited)

 

A.             Description of Business

 

AMAG Pharmaceuticals, Inc., a Delaware corporation, was founded in 1981. We are a specialty pharmaceutical company focused on the development and commercialization of Feraheme ® (ferumoxytol) Injection for Intravenous, or IV, use to treat iron deficiency anemia, or IDA. Currently, our principal source of revenue is from the sale of Feraheme , which was approved for marketing in the U.S. in June 2009 by the U.S. Food and Drug Administration for use as an IV iron replacement therapy for the treatment of IDA in adult patients with chronic kidney disease, or CKD. We market and sell Feraheme in the U.S. through our own commercial organization and began shipping Feraheme to our customers in July 2009.

 

In December 2011, ferumoxytol was granted marketing approval in Canada, under the trade name Feraheme , for use as an IV iron replacement therapy for the treatment of IDA in adult patients with CKD. In June 2012, the European Commission granted marketing authorization for ferumoxytol , under the trade name Rienso ®  30mg/ml solution for Injection, for use as an IV iron replacement therapy for the treatment of IDA in adult patients with CKD. In August 2012, ferumoxytol was granted marketing approval in Switzerland under the trade name Rienso for use as an IV iron replacement therapy for the treatment of IDA in adult patients with CKD. Under our agreement with Takeda Pharmaceutical Company Limited, or Takeda, Takeda has an exclusive license to market and sell ferumoxytol in Canada, the European Union, or EU, and Switzerland. The EU marketing authorization triggered a $15.0 million milestone payment to us from Takeda, which we received in July 2012. Rienso was commercially launched in Canada in October 2012 and in the EU in November 2012. In October 2012, we received a $3.0 million milestone payment from Takeda related to the Canadian launch and we expect to receive a $15.0 million milestone payment related to the EU launch in the fourth quarter of 2012.

 

GastroMARK ® , which has been marketed and sold under the trade name Lumirem ® outside of the U.S, is our oral contrast agent used for delineating the bowel in magnetic resonance imaging and is approved and marketed in the U.S., Europe and other countries through our licensees. In the second quarter of 2012, we terminated our commercial license agreements for GastroMARK. Following the completion of our obligations under these agreements, we no longer intend to commercially manufacture or sell GastroMARK . Pursuant to the terms of the respective termination agreements, in June 2012, we paid our licensees termination fees of $1.6 million, which we recorded in selling, general and administrative expenses in our condensed consolidated statement of operations.

 

Throughout this Quarterly Report on Form 10-Q, AMAG Pharmaceuticals, Inc. and our consolidated subsidiaries are collectively referred to as “the Company,” “we,” “us,” or “our.”

 

B.             Basis of Presentation and Summary of Significant Accounting Policies

 

Basis of Presentation

 

These condensed consolidated financial statements are unaudited and, in the opinion of management, include all adjustments necessary for a fair statement of the financial position and results of operations of the Company for the interim periods presented. Such adjustments consisted only of normal recurring items. The year-end condensed consolidated balance sheet data was derived from audited financial

 

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statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America.

 

In accordance with accounting principles generally accepted in the United States of America for interim financial reports and the instructions for Form 10-Q and the rules of the Securities and Exchange Commission, or SEC, certain information and footnote disclosures normally included in annual financial statements have been condensed or omitted. Our accounting policies are described in the Notes to the Financial Statements in our Annual Report on Form 10-K for the year ended December 31, 2011. Interim results are not necessarily indicative of the results of operations for the full year. These interim financial statements should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2011.

 

Use of Estimates and Assumptions

 

The preparation of condensed consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make certain estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and the related disclosure of contingent assets and liabilities. The most significant estimates and assumptions are used in, but are not limited to, revenue recognition related to product sales and collaboration agreements, product sales allowances and accruals, assessing investments for potential other-than-temporary impairment, estimates used to measure the fair value of our held for sale assets, and determining values of investments, reserves for doubtful accounts, accrued expenses, reserves for legal matters, income taxes and equity-based compensation expense. Actual results could differ materially from those estimates.

