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MEDICINES CO /DE - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations(Edgar Glimpses Via Acquire Media NewsEdge) You should read the following discussion and analysis of our financial condition and results of operations together with our financial statements and accompanying notes included elsewhere in this quarterly report on Form 10-Q. In addition to the historical information, the discussion in this quarterly report on Form 10-Q contains certain forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated by the forward-looking statements due to our critical accounting estimates discussed below and important factors set forth in this quarterly report on Form 10-Q, including under "Risk Factors" in Part II, Item 1A of this quarterly report on Form 10-Q. Overview Our Business We are a global biopharmaceutical company focused on saving lives, alleviating suffering and contributing to the economics of healthcare by focusing on leading acute/intensive care hospitals worldwide. We market Angiomax® (bivalirudin), Cleviprex® (clevidipine) injectable emulsion, Minocin® (minocycline) for injection, OrbactivTM (oritavancin), PreveLeakTM and Recothrom® Thrombin topical (Recombinant). We also have a pipeline of acute and intensive care hospital products in development, including four registration stage product candidates for which we have submitted applications for regulatory approval or plan to submit applications for regulatory approval in the United States in 2014, cangrelor, IONSYSTM (fentanyl iontophoretic transdermal system), RaplixaTM, formerly referred to as FibrocapsTM, and RPX-602, and four research and development product candidates, ABP-700, ALN-PCSsc, CarbavanceTM and MDCO-216. We refer to our registration stage product candidates and our research and development product candidates as our products in development. ABP-700 is under development by Annovation BioPharma Inc., or Annovation, a company which we have an exclusive option to acquire. We have the right to develop, manufacture and commercialize ALN-PCSsc under our collaboration agreement with Alnylam Pharmaceuticals, Inc., or Alnylam. We believe that these marketed products and products in development possess favorable attributes that competitive products do not provide, can satisfy unmet medical needs in the acute and intensive care hospital product market and offer, or, in the case of our products in development, have the potential to offer, improved performance to hospital businesses. In addition to these products and products in development, we sell a ready-to-use formulation of Argatroban and have a portfolio of ten generic drugs, which we refer to as our acute care generic products, that we have the non-exclusive right to market in the United States. We are currently selling three of our acute care generic products, midazolam, ondansetron and rocuronium. We also co-promote the oral tablet antiplatelet medicine BRILINTA® (ticagrelor) in the United States under our global collaboration agreement with AstraZeneca LP, or AstraZeneca, and co-promote the Promus PREMIERTM Everolimus-Eluting Platinum Chromium Coronary Stent System, or Promus PREMIER Stent System, in the United States under our co-promotion agreement with Boston Scientific Corporation, or BSX. The following table identifies each of our marketed products and our products in development, their stage of development, their mechanism of action and the indications for which they have been approved for use or which they are intended to address. The following chart also identifies each of our acute care generic products and the therapeutic areas which they are intended to address. All of our marketed products and products in development, except for ALN-PCSsc, IONSYS, PreveLeak, Raplixa and Recothrom, are administered intravenously. Each of PreveLeak and Recothrom are, and Raplixa is being developed as, a topical hemostat, IONSYS is being developed to be administered transdermally and ALN-PCSsc is being developed as a subcutaneous injectable. All of our acute care generic products are injectable products. Product or Product Development Stage Mechanism/Target Clinical in Development Indication(s)/Therapeutic Areas Marketed Products Angiomax Marketed Direct thrombin U.S. - for use as an inhibitor anticoagulant in combination with aspirin in patients with unstable angina undergoing percutaneous transluminal coronary angioplasty, or PTCA, and for use in patients undergoing percutaneous coronary intervention, or PCI, including patients with or at risk of heparin induced thrombocytopenia and thrombosis syndrome, or HIT/HITTS 25-------------------------------------------------------------------------------- Europe - for use as an anticoagulant in patients undergoing PCI, adult patients with acute coronary syndrome, or ACS, and for the treatment of patients with ST-segment elevation myocardial infarction, or STEMI, undergoing primary PCI Cleviprex Marketed in the Calcium channel U.S. - Blood pressure reduction United States, blocker when oral therapy is not feasible Australia, France, or not desirable Germany, Spain and Switzerland - with indications for Switzerland blood pressure control in perioperative settings Approved in Austria, Ex-U.S. - with indications for Belgium, Canada, blood pressure control in Luxembourg, the perioperative settings Netherlands, New Zealand and the United Kingdom MAA submitted for other European Union countries Minocin IV Marketed in the Tetracycline-class Treatment of bacterial infections United States antibiotic caused by Acinetobacter species Orbactiv Marketed in the Antibiotic Treatment of acute bacterial skin United States; MAA and skin structure infections, or accepted for review ABSSSI, including in the European methicillin-resistant Union in the first Staphylococcus aureus, or MRSA quarter of 2014 PreveLeak Approved in the Mechanical vascular U.S. - for use as a vascular United States; and surgical sealant sealant Europe - for use as a Marketed in the surgical sealant applicable to European Union cardiovascular, general, urological, and thoracic surgery Ready-to-use Marketed in the Direct thrombin For prophylaxis or treatment of Argatroban United States inhibitor thrombosis in adult patients with HIT and for use as an anticoagulant in adult patients with or at risk for HIT undergoing PCI Recothrom Marketed in the Recombinant human For use as an aid to hemostasis to United States and thrombin help control oozing blood and mild Canada bleeding during surgical procedures Acute care generic Approved in the Various Acute cardiovascular products: Adenosine, United States Amiodarone, Esmolol and Milrinone Acute care generic Approved in the Various Serious infectious disease products: United States Azithromycin and Clindamycin Acute care generic Approved in the Various Surgery and perioperative products: United States; Haloperidol, Midazolam, Midazolam, Ondansetron and Ondansteron and Rocuronium marketed Rocuronium in the United States Registration Stage Cangrelor NDA in the United Antiplatelet agent Prevention of platelet activation States accepted for and aggregation when oral therapy filing by the FDA in is not feasible or not desirable the third quarter of 2013; resubmission of NDA planned for fourth quarter of 2014; MAA accepted for review in the European Union in the fourth quarter of 2013 26-------------------------------------------------------------------------------- IONSYS Supplemental New Patient-controlled Short-term Drug Application, analgesia