 

During the three months ended September 30, 2012, we reduced our clinical trial accruals by approximately $1.2 million, primarily related to cost savings below the contracted rates passed on by a certain third-party service provider, which resulted in changes in our estimated clinical trial costs for  Feraheme  to treat IDA regardless of the underlying cause. This change in estimate had an impact of $0.06 per basic and diluted share for the three and nine months ended September 30, 2012.

 

Principles of Consolidation

 

The accompanying condensed consolidated financial statements include our accounts and the accounts of our wholly-owned subsidiaries, Alamo Acquisition Sub, Inc., AMAG Europe Limited, and AMAG Securities Corporation. Alamo Acquisition Sub, Inc. was incorporated in Delaware in July 2011. AMAG Europe Limited was incorporated in October 2009 in London, England. AMAG Securities Corporation is a Massachusetts corporation which was incorporated in August 2007. All intercompany account balances and transactions between the companies have been eliminated.

 

Fair Value of Financial Instruments

 

Under current accounting standards, fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date.

 

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Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs.

 

Current accounting guidance establishes a hierarchy used to categorize how fair value is measured and which is based on three levels of inputs, of which the first two are considered observable and the third unobservable, as follows:

 

Level 1 - Quoted prices in active markets for identical assets or liabilities.

 

Level 2 - Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

 

Level 3 - Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

 

Assets Measured at Fair Value on a Recurring Basis

 

We hold certain assets that are required to be measured at fair value on a recurring basis, including our cash equivalents and short- and long-term investments. The following tables represent the fair value hierarchy as of September 30, 2012 and December 31, 2011 for those assets that we measure at fair value on a recurring basis (in thousands):

 

		Fair Value Measurements at September 30, 2012 Using:
					Quoted Prices in Active Markets for Identical Assets			Significant Other Observable Inputs			Significant Unobservable Inputs
		Total			(Level 1)			(Level 2)			(Level 3)
Money market funds		$	41,500		$	41,500		$	—		$	—
Corporate debt securities		104,787			—			104,787			—
U.S. treasury and government agency securities		56,662			—			56,662			—
Commercial paper		6,494			—			6,494			—
		$	209,443		$	41,500		$	167,943		$	—

 

		Fair Value Measurements at December 31, 2011 Using:
					Quoted Prices in Active Markets for Identical Assets			Significant Other Observable Inputs			Significant Unobservable Inputs
		Total			(Level 1)			(Level 2)			(Level 3)
Money market funds		$	55,995		$	55,995		$	—		$	—
Corporate debt securities		94,626			—			94,626			—
U.S. treasury and government agency securities		48,086			—			48,086			—
Commercial paper		5,991			—			5,991			—
Auction rate securities		17,527			—			—			17,527
		$	222,225		$	55,995		$	148,703		$	17,527

 

With the exception of our money market funds and, previously, our auction rate securities, or ARS, which we sold in June 2012, and which were valued using Level 3 inputs, the fair value of our investments is primarily determined from independent pricing services which use Level 2 inputs to

 

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determine fair value. Independent pricing services normally derive security prices from recently reported trades for identical or similar securities, making adjustments based upon other significant observable market transactions. At the end of each reporting period, we perform quantitative and qualitative analyses of prices received from third parties to determine whether prices are reasonable estimates of fair value. After completing our analyses, we did not adjust or override any fair value measurements provided by our pricing services as of either September 30, 2012 or December 31, 2011. In addition, there were no transfers or reclassifications of any securities between Level 1 and Level 2 during the nine months ended September 30, 2012.

 

In June 2012, we sold our remaining ARS portfolio, with a par value of $19.8 million, for proceeds of $18.3 million.