system management of acute or sNDA, accepted postoperative pain for filing by the FDA in the third quarter of 2014; MAA accepted for review in European Union in the third quarter of 2014 Raplixa Phase 3 completed; Dry powder topical For use as an aid to Biologics License formulation of stop bleeding during Application, or fibrinogen and surgery BLA, accepted for thrombin filing by the FDA in April 2014; MAA submission in the European Union accepted for review by the European Medicines Agency, or EMA, in the fourth quarter of 2013 RPX-602 sNDA submission in Improved Treatment of the United States formulation of infections caused by planned for fourth Minocin IV Acinetobacter quarter of 2014 species Research and Development Stage ABP-700 Phase 1 being Analogue of Sedative-hypnotic conducted by etomidate, an used to induce and Annovation intravenous maintain sedation imidazole agent for procedural care used for induction and general of general anesthesia for anesthesia surgical care ALN-PCSsc Pre-clinical PCSK-9 gene Treatment of antagonist hypercholesterolemia addressing low-density lipoprotein, or LDL, cholesterol disease modification Carbavance Phase 1 completed, Combination of Treatment of Phase 3 clinical RPX-7009, a hospitalized trial commenced in proprietary, novel patients with the fourth quarter beta-lactamase serious of 2014 inhibitor, with a Gram-negative carbapenem infections antibiotic MDCO-216 Phase 1 completed Naturally occurring Reversal cholesterol variant of a transport agent to protein found in reduce high-density atherosclerotic lipoprotein, or HDL plaque burden development and thereby reduce the risk of adverse thrombotic events Our revenues to date have been generated primarily from sales of Angiomax in the United States. In the nine months ended September 30, 2014, we had net revenue from sales of Angiomax of approximately $469.8 million, net revenue from sales of Recothrom of approximately $46.5 million and net revenue from sales of Cleviprex, ready-to-use Argatroban, Minocin IV and PreveLeak of approximately $17.1 million in the aggregate. We continue to enhance our sales and marketing efforts both in the United States and outside the United States. In the United States, we are building an infectious disease sales force, currently comprised of approximately 100 employees, to sell Orbactiv and Minocin IV and our products in development for use in the treatment of infectious diseases if and when they are approved. Outside the United States, we plan to streamline our current operations and strategically target hospitals and countries. In October 2014, we commenced a reorganization of our European operations intended to improve efficiency and better align our costs and employment structure with our strategic plans, including a workforce reduction and the consolidation of our European sites into a single location in Zurich, Switzerland. We expect to record a one-time charge of approximately $10.0 million to $14.0 million in the fourth quarter of 2014 in connection with the reorganization. We are also exploring potential collaboration opportunities for certain of our products and products in development outside of the United States. We believe that these actions will improve the performance of our products being marketed outside the United States and provide a viable platform to commercialize our products and products in development that are not yet approved outside the United States, if and when they are approved and ready to be marketed outside of the United States. Cost of revenue represents expenses in connection with contract manufacture of our products sold and logistics, product costs, royalty expenses and amortization of the costs of license agreements, amortization of product rights and other identifiable intangible assets, from product and business acquisitions. Research and development expenses represent costs incurred for licenses of rights to products, clinical trials, nonclinical and preclinical studies, regulatory filings and manufacturing development efforts. We 27 -------------------------------------------------------------------------------- outsource much of our clinical trials, nonclinical and preclinical studies and all of our manufacturing development activities to third parties to maximize efficiency and minimize our internal overhead. We expense our research and development costs as they are incurred. Selling, general and administrative expenses consist primarily of salaries and related expenses, costs associated with general corporate activities and costs associated with marketing and promotional activities. Research and development expense, selling, general and administrative expense and cost of revenue also include share-based compensation expense, which we allocate based on the responsibilities of the recipients of the share-based compensation. Angiomax Patent Litigation The principal U.S. patents covering Angiomax include U.S. Patent No. 5,196,404, or the '404 patent, U.S. Patent No. 7,582,727, or the '727 patent, and U.S. Patent No. 7,598,343, or the '343 patent. In the second half of 2009, the U.S. Patent and Trademark Office, or PTO, issued to us the '727 patent and the '343 patent, covering a more consistent and improved Angiomax drug product and the processes by which it is made. The '727 patent and the '343 patent are set to expire in July 2028. In response to Paragraph IV Certification Notice letters we received with respect to abbreviated new drug applications, or ANDAs, filed by a number of parties with the FDA seeking approval to market generic versions of Angiomax, we have filed lawsuits against the ANDA filers alleging patent infringement of the '727 patent and '343 patent. On September 30, 2011, we settled our '727 patent and '343 patent infringement litigation with Teva Pharmaceuticals USA, Inc. and its affiliates, which we collectively refer to as Teva. In connection with the Teva settlement, we entered into a license agreement with Teva under which we granted Teva a non-exclusive license under the '727 patent and '343 patent to sell a generic bivalirudin for injection product under a Teva ANDA in the United States beginning June 30, 2019 or earlier under certain conditions. The license agreement also contains a grant by Teva to us of an exclusive (except as to Teva) license under Teva's bivalirudin patents and right to enforce Teva's bivalirudin patents. On January 22, 2012, we settled our patent litigation with APP Pharmaceuticals LLC, or APP, including our litigation with respect to the extension of the patent term of the '404 patent and our patent infringement litigation with respect to the '727 patent and the '343 patent. In connection with the APP settlement, we entered into a license agreement with APP under which we granted APP a non-exclusive license under the '727 patent and '343 patent to sell a generic bivalirudin for injection product under an APP ANDA in the United States beginning on May 1, 2019. In certain limited circumstances, the license to APP could become effective prior to May 1, 2019. In addition, in certain limited circumstances, this license to APP could include the right to sell a generic bivalirudin product under our NDA for Angiomax in the United States beginning on May 1, 2019 or, in certain limited circumstances, on June 30, 2019 or on a date prior to May 1, 2019. In September 2013, a three day bench trial was held regarding our patent infringement litigation with Hospira, Inc., or Hospira, with respect to the '727 patent and '343 patent, and a post-trial briefing