 

The following table provides a rollforward of Level 3 assets for the nine months ended September 30, 2012 (in thousands):

 

		Nine Months Ended September 30, 2012
Balance at beginning of period		$	17,527
Transfers to Level 3		—
Total gains (losses) (realized or unrealized):
Included in earnings		(1,471		)
Included in other comprehensive income (loss)		2,373
Purchases, issuances, sales and settlements:
Purchases		—
Issuances		—
Sales		(18,329		)
Settlements		(100		)
Balance at end of period		$	—
The amount of total gains (losses) for the period included in earnings attributable to the change in unrealized gains (losses) relating to assets still held at end of period		$	—

 

Gains and losses (realized or unrealized) included in earnings in the table above are reported in other income (expense) in our condensed consolidated statement of operations.

 

Assets Held for Sale

 

During the quarter ended September 30, 2012, we determined that certain assets related to our Cambridge, Massachusetts manufacturing facility, including the related land, building and certain equipment, met the criteria established by current accounting guidance for classifying assets as held for sale. As a result we have reclassified these assets from property, plant and equipment to assets held for sale in our condensed consolidated balance sheet as of September 30, 2012. In anticipation of a future sale, we have valued these assets at the lower of their carrying amount or fair value less cost to sell to arrive at the estimated fair value of $2.3 million as of September 30, 2012. Prior to our determination that our Cambridge, Massachusetts manufacturing facility and related assets met the requirements to be classified as assets held for sale, we accelerated the depreciation on such assets to reflect our then estimated fair value. In doing so, we recorded $1.1 million and $1.4 million of accelerated depreciation in our condensed consolidated statements of operations for the three and nine months ended September 30, 2012, respectively. Upon determination that these assets met the criteria for held for sale, we recognized an impairment loss of $0.8 million to

 

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decrease the carrying value of the assets to our best estimate of fair value as of September 30, 2012. Of these $2.2 million of non-cash charges, we recorded $2.0 million in cost of product sales and $0.2 million in research and development expenses in our condensed consolidated statement of operations for the nine months ended September 30, 2012. The fair values of the land, building, and equipment were estimated using offers received from potential purchasers, real estate appraisals and other estimates from third-parties and accordingly, these assets have been classified as Level 3 assets.

 

Revenue Recognition

 

Net Product Sales

 

We recognize net product sales in accordance with current accounting guidance related to the recognition, presentation and disclosure of revenue in financial statements, which outlines the basic criteria that must be met to recognize revenue and provides guidance for disclosure of revenue in financial statements. In addition, we record all revenue for Feraheme sold to our licensees in deferred revenues in our condensed consolidated balance sheets. We will recognize revenues from product sales to our licensees, the related cost of goods sold, as well as any royalty revenues due from our licensees, in our condensed consolidated statement of operations at the time our licensees report to us that sales have been made or samples provided to its customers.

 

We record product sales allowances and accruals related to prompt payment discounts, chargebacks, governmental and other rebates, distributor, wholesaler and group purchasing organizations, or GPO, fees, and product returns as a reduction of revenue in our condensed consolidated statement of operations at the time product sales are recorded. Calculating these gross-to-net sales adjustments involves estimates and judgments based primarily on actual Feraheme sales data, forecasted customer buying patterns blended with historical experience of products similar to Feraheme sold by others, and other market research. In addition, we also monitor our distribution channel to determine whether additional allowances or accruals are required based on inventory in our sales channel. An analysis of our product sales allowances and accruals for the three and nine months ended September 30, 2012 and 2011 is as follows (in thousands):

 

		Three Months Ended September 30,
		2012			2011
Product sales allowances and accruals
Discounts and chargebacks		$	6,644		$	3,601
Government and other rebates		1,595			2,120
Medicaid rebate reserve adjustment		(861		)	(3,026		)
Returns		(1,122		)	354
Total provision for product sales allowances and accruals		$	6,256		$	3,049
Total gross product sales		$	22,432		$	18,851
Total provision for product sales allowances and accruals as a percent of total gross product sales		28		%	16		%

 