was completed in December 2013. On March 31, 2014, the U.S. District Court for the District of Delaware issued its trial opinion on the matter. With respect to patent validity, the court held that the '727 and '343 patents were valid on all grounds. Specifically, the court found that Hospira had failed to prove that the patents were either anticipated or obvious. The court further held that the patents satisfied the written description requirement, were enabled and were not indefinite. With respect to infringement, based on its July 2013 Markman decision, the court found that Hospira's ANDAs did not meet the "efficient mixing" claim limitation and thus did not infringe the asserted claims of the '727 and '343 patents. The court found that the other claim limitations in dispute were present in Hospira's ANDA products. The court entered a final judgment on April 15, 2014. On May 9, 2014, we filed a Notice of Appeal to the United States Court of Appeals for the Federal Circuit. On May 23, 2014, Hospira filed a notice of cross-appeal. We filed our opening appeal brief on August 13, 2014. Hospira filed its opening appeal brief on September 26, 2014 asserting that the claim constructions and non-infringement findings were correct. Hospira also seeks to overturn the finding of patent validity. We expect briefing to be completed by November 2014. If our appeal is not successful or Hospira's cross-appeal is successful, then Angiomax could be subject to generic competition earlier than anticipated, possibly as early as June 15, 2015, the date of expiration of the patent term of the '404 patent and the six month pediatric exclusivity, including from Hospira's generic bivalirudin, as well as potentially Teva's and APP's generic bivalirudin products. In June 2013, Mylan Pharmaceuticals, Inc., or Mylan, filed a summary judgment motion of non-infringement of the '727 and '343 patents and alternatively that the '727 patent was invalid. The U.S. District Court for the Northern District of Illinois granted the motion with respect to non-infringement of the '343 patent and denied the motion with respect to non-infringement and invalidity of the '727 patent. In June 2014, we completed a six day trial directed to the validity and infringement of the '727 patent. Post-trial briefs were filed on July 1, 2014 and July 11, 2014. On October 27, 2014, the district court issued an opinion and order finding that Mylan's ANDA product infringes all of the asserted claims of the '727 patent. The district court further found that Mylan failed to prove that the same asserted claims of the '727 patent are invalid or unenforceable. Specifically, the 28 -------------------------------------------------------------------------------- district court found that Mylan failed to prove its allegations of anticipation, obviousness, non-enablement and unenforceability due to inequitable conduct. On October 28, 2014, Mylan filed in the district court a Notice of Appeal to the U.S. Court of Appeals for the Federal Circuit. If we receive an adverse decision on appeal, then Angiomax could be subject to generic competition earlier than anticipated, possibly as early as June 15, 2015, including from Mylan's generic bivalirudin, as well as potentially Teva's and APP's generic bivalirudin products. We remain in patent infringement litigation involving the '727 patent and '343 patent with other ANDA filers, as described in Part II, Item 1, Legal Proceedings, of this quarterly report on Form 10-Q. If we are unable to maintain our market exclusivity for Angiomax in the United States through enforcement of our U.S. patents covering Angiomax, then Angiomax could be subject to generic competition earlier than May 1, 2019 and as early as June 15, 2015. Cangrelor Regulatory Review In February 2014, the FDA Cardiovascular and Renal Drugs Advisory Committee advised against approval of cangrelor for use in patients undergoing PCI or those that require bridging for oral antiplatelet therapy to surgery. On April 30, 2014, the FDA issued a Complete Response Letter for our NDA for cangrelor. For the PCI indication, the FDA stated that the NDA cannot be approved at the present time and the FDA suggested that we perform a series of clinical data analyses of the CHAMPION PHOENIX study, review certain processes regarding data management, and provide bioequivalence information on the clopidogrel clinical supplies for the CHAMPION trials. For the BRIDGE indication, the FDA concluded that a prospective, adequate and well-controlled study in which outcomes such as bleeding are studied, can result in the clinical data necessary to assess the benefit-risk relationship in this indication. The FDA also provided additional comments for us to address, stating that the comments are not currently approvability issues, but could affect labeling. We plan to resubmit an NDA for cangrelor by the end of 2014 with respect to the PCI indication. In September 2014, we received the Day 180 List of Outstanding Issues, or LOI, from the Committee for Medicinal Products for Human Use regarding our MAA for cangrelor in the European Union. The LOI contained one major objection regarding the benefit-risk relationship of cangrelor, which we believe we can address. Business Development Activity Tenaxis Medical, Inc. In April 2014, we entered into an Agreement and Plan of Merger with Tenaxis Medical, Inc., or Tenaxis, Napa Acquisition Corp., our wholly owned subsidiary, and Fortis Advisors LLC, a Delaware limited liability company, solely in its capacity as the representative and agent of the stockholders and optionholders of Tenaxis. On May 1, 2014, we completed our acquisition of Tenaxis and Tenaxis became our wholly owned subsidiary. As a result of the acquisition of Tenaxis, we acquired Tenaxis's sole product, PreveLeak, a vascular and surgical sealant that mechanically seals both human tissue and artificial grafts. In the United States, PreveLeak received a premarket approval from the FDA in March 2013 for use as a vascular sealant, but it has not yet been commercialized in the United States. We expect to begin selling PreveLeak in the United States by the end of the first quarter of 2015. In the European Union, PreveLeak is approved for sale as a surgical sealant applicable to cardiovascular, general, urological, and thoracic surgery with a European CE Mark. Pursuant to this approval, PreveLeak has been sold in the European Union since September 2008. Under the merger agreement, we paid to the holders of Tenaxis's capital stock, the holders of options to purchase shares of Tenaxis's capital stock (whether or not such capital stock or options were vested or unvested as of immediately prior to the closing) and the holders of certain warrants and side letters, which we refer to collectively as the Tenaxis equityholders, an aggregate of approximately $58.9 million in cash, subject to customary adjustments at and after the closing. At the closing, we deposited approximately $5.4 million of the purchase price into an escrow fund for the purposes of securing the indemnification obligations of the Tenaxis equityholders to us for any and all losses for which we are entitled to indemnification pursuant to the merger agreement and to provide the source of recovery for any amounts payable to us as a result of the post-closing purchase price adjustment process. During the third quarter of 2014, we finalized the purchase price adjustment process, which resulted in an insignificant adjustment to the purchase price. To the extent that any amounts remain in the escrow