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		Nine Months Ended September 30,
		2012			2011
Product sales allowances and accruals
Discounts and chargebacks		$	19,382		$	9,400
Government and other rebates		4,487			6,897
Medicaid rebate reserve adjustment		(621		)	(2,532		)
Returns		(1,680		)	1,022
Total provision for product sales allowances and accruals		$	21,568		$	14,787
Total gross product sales		$	65,872		$	54,692
Total provision for product sales allowances and accruals as a percent of total gross product sales		33		%	27		%

 

Product sales allowances and accruals are primarily comprised of both direct and indirect fees, discounts and rebates and provisions for estimated product returns. Direct fees, discounts and rebates are contractual fees and price adjustments payable to wholesalers, specialty distributors and other customers that purchase products directly from us. Indirect fees, discounts and rebates are contractual price adjustments payable to healthcare providers and organizations, such as certain physicians, clinics, hospitals, GPOs, and dialysis organizations that typically do not purchase products directly from us but rather from wholesalers and specialty distributors. In accordance with guidance related to accounting for fees and consideration given by a vendor to a customer, including a reseller of a vendor’s products, these fees, discounts and rebates are presumed to be a reduction of the selling price of Feraheme . Product sales allowances and accruals are based on definitive contractual agreements or legal requirements (such as Medicaid laws and regulations) related to the purchase and/or utilization of the product by these entities and are recorded in the same period that the related revenue is recognized. We estimate product sales allowances and accruals using either historical, actual and/or other data, including estimated patient usage, applicable contractual rebate rates, contract performance by the benefit providers, other current contractual and statutory requirements, historical market data based upon experience of Feraheme and other products similar to Feraheme , specific known market events and trends such as competitive pricing and new product introductions and current and forecasted customer buying patterns and inventory levels, and the shelf life of Feraheme . As part of this evaluation, we also review changes to federal and other legislation, changes to rebate contracts, changes in the level of discounts, and changes in product sales trends. Although allowances and accruals are recorded at the time of product sale, certain rebates are typically paid out, on average, up to six months or longer after the sale.

 

As part of our sales allowances and accruals, we reserve for estimated Medicaid rebates associated with instances where Medicaid will act as the insurer and for which we are required to pay a statutory rebate to Medicaid. During the three months ended September 30, 2012 and 2011, we revised our estimated Medicaid reserve rate based on actual product-specific rebate claims received since the launch of Feraheme in July 2009, our expectations of state level activities, and estimated rebate claims not yet submitted, which resulted in a $0.9 million and $3.0 million reduction of our estimated Medicaid rebate reserve, respectively, related to prior period Feraheme sales. During the nine months ended September 30, 2012 and 2011, this revision to our estimated Medicaid reserve rate resulted in a $0.6 million and $2.5 million reduction of our estimated Medicaid rebate reserve, respectively, related to prior years Feraheme sales. These changes in estimates are reflected as an increase in our net product sales for the three and nine months ended September 30, 2012 and 2011 and resulted in reductions to our gross to net percentage in the respective periods. The reduction of our estimated Medicaid rebate reserve had an impact of $0.04 and $0.03 per basic and diluted share for the three and nine months ended September 30, 2012, respectively,

 

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and $0.14 per basic and diluted share for each of the three and nine months ended September 30, 2011. We regularly assess our Medicaid reserve balance and the rate at which we accrue for claims against product sales. If we determine in future periods that our actual rebate experience is not indicative of expected claims, if our actual claims experience changes, or if other factors affect estimated claims rates, we may be required to adjust our current Medicaid accumulated reserve estimate, which would affect our earnings in the period of the adjustment and could be significant.

 

We generally offer our wholesalers, specialty distributors and other customers a limited right to return product purchased directly from us, principally based on the product’s expiration date which, once packaged, is currently four years in the U.S. Reserves for product returns for domestic sales are recorded in the period the related revenue is recognized, resulting in a reduction to product sales. Currently, sales to our licensees are recognized as revenue when product is sold to our licensees’ customers and therefore no return reserve is required at the time of sale to our licensees. We evaluate our estimated product returns rate each period based on the historical return patterns and known or expected changes in the marketplace. During the three and nine months ended September 30, 2012, we reduced our reserve for product returns by approximately $1.3 million and $2.1 million, respectively, primarily as a result of a lower expected rate of product returns based on our actual returns experience to date as well as the lapse of the product return period on certain manufactured Feraheme lots that carried a two year expiration. As a result, the product returns reserve applied to gross product sales for the three and nine months ended September 30, 2012 was ($1.1) million and ($1.7) million, respectively, as compared to $0.4 million and $1.0 million in the three and nine months ended September 30, 2011, respectively. The reduction of our estimated product returns reserve had an impact of $0.06 and $0.10 per basic and diluted share for the three and nine months ended September 30, 2012, respectively. If we determine in future periods that our actual returns experience is not indicative of expected returns or if other factors affect estimated returns rates, we may be required to adjust our current accumulated returns reserve estimate, which would affect our earnings in the period of the adjustment and could be significant.

 

Concentrations and Significant Customer Information

 

Financial instruments which potentially subject us to concentrations of credit risk consist principally of cash, cash equivalents, investments, and accounts receivable. As of September 30, 2012, our cash, cash equivalents and investments amounted to approximately $210.8 million. We currently invest our excess cash primarily in U.S. government and agency money market funds, and investments in corporate debt securities, U.S. treasury and government agency securities, and commercial paper. As of September 30, 2012 we had approximately $41.5 million of our total $42.9 million cash and cash equivalents balance invested in institutional money market funds, of which $21.4 million was invested in a single fund, which is collateralized solely by U.S. treasury and government agency securities.

 

Our operations are located solely within the U.S. We are focused principally on developing, manufacturing, and commercializing Feraheme . We perform ongoing credit evaluations of our customers and generally do not require collateral. The following table sets forth customers who represented 10% or more of our total revenues for the nine months ended September 30, 2012 and 2011.

 

		Nine Months Ended September 30,
		2012		2011
AmerisourceBergen Drug Corporation		34	%	42	%
Takeda Pharmaceuticals Company Limited		31	%	13	%
McKesson Corporation		17	%	20	%
Cardinal Health, Inc.		11	%	12	%

 

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In addition, approximately 33% of our end-user demand during the nine months ended September 30, 2012 was generated by members of a single GPO with which we have contracted. Revenues from customers outside of the U.S. amounted to approximately 32% and 15% of our total revenues for the nine months ended September 30, 2012 and 2011, respectively, and were principally related to collaboration revenue recognized in connection with our collaboration agreement with Takeda, which is based in Japan.

 

Other

 

During the three months ended September 30, 2012, we reduced our clinical trial accruals by approximately $0.3 million as the result of an error in estimated clinical trial costs, which should have been recognized during the three months ended June 30, 2012. We determined that this correction was not material to our results of operations or financial condition for the three months ended June 30, 2012 or September 30, 2012.

 

C.             Investments

 

As of September 30, 2012 and December 31, 2011, the combined total of our short- and long-term investments equaled $167.9 million and $166.2 million, respectively, and consisted of securities classified as available-for-sale in accordance with accounting standards which provide guidance related to accounting and classification of certain investments in debt and equity securities.

 

The following is a summary of our short- and long-term investments as of September 30, 2012 and December 31, 2011 (in thousands):

 

		September 30, 2012
					Gross			Gross			Estimated
		Amortized			Unrealized			Unrealized			Fair
		Cost			Gains			Losses			Value
Corporate debt securities
Due in one year or less		$	57,930		$	112		$	(15	)	$	58,027
Due in one to three years		46,575			186			(1		)	46,760
U.S. treasury and government agency securities
Due in one year or less		17,969			81			—			18,050
Due in one to three years		38,483			131			(2		)	38,612
Commercial paper
Due in one year or less		6,493			1			—			6,494
Total investments		$	167,450		$	511		$	(18	)	$	167,943

 