fund after October 1, 2015 and are not subject to claims by us, such amounts will be released to the Tenaxis equityholders, subject to certain conditions set forth in the merger agreement. In addition, we have agreed to pay to the Tenaxis equityholders milestone payments subsequent to the closing, if we achieve certain regulatory approval milestones and commercial net sales milestones with respect to PreveLeak, at the times and on the conditions set forth in the merger agreement. In the event that all of the milestones set forth in the merger agreement are achieved in accordance with the terms of the merger agreement, we will pay the Tenaxis equityholders up to an additional $112.0 million in cash in the aggregate. Promus PREMIER Stent System Co-Promotion. In December 2013, we entered into a co-promotion agreement with BSX for the Promus PREMIER Stent System. Under the terms of the co-promotion agreement, in January 2014, our acute cardiovascular 29 -------------------------------------------------------------------------------- care sales force began a collaboration with the BSX Interventional Cardiology sales force to provide promotional support for the Promus PREMIER Stent System in U.S. hospitals. The Promus PREMIER Stent System combines a platinum chromium alloy stent, everolimus drug (manufactured by Novartis) and polymer coating, and a stent delivery system. Under the terms of the agreement, BSX paid us $2.5 million in December 2013 upon completion of certain training activities and has agreed to pay quarterly, performance-based payments if BSX's drug-eluting stent sales in the U.S. exceed certain targets as specified in the agreement. In addition, under the terms of the agreement, BSX has agreed to pay us an additional fee if yearly sales exceed a certain amount specified in the agreement and a fee if the agreement is still in effect at a certain date as specified in the agreement. Rempex Pharmaceuticals, Inc. In December 2013, we acquired Rempex Pharmaceuticals, Inc., or Rempex, a company focused on the discovery and development of new antibacterial drugs to meet the growing clinical need created by multi-drug resistant bacterial pathogens. Under the terms of our agreement with Rempex, we paid the Rempex equityholders an aggregate of approximately $140.3 million in cash at closing. In addition, we agreed to pay to the Rempex equityholders milestone payments subsequent to the closing, if we achieve certain development and regulatory approval milestones and commercial sales milestones with respect to Minocin IV, RPX-602, Carbavance and Rempex's other product candidates, at the times and on the conditions set forth in the merger agreement. In the event that all of the milestones set forth in the merger agreement are achieved in accordance with the terms of the merger agreement, we will pay the Rempex equityholders an additional $214.0 million in cash in the aggregate for achieving development and regulatory milestones and an additional $120.0 million in cash in the aggregate for achieving commercial milestones, in each case, less certain transaction expenses and employer taxes owing because of the milestone payments. Under the terms of our agreement with Rempex, we also agreed that in the event that any milestone payments became due within eighteen months following the closing, we would enter into an escrow agreement and deposit the first $14.0 million of the aggregate milestone payments into an escrow fund. In October 2014, as a result of Rempex achieving certain regulatory milestones, we entered into an escrow agreement and deposited approximately $3.3 million into the escrow fund. To the extent that any amounts remain in the escrow fund after June 3, 2015 and not subject to claims by us, such amounts will be released to the Rempex equityholders, subject to certain conditions set forth in the merger agreement. ProFibrix B.V. On August 5, 2013, we completed our acquisition of all of the outstanding equity of ProFibrix B.V., or ProFibrix, pursuant to a share purchase agreement entered into with ProFibrix and its equityholders on June 4, 2013. Under the terms of the share purchase agreement with ProFibrix, we paid an aggregate of approximately $90.9 million in cash to the ProFibrix equityholders and optionholders at the closing. In addition, we are obligated to pay up to an aggregate of $140.0 million in cash to the ProFibrix equityholders and optionholders upon the achievement of certain U.S. and European regulatory approvals prior to January 1, 2016 and certain U.S. and European sales milestones during the 24-month period that follows the initial commercial sale of Raplixa. As a result of our acquisition of ProFibrix, we acquired a portfolio of patents and patent applications, including patents licensed from Quadrant Drug Delivery Limited, or Quadrant, which included the U.S. patent directed to the composition of matter of Raplixa. Under the terms of a license agreement between ProFibrix and Quadrant, we are required to pay low single digit percentage royalties based on annual worldwide net sales of licensed products, including Raplixa, by us or our affiliates and sublicensees. The royalties are subject to reduction in specified circumstances. ALN-PCS Program. In February 2013, we entered into a license and collaboration agreement with Alnylam to develop, manufacture and commercialize therapeutic products targeting the human PCSK-9 gene based on certain of Alnylam's RNAi technology. Under the terms of the agreement, we obtained the exclusive, worldwide right under Alnylam's technology to develop, manufacture and commercialize PCSK-9 products for the treatment, palliation and/or prevention of all human diseases. We paid Alnylam $25.0 million in an initial license payment and agreed to pay up to $180.0 million in cash to Alnylam upon the achievement of certain milestones, including up to $30.0 million in cash upon the achievement of specified development milestones, up to $50.0 million in cash upon the achievement of specified regulatory milestones and up to $100.0 million in cash upon the achievement of specified commercialization milestones. In addition, Alnylam will be eligible to receive scaled double-digit royalties based on annual worldwide net sales of PCSK-9 products by us or our affiliates and sublicensees. Royalties to Alnylam are payable on a product-by-product and country-by-country basis until the last to occur of the expiration of patent rights in the applicable country that cover the applicable product, the expiration of non-patent regulatory exclusivities for such product in such country, and the twelfth anniversary of the first commercial sale of the product in such country. The royalties are subject to reduction in specified circumstances. We are also responsible for paying royalties, and in some cases milestone payments, owed by Alnylam to its licensors with respect to intellectual property covering these products. Recothrom. In February 2013, pursuant to a master transaction agreement with Bristol-Myers Squibb Company, or BMS, we acquired the right to sell, distribute and market Recothrom on a global basis for a two-year period, which we refer to as the collaboration term, and certain limited assets exclusively related to Recothrom, primarily the biologics license application for 30 -------------------------------------------------------------------------------- Recothrom and certain related regulatory assets. BMS also granted to us, under the master transaction agreement, an option to purchase from BMS and its affiliates, following the expiration or earlier termination of the collaboration term, certain other assets, including certain patent and trademark rights, contracts, inventory, equipment and related books and records, held by BMS which are exclusively related to Recothrom. On August 6, 2014, we exercised our option to acquire such assets and assume certain liabilities of BMS and its affiliates related to those assets. Under the master transaction agreement, we paid to BMS a one-time collaboration fee equal to $105.0 million and a one-time option fee equal to $10.0 million. Upon the closing of the transactions contemplated by the option, we will be obligated to pay to BMS a purchase price equal to the net book value of inventory included in the acquired assets, plus a multiple of average net sales over each of the two 12-month periods preceding the closing (unless such closing occurs prior to February 8, 2015, in which case, the measurement period would be the 12-month period preceding the closing). We expect the closing for the transactions contemplated by the option exercise to occur in the first quarter of 2015, and we expect the purchase price will equal approximately $80.0 million to $85.0 million. We did not assume, and upon the closing of the transactions contemplated by the option exercise we will not assume, any pre-existing liabilities related to the Recothrom business, contingent or otherwise, arising prior to the collaboration period, and we did not acquire, and upon the closing of the transactions contemplated by the option exercise we will not acquire, any significant tangible assets related to the Recothrom business. Under the master transaction agreement, we agreed to pay to BMS quarterly tiered royalty payments during the two-year collaboration term equal to a percentage of worldwide net sales of Recothrom. Incline Therapeutics, Inc. In January 2013, we acquired Incline Therapeutics, Inc., or Incline, a company focused on the development of IONSYS, a compact, disposable, needleless patient-controlled system for the short-term management of acute postoperative pain in the hospital setting. Under the terms of our agreement with Incline, we paid to the holders of Incline's capital stock and the holders of options to purchase shares of Incline's capital stock, or collectively, the Incline equityholders, an aggregate of approximately $155.2 million in cash. In addition, we also paid $13.0 million to Cadence Pharmaceuticals, Inc., or Cadence, to terminate Cadence's option to acquire Incline pursuant to an agreement between Cadence and Incline and deposited $18.5 million in cash into an escrow fund for the purposes of securing the indemnification obligations of the Incline equityholders to us for any and all losses for which we are entitled to indemnification pursuant to the merger agreement and to provide the source of recovery for any amounts payable to us as a result of the post-closing purchase price adjustment process. Under the terms of our agreement with Incline, we agreed to pay up to $205.0 million in cash in the aggregate, less certain transaction expenses and taxes, to the former Incline equityholders upon our entering into a license agreement in Japan and achieving certain regulatory approval and certain sales milestones with respect to IONSYS. Collaboration with AstraZeneca. On April 25, 2012, we entered into a global collaboration agreement with AstraZeneca pursuant to which we and AstraZeneca agreed to collaborate globally to develop and commercialize certain acute ischemic heart disease compounds. Under the terms of the collaboration agreement, a joint development and research committee and a joint commercialization committee have been established to prepare and deliver a global development plan and a country-by-country collaboration and commercialization plan, respectively, related to BRILINTA and Angiomax and cangrelor. Implementation of these plans is subject to agreement between both parties. The first joint activity agreed upon by the parties under the global collaboration is a four-year co-promotion arrangement for BRILINTA in the United States. Pursuant to the agreement, our sales force began supporting promotion activities for BRILINTA in May 2012. Under the terms of the agreement, AstraZeneca agreed to pay us $15.0 million in base consideration per year from 2013 through 2015 for conducting BRILINTA co-promotion activities, plus up to an additional $5.0 million per year from 2013 to 2015 if certain performance targets with respect to new prescriptions are achieved, and $7.5 million in base consideration for conducting BRILINTA co-promotion activities during the period from January 1, 2016 until June 30, 2016, plus up to an additional $2.5 million in additional consideration for the same period if certain performance targets with respect to new prescriptions are achieved. In the first nine months of 2014, AstraZeneca has paid us $12.2 million under the agreement. Targanta Therapeutics Corporation. In February 2009, we acquired Targanta Therapeutics Corporation, or Targanta, a biopharmaceutical company focused on developing and commercializing innovative antibiotics to treat serious infections in the hospital and other institutional settings. Under the terms of our agreement with Targanta, we paid Targanta shareholders an aggregate of approximately $42.0 million in cash at closing. In addition, we originally agreed to pay contingent cash payments up to an additional $90.4 million in the aggregate. This amount has been reduced to $49.4 million as certain milestones have not been achieved by specified dates. We will owe $49.4 million if aggregate net sales of Orbactiv in four consecutive calendar quarters ending on or before December 31, 31 -------------------------------------------------------------------------------- 2021 reach or exceed $400.0 million, and up to an additional $40.0 million in additional payments to other third parties. In the third quarter of 2014, we paid $15.0 million to other third parties upon FDA approval of Orbactiv. Annovation BioPharma, Inc. Under the terms of a purchase option agreement with Annovation and its equityholders, we have an exclusive option to acquire all of the equity of Annovation, including its rights to ABP-700, at any time beginning on the date of completion of a proof of concept study with respect to one or more of Annovation's product candidates and ending 30 days after our receipt of written notice from Annovation of the completion of such study. Annovation is currently conducting a proof of concept study for ABP-700, which we expect to be completed by the end of the first quarter of 2015. If we elect to exercise our option to acquire Annovation following our evaluation of the results of the study, we will be obligated to pay an aggregate of approximately $35.3 million in cash to Annovation's equityholders at closing, less the pro rata portion of such amount allocable to certain shares of Annovation's capital stock held by us. In addition, we will be obligated to pay: • up to an aggregate of approximately $26.3 million in cash to the Annovation equityholders upon the achievement of certain clinical and regulatory milestones; and • additional amounts to the Annovation equityholders based on a low single digit percentage of worldwide net sales, if any, of Annovation's products during a specified earnout period. In the event that we elect not to exercise the option to acquire Annovation or terminate the purchase option agreement, then upon Annovation's request, we will be obligated to loan