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		December 31, 2011
					Gross			Gross			Estimated
		Amortized			Unrealized			Unrealized			Fair
		Cost			Gains			Losses			Value
Short-term investments:
Corporate debt securities
Due in one year or less		$	74,687		$	81		$	(115	)	$	74,653
Due in one to three years		19,950			73			(50		)	19,973
U.S. treasury and government agency securities
Due in one year or less		26,770			67			(7		)	26,830
Due in one to three years		21,028			228			—			21,256
Commercial paper
Due in one year or less		5,997			—			(6		)	5,991
Total short-term investments		$	148,432		$	449		$	(178	)	$	148,703
Long-term investments:
Auction rate securities
Due after five years		19,900			—			(2,373		)	17,527
Total long-term investments		$	19,900		$	—		$	(2,373	)	$	17,527
Total investments		$	168,332		$	449		$	(2,551	)	$	166,230

 

Auction Rate Securities

 

In June 2012, we sold our remaining ARS portfolio, with a par value of $19.8 million, for proceeds of $18.3 million and recognized a loss of approximately $1.5 million in other income (expense) in our condensed consolidated statements of income for the nine months ended September 30, 2012. All of the ARS we held consisted of municipal bonds with an auction reset feature and were classified as available-for-sale.

 

Impairments and Unrealized Gains and Losses on Investments

 

The following is a summary of the fair value of our investments with unrealized losses that are deemed to be temporarily impaired and their respective gross unrealized losses aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position as of September 30, 2012 and December 31, 2011 (in thousands):

 

		September 30, 2012
		Less than 12 Months						12 Months or Greater						Total
		Fair			Unrealized			Fair			Unrealized			Fair			Unrealized
		Value			Losses			Value			Losses			Value			Losses
Corporate debt securities		$	6,838		$	(12	)	$	847		$	(4	)	$	7,685		$	(16	)
U.S. treasury and government agency securities		3,334			(2		)	—			—			3,334			(2		)
		$	10,172		$	(14	)	$	847		$	(4	)	$	11,019		$	(18	)

 

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		December 31, 2011
		Less than 12 Months						12 Months or Greater						Total
		Fair			Unrealized			Fair			Unrealized			Fair			Unrealized
		Value			Losses			Value			Losses			Value			Losses
Corporate debt securities		$	34,097		$	(161	)	$	4,124		$	(4	)	$	38,221		$	(165	)
U.S. treasury and government agency securities		8,841			(7		)	—			—			8,841			(7		)
Commercial paper		5,991			(6		)	—			—			5,991			(6		)
Auction rate securities		—			—			19,900			(2,373		)	19,900			(2,373		)
		$	48,929		$	(174	)	$	24,024		$	(2,377	)	$	72,953		$	(2,551	)

 

We did not recognize any unrealized other-than-temporary impairment losses in our condensed consolidated statements of operations related to our securities during either of the three or nine months ended September 30, 2012. Future events may occur, or additional information may become available, which may cause us to identify credit losses where we do not expect to receive cash flows sufficient to recover the entire amortized cost basis of a security and which may necessitate the recording of future realized losses on securities in our portfolio. Significant losses in the estimated fair values of our investments could have a material adverse effect on our earnings in future periods.

 

Realized Gains and Losses on Investments

 

Gains and losses are determined on the specific identification method. During the nine months ended September 30, 2012 we recorded realized losses of $1.5 million to our condensed consolidated statements of operations related to the sale of our remaining ARS portfolio, as discussed above.

 

D.             Accounts Receivable

 

Our accounts receivable were $7.4 million and $5.9 million as of September 30, 2012 and December 31, 2011, respectively, and primarily represented amounts due from wholesalers and distributors to whom we sell Feraheme directly. Accounts receivable are recorded net of reserves for estimated chargeback obligations, prompt payment discounts and any allowance for doubtful accounts. Reserves for other sales-related allowances such as rebates, distribution and other fees, and product returns are included in accrued expenses in our condensed consolidated balance sheets.