Annovation up to $5.0 million pursuant to a convertible promissory note and the preferred stock of Annovation that we own will be converted into ten percent of the shares of common stock that would otherwise be issuable upon conversion. Principal and accrued interest on the convertible promissory note would be payable in cash by Annovation on the date that is 10 years from the date of issuance or in shares of Annovation's common stock at any time upon Annovation's written election. BARDA Agreement In February 2014, our subsidiary Rempex entered into an agreement with the Biomedical Advanced Research and Development Authority, or BARDA, of the U.S. Department of Health and Human Services, under which Rempex has the potential to receive up to $89.8 million in funding to support the development of Carbavance. The BARDA agreement is a cost-sharing arrangement that consists of an initial base period and seven option periods that BARDA may exercise in its sole discretion pursuant to the BARDA agreement. The BARDA agreement provides for an initial commitment by BARDA of an aggregate of $19.8 million for the initial base period and the first option period, and up to an additional $70.0 million if the remaining six option periods are exercised by BARDA. In October 2014, BARDA exercised the second option, increasing BARDA's total commitment to $37.8 million. Under the cost-sharing arrangement, Rempex will be responsible for a designated portion of the costs associated with each period of work. If all option periods are exercised by BARDA, the estimated period of performance would be extended until approximately July 31, 2019. BARDA is entitled to terminate the agreement, including the projects under the BARDA agreement for convenience, in whole or in part, at any time and is not obligated to provide continued funding beyond current year amounts from Congressionally approved annual appropriations. We expect to use the total award under the BARDA agreement to support non-clinical development activities, clinical studies, manufacturing and associated regulatory activities designed to obtain marketing approval of Carbavance in the United States for treatment of serious Gram-negative infections. The BARDA agreement also covers initial non-clinical studies to assess the potential usefulness of Carbavance for treatment of certain Gram-negative bioterrorism agents. Under the terms of our agreement with Rempex, we agreed to pay Rempex equityholders on a quarterly basis, as part of our development milestones, a specified percentage of amounts actually received by us from BARDA. We recorded approximately $6.0 million of reimbursements by the government as a reduction of research and development expenses for the nine months ended September 30, 2014. Convertible Senior Notes We have convertible debt outstanding as of September30, 2014 related to our 1.375% convertible senior notes due 2017, which we issued in June 2012 in the aggregate principal amount of $275.0 million, or the Notes. The Notes are convertible into common stock upon satisfaction of certain conditions. The Notes bear cash interest at a fixed rate of 1.375% per year, payable semi-annually in arrears on June 1 and December of each year. The Notes will mature on June 1, 2017 unless earlier repurchased by us or converted at the option of holders. See note 10, "Convertible Senior Notes," in the accompanying notes to condensed consolidated financial statements for additional information. 32 -------------------------------------------------------------------------------- Convertible Note Hedge and Warrant Transactions In June 2012, we entered into convertible note hedge transactions and warrant transactions with several of the initial purchasers of the Notes, their respective affiliates and other financial institutions. Subject to certain conditions, we may elect to settle all of the warrants in cash. See note 10, "Convertible Senior Notes," in the accompanying notes to condensed consolidated financial statements for additional information. Biogen Letter Agreement On August 7, 2012, we and Biogen Idec MA Inc., or Biogen, entered into a letter agreement resolving a disagreement between the parties as to the calculation and amount of the royalties required to be paid to Biogen by us under our license agreement with Biogen. The letter agreement amends the license agreement providing, among other things, that effective solely for the period from January 1, 2013 through and including December 15, 2014, each of the royalty rate percentages payable by us as set forth in the license agreement shall be increased by one percentage point. U.S. Health Care Reform In March 2010, President Obama signed into law the Patient Protection and Affordable Care Act, or PPACA, which was amended by the Health Care and Education Reconciliation Act of 2010. The PPACA, as amended, contains numerous provisions that impact the pharmaceutical and healthcare industries that are expected to be implemented over the next several years. We are continually evaluating the impact of the PPACA on our business. As of the date of this quarterly report on Form 10-Q, we have not identified any provisions that currently materially impact our business or results of operations. However, we believe that the Biologics Price Competition and Innovation Act, or BPCIA, provisions of PPACA could impact our business or results of operations. Under the BPCIA, the FDA has the authority to approve biosimilar interchangeable versions of biological products through an abbreviated pathway following periods of data and marketing exclusivity. However, the potential impact of the PPACA and the BPCIA on our business and results of operations is inherently difficult to predict because many of the details regarding the implementation of this legislation have not been determined. In addition, the impact on our business and results of operations may change as and if our business evolves. On July 9, 2012, President Obama signed the Food and Drug Administration Safety and Innovation Act, or FDASIA. Under the "Generating Antibiotic Incentives Now," or GAIN, provisions of FDASIA, the FDA may designate a product as a qualified infectious disease product, or QIDP. A QIDP is defined as an antibacterial or antifungal drug for human use intended to treat serious or life-threatening infections, including those caused by either an antibacterial or antifungal resistant pathogen, including novel or emerging infectious pathogens or a so-called "qualifying pathogen" found on a list of potentially dangerous, drug-resistant organisms to be established and maintained by the FDA under the new law. The GAIN provisions describe several examples of "qualifying pathogens," including MRSA and Clostridium difficile. Upon the designation of a drug by the FDA as a QIDP, any non-patent exclusivity period awarded to the drug will be extended by an additional five years. This extension is in addition to any pediatric exclusivity extension awarded. We developed Orbactiv for the treatment of ABSSSI, including infections caused by MRSA, and are exploring the development of Orbactiv for other indications, including for the treatment of bacteremia, Clostridium difficile, prosthetic joint infections, anthrax and other Gram-positive bacterial infections. We are also developing Carbavance for the treatment of hospitalized patients with serious Gram-negative bacterial infections. In November 2013, the FDA designated Orbactiv a QIDP. In August 2014, the FDA informed us that Orbactiv meets the criteria for an additional five years of non-patent exclusivity to be added to the five year exclusivity period already provided by the Food, Drug and Cosmetic Act. As a result, Orbactiv's non-patent regulatory exclusivity is scheduled to expire in August 2024. In December 2013, the FDA designated Carbavance a QIDP. We expect that, if we submit an NDA for Carbavance and the NDA is approved, Carbavance would receive an additional five-years of non-patent exclusivity. Recent Developments Orbactiv and Minocin IV. In August 2014, we received FDA approval of our NDA for Orbactiv. In October 2014, we commercially launched Orbactiv, as well as Minocin IV, in the United States. IONSYS. In September 2014, the FDA accepted for filing the sNDA that we had submitted for IONSYS in the United States. The FDA action date, known as the PDUFA date, which is the date by which the FDA is expected to make decision on the sNDA, is April 30, 2015. In September 2014, the EMA accepted for review the MAA for IONSYS that we had submitted in the European Union. 