 

As part of our credit management policy, we perform ongoing credit evaluations of our customers, and we have not required collateral from any customer. To date, we have not experienced significant bad debts. Accordingly, we have not established an allowance for doubtful accounts at either September 30, 2012 or December 31, 2011. If the financial condition of any of our significant customers was to deteriorate and result in an impairment of its ability to make payments owed to us, an allowance for doubtful accounts may be required which could have a material effect on earnings in the period of any such adjustment.

 

Customers which represented greater than 10% of our accounts receivable balances as of September 30, 2012 and December 31, 2011 were as follows:

 

		September 30, 2012		December 31, 2011
AmerisourceBergen Drug Corporation		47	%	44	%
McKesson Corporation		28	%	33	%
Cardinal Health, Inc.		16	%	15	%

 

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E.             Inventories

 

Our major classes of inventories were as follows as of September 30, 2012 and December 31, 2011 (in thousands):

 

		September 30, 2012			December 31, 2011
Raw materials		$	2,416		$	1,892
Work in process		1,108			3,696
Finished goods		8,703			9,618
Total inventories		$	12,227		$	15,206

 

During the nine months ended September 30, 2012, we wrote-off $0.6 million of inventory which was produced to validate the manufacturing process at third-party suppliers and which we no longer believed was suitable for sale. In addition, we wrote-off $0.4 million of additional inventory as a restructuring cost in the nine months ended September 30, 2012 related to our ongoing divestiture of our Cambridge, Massachusetts manufacturing facility.

 

On a quarterly basis, we analyze our inventory levels to determine whether we have any obsolete, expired, or excess inventory. If any inventory is expected to expire prior to being sold, has a cost basis in excess of its net realizable value, is in excess of expected sales requirements as determined by internal sales forecasts, or fails to meet commercial sale specifications, the inventory is written-down through a charge to cost of goods sold. The determination of whether inventory costs will be realizable requires estimates by management. A critical input in this determination is future expected inventory requirements, based on internal sales forecasts. Once packaged, Feraheme currently has a shelf-life of four years in the U.S. and between two to three years outside of the U.S., and as a result of comparison to internal sales forecasts, we expect to fully realize the carrying value of our current Feraheme finished goods inventory. If actual market conditions are less favorable than those projected by management, additional inventory write-downs may be required. Charges for inventory write-downs are not reversed if it is later determined that the product is saleable.

 

F.              Property, Plant and Equipment

 

Property, plant and equipment consisted of the following as of September 30, 2012 and December 31, 2011, respectively (in thousands):

 

		September 30, 2012			December 31, 2011
Land		$	—		$	360
Buildings and improvements		5,373			11,308
Laboratory and production equipment		83			7,662
Furniture and fixtures		5,326			5,382
Construction in process		—			86
		10,782			24,798
Less - accumulated depreciation		(7,371		)	(15,592		)
Property, plant and equipment, net		$	3,411		$	9,206

 

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During the three months ended September 30, 2012, we determined that certain assets related to our Cambridge, Massachusetts manufacturing facility, including the related land, building and certain equipment, met the criteria established by current accounting guidance for classifying assets as held for sale. As a result, we reclassified these assets from property, plant and equipment to assets held for sale in our condensed consolidated balance sheet as of September 30, 2012. We have classified these assets as current as we expect to complete the sale within one year. Current accounting guidance requires us to record assets held for sale at the lower of the carrying amount or fair value less cost to sell and discontinue the recognition of depreciation. Based on such guidance, we adjusted the value of these assets to $2.3 million, their fair market value. Prior to our determination that our Cambridge, Massachusetts manufacturing facility and related assets met the requirements to be classified as assets held for sale, we accelerated the depreciation on such assets to reflect our then estimated fair value. In doing so, we recorded $1.1 million and $1.4 million of accelerated depreciation in our condensed consolidated statements of operations for the three and nine months ended September 30, 2012, respectively. Upon determination that these assets met the criteria for held for sale, we recognized an impairment loss of $0.8 million to decrease the carrying value of the assets to our best estimate of fair value as of September 30, 2012. The fair values of the land, building and equipment were estimated using offers received from potential purchasers, real estate appraisals and other estimates from third-parties.

 

G.            Income Taxes

 

Deferred tax assets and deferred tax liabilities are recognized based on temporary differences between the financial reporting and tax basis of assets and liabilities using future enacted rates. A valuation allowance is recorded against deferred tax assets if it is more likely than not that some or all of the deferred tax assets will not be realized.

 

For the three and nine months ended September 30, 2012, we recognized a $0.3 million and $0.8 million current federal income tax benefit, respectively, which was primarily the result of a decrease in unrealized losses associated with the sale of our remaining ARS portfolio in the second quarter of 2012. For the three and nine months ended September 30, 2011, we recognized a $0.2 million and $0.6 million current federal income tax benefit, respectively, which was the result of our recognition of corresponding income tax expense associated with the increase in the value of certain securities that we carried at fair market value during the period. The corresponding income tax expense was recorded in other comprehensive income (loss). Due to the uncertainty surrounding the realization of favorable tax attributes in future tax returns, we have recorded a full valuation allowance against our otherwise recognizable net deferred tax assets.

 

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H.            Net Loss Per Share

 

We compute basic net loss per share by dividing net loss by the weighted average number of common shares outstanding during the relevant period. The components of basic and diluted net loss per share were as follows (in thousands, except per share data):

 

		Three Months Ended September 30,						Nine Months Ended September 30,
		2012			2011			2012			2011
Net loss		$	(3,967	)	$	(16,631	)	$	(13,064	)	$	(58,488	)
Weighted average common shares outstanding		21,403			21,194			21,374			21,169
Net loss per share:
Basic and diluted		$	(0.19	)	$	(0.78	)	$	(0.61	)	$	(2.76	)

 

The following table sets forth the potential common shares issuable upon the exercise of outstanding options and the vesting of restricted stock units (prior to consideration of the treasury stock method), that were excluded from our computation of diluted net loss per share because such options and restricted stock units were anti-dilutive due to a net loss or because the exercise price exceeded the current stock price for options in the relevant periods (in thousands):

 

		As of September 30,
		2012		2011
Options to purchase shares of common stock		2,315		2,013
Shares of common stock issuable upon the vesting of restricted stock units		468		629
Total		2,783		2,642

 

I.                 Equity-Based Compensation

 

We currently maintain several equity compensation plans, including our Second Amended and Restated 2007 Equity Incentive Plan, or the 2007 Plan, our Amended and Restated 2000 Stock Plan, or the 2000 Plan, and our 2010 Employee Stock Purchase Plan.

 

Second Amended and Restated 2007 Equity Incentive Plan

 

As of September 30, 2012, we have granted options and restricted stock units covering 5,249,275 shares of common stock under our 2007 Plan, of which 2,129,412 stock options and 600,181 restricted stock units have expired or terminated, and of which 35,338 options have been exercised and 265,600 shares of common stock have been issued pursuant to restricted stock units that became fully vested. The number of options and restricted stock units outstanding under this plan as of September 30, 2012 was 1,850,694 and 368,050, respectively. The remaining number of shares available for future grants as of September 30, 2012 was 1,399,694, not including shares subject to outstanding awards under the 2000 Plan, which will be added to the total number of shares available for issuance under the 2007 Plan to the extent that such awards expire or terminate for any reason prior to exercise. All outstanding stock options granted under our 2007 Plan have an exercise price equal to the closing price of a share of our common stock on the grant date and have either a seven or ten-year term.

 

Amended and Restated 2000 Stock Plan

 

As of September 30, 2012, the number of shares underlying outstanding options which were issued pursuant to our 2000 Plan was 164,404. There were no restricted stock units outstanding as of September 30, 2012. In November 2007, the 2000 Plan was succeeded by our 2007 Plan and, accordingly, no further

 

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