33 -------------------------------------------------------------------------------- Carbavance. In November 2014, we enrolled the first patient in TANGO 1, the first of two Phase 3 clinical trials for Carbavance. The Carbavance Phase 3 clinical trial program consists of the TANGO 1 and TANGO 2 clinical trials. The TANGO 1 Phase 3 clinical trial is a multi-center, randomized, double-blind, double-dummy study designed to evaluate the efficacy, safety, and tolerability of Carbavance compared to piperacillin/tazobactam in the treatment of complicated urinary tract infections, or cUTI, including acute pyelonephritis, in adults. We expect to enroll approximately 850 patients in the trials. Such subjects will be randomized (1:1) to receive either Carbavance or piperacillin/tazobactam each given intravenously for up to 10 days. The TANGO 2 Phase 3 clinical trial is a multi-center, randomized, open-label study of Carbavance versus "best available therapy" in subjects with selected serious infections due to carbapenem-resistant enterobacteriaceae. We expect to enroll in the trial approximately 150 patients with cUTI, nosocomial pneumonia and/or bacteremia. Subjects will be randomized (2:1) to receive either Carbavance or "Best Available Therapy" for up to 14 days. Additionally, in October 2014, BARDA exercised its second option bringing the total commitment to date by BARDA to $37.8 million. The BARDA contract is a cost-sharing arrangement that includes non-clinical development activities, clinical studies, manufacturing, and associated regulatory activities designed to gain approval of Carbavance in the United States for treatment of serious gram-negative infections. Raplixa. In November 2014, the FDA informed us that it will extend the PDUFA date for the NDA for Raplixa by up to three months from the original date of January 31, 2015 based on an NDA amendment we submitted on manufacturing specifications. Results of Operations Net Revenue: Net revenue decreased 1.1% to $172.4 million for the three months ended September 30, 2014 as compared to $174.3 million for the three months ended September 30, 2013. Net revenue increased to $533.4 million for the nine months ended September 30, 2014, a 6.1% increase from $502.9 million for the nine months ended September 30, 2013. The following tables reflect the components of net revenue for the three and nine months ended September 30, 2014 and 2013: Net Revenue Three Months Ended September 30, Nine Months Ended September 30, Change Change 2014 2013 $ % 2014 2013 Change $ Change % (in thousands) Angiomax $ 150,992 153,596 $ (2,604 ) (1.7 )% $ 469,792 $ 447,641 $ 22,151 4.9 % Recothrom 16,765 16,993 (228 ) (1.3 )% 46,542 43,540 3,002 6.9 % Other products 4,644 3,693 951 25.8 % 17,076 11,680 5,396 46.2 % Total net revenue $ 172,401 $ 174,282 $ (1,881 ) (1.1 )% $ 533,410 $ 502,861 $ 30,549 6.1 % Net revenue decreased by $1.9 million, or 1.1%, to $172.4 million in the three months ended September 30, 2014 compared to $174.3 million in the three months ended September 30, 2013, reflecting an increase of $5.7 million in the United States offset by a decrease of $7.6 million in international markets. Net revenue decreased for Angiomax by $2.6 million, in the three months ended September 30, 2014, reflecting a decrease of $14.0 million of net revenue associated with net volume decreases due to a reduction in unit shipments to customers of Angiomax, partially offset by an increase of $11.3 million of net revenue associated with a price increase for Angiomax effective as of July 1, 2014 and a favorable impact from foreign exchange of $0.1 million. Net revenue increased by $30.5 million, or 6.1%, to $533.4 million in the nine months ended September 30, 2014 compared to $502.9 million in the nine months ended September 30, 2013, reflecting an increase of $42.3 million, or 9.1%, in the United States, partially offset by a decrease of $11.8 million, or 29.5%, in international markets. Net revenue increased for Angiomax by$22.2 million in the nine months ended September 30, 2014 with $19.8 million associated with a price increase for Angiomax effective as of January 1, 2014 and July 1, 2014 in the United States, $1.4 million due to increased unit shipments to customers of Angiomax, and a favorable impact from a foreign exchange of $0.9 million. 34 -------------------------------------------------------------------------------- Angiomax. Net revenue from sales of Angiomax decreased by $2.6 million, or 1.7%, to $151.0 million in the three months ended September 30, 2014 compared to $153.6 million in the three months ended September 30, 2013, primarily due to volume decreases in Europe and the United States, partially offset by the price increases in the United States. Net revenue in the United States in both the three months ended September 30, 2014 and 2013 reflect chargebacks related to the 340B Drug Pricing Program and rebates related to the PPACA. Under the 340B Drug Pricing Program, we offer qualifying entities a discount off the commercial price of Angiomax for patients undergoing PCI on an outpatient basis. Chargebacks related to the 340B Drug Pricing Program increased by $0.5 million to $17.1 million in the three months ended September 30, 2014 compared to $16.6 million in the three months ended September 30, 2013, primarily due to higher amounts paid to eligible hospital customers. Rebates related to the PPACA increased by $0.2 million to $0.7 million in the three months ended September 30, 2014 compared to $0.5 million in the three months ended September 30, 2013. Net revenue from sales of Angiomax increased by $22.2 million, or 4.9%, to $469.8 million in the nine months ended September 30, 2014 compared to $447.6 million in the nine months ended September 30, 2013, primarily due to price and volume increases in the United States. Net revenue in the United States in both the nine months ended September 30, 2014 and 2013 reflect chargebacks related to the 340B Drug Pricing Program under the Public Health Service Acts and rebates related to the PPACA. Chargebacks related to 340B Drug Pricing Program increased by $11.0 million to $52.8 million in the nine months ended September 30, 2014 compared to $41.8 million in the nine months ended September 30, 2013, primarily due to increased usage by eligible hospital customers. Rebates related to the PPACA increased by $0.3 million to $1.5 million in the nine months ended September 30, 2014 compared to $1.2 million in the nine months ended September 30, 2013. Net revenue outside of the United States decreased by $12.1 million to $27.8 million in the nine months ended September 30, 2014 compared to $39.9 million in the nine months ended September 30, 2013, primarily due in part to a decline in sales in the United Kingdom where some hospitals chose to use heparin instead of Angiomax for primary PCI following the publication of data from the HEAT-PPCI trial in March 2014, as well as a diversion of primary PCI patients into a large scale, cross-Europe clinical trial and the ongoing cost-of-care pressures in Europe causing some physicians and medical decision-makers to choose to use heparin due to its cost. Recothrom. Net revenue from Recothrom decreased by $0.2 million, or 1.3%, to $16.8 million in the three months ended September 30, 2014 compared to $17.0 million in the three months ended September 30, 2013. Net revenue from Recothrom increased by $3.0 million, or 6.9%, to $46.5 million in the nine months ended September 30, 2014 compared to $43.5 million in the nine months ended September 30, 2013 due to full quarter of sales during the first quarter of 2014. We commenced sales of Recothrom on February 8, 2013 pursuant to the master transaction agreement with BMS. Other Products. Net revenue from sales of Cleviprex, Minocin IV, PreveLeak and ready-to-use Argatroban increased by $1.0 million, or 25.8%, to $4.6 million in the three months ended September 30, 2014 from $3.7 million in the three months ended September 30, 2013, primarily due to the increase in revenue from Cleviprex and ready-to-use Argatroban, and our acquired products, Minocin IV and PreveLeak. Net revenue from sales of Cleviprex was $1.3 million in the three months ended September 30, 2014, compared to $0.9 million in the three months ended September 30, 2013. Net revenue from sales of ready-to-use Argatroban was $3.0 million in the three months ended September 30, 2014, compared to $2.8 million in September 30, 2013. Net revenue from sales of Minocin IV and PreveLeak was $0.3 million and $0.1 million in the three months ended September 30, 2014, respectively. We commenced the sale of Minocin IV in December 2013 after the acquisition of Rempex, and the sale of PreveLeak in Europe in May 2014 after our acquisition of Tenaxis. Net revenue from sales of Cleviprex, Minocin IV, PreveLeak and ready-to-use Argatroban increased by $5.4 million or 46.2%, to $17.1 million in the nine months ended September 30, 2014 from $11.7 million in the nine months ended September 30, 2013, primarily due to the change in our revenue recognition method for Cleviprex and ready-to-use Argatroban in the first quarter of 2014 and an increase in revenue from Cleviprex and ready-to-use Argatroban. Under our revised revenue recognition policy, beginning with the first quarter for 2014, we recognize revenue for Cleviprex and ready-to-use Argatroban as product is sold to Integrated Commercialization Solutions, or ICS. For periods prior to 2014, we recognized revenue for Cleviprex and ready-to-use Argatroban using the deferred revenue model. During 2014, we recognized one-time increases of $0.7 million in net sales of Cleviprex and $1.6 million in net sales of ready-to-use Argatroban, representing product sales previously deferred as of December 31, 2013, net of chargebacks and other discounts or accruals for product returns, rebates and fee-for-service charges. Net revenue from sales of Cleviprex was $5.3 million in the nine months ended September 30, 2014, compared to $3.1 million in the nine months ended September 30, 2013. Net revenue from sales of ready-to-use Argatroban was $10.6 million in the nine months ended September 30, 2014, compared to $8.5 million in the nine months ended September 30, 2013. Net revenue from sales of Minocin IV and PreveLeak was $0.9 million and $0.2 million in the nine months ended September 30, 2014, respectively. 35 --------------------------------------------------------------------------------Cost of Revenue: Cost of revenue for the three months ended September 30, 2014 was $69.1 million, or 40.1% of net revenue, compared to $65.8 million, or 37.8% of net revenue, in the three months ended September 30, 2013. Cost of revenue for the nine months ended September 30, 2014 was $221.6 million, or 41.5% of net revenue, compared to $186.4 million, or 37.1% of net revenue for the nine months ended September 30, 2013. Cost of revenue during these periods consisted of: • expenses in connection with the manufacture of our products sold; • royalty expenses under our agreements with Biogen and Health Research Inc. related to Angiomax, our agreement with AstraZeneca related to Cleviprex and our agreement with Eagle Pharmaceuticals, Inc., or Eagle, related to ready-to-use Argatroban; • amortization of the costs of license agreements, product rights, developed product rights and other identifiable intangible assets, which result from product and business acquisitions and impairment charges related to product rights; • logistics costs related to Angiomax, Cleviprex, Minocin IV, PreveLeak and ready-to-use Argatroban, including distribution, storage, and handling costs; and • expenses related to our license agreement with BMS for Recothrom and expenses related to our supply agreement for Recothrom with BMS including product cost and logistics as well as royalties and amortization related to Recothrom. Cost of Revenue Three Months Ended September 30, Nine Months Ended September 30, 2014 % of Total 2013 % of Total 2014 % of Total 2013 % of Total (in thousands) (in thousands) (in thousands) (in thousands) Manufacturing/Logistics $ 25,239 37 % $ 20,144 30 % $ 70,003 33 % $ 58,585 32 % Royalties 37,601 55 % 40,582 62 % 118,783 54 % 113,975 61 % Amortization of acquired product rights and intangible assets 6,236 8 % 5,068 8 % 32,844 13 % 13,886 7 % Total cost of revenue $ 69,076 100 % $ 65,794 100 % $ 221,630 100 % $ 186,446 100 % Cost of revenue increased by $3.3 million during the three months ended September 30, 2014 compared to the three months ended September 30, 2013, primarily due to increased manufacturing and logistics costs and amortization of acquired product rights and intangible assets. Cost of revenue increased by $35.2 million during the nine months ended September 30, 2014 compared to the nine months ended September 30, 2013, primarily due to increases in manufacturing and logistics costs and amortization of acquired product rights and intangible assets. During the second quarter of 2014, we also recorded an impairment charge on product licenses of $15.1 million to cost of sales as a result of reduction in estimated future cash flows expected to be generated by our acute care generic products. Royalty expense increased for the nine months ended September 30, 2014 compared to nine months ended September 30, 2013 due to an increase in royalties to BMS in connection with our sales of Recothrom for the full nine months ended September 30, 2014 as compared to a partial nine months ended September 30, 2013 as a result of our commencement of selling Recothrom in February 2013. Increased manufacturing and logistics costs were associated with our sales of Recothrom for the nine months ended September 30, 2014. 36--------------------------------------------------------------------------------Research and Development Expenses: Research and Development Spending Three Months Ended September 30, Nine Months Ended September 30, (in millions, except percentages ) 2014 % of Total 2013 % of Total 2014 % of Total 2013 % of Total Marketed products $ 7,432 22 % $ 10,432 45 % $ 25,550 24 % $ 40,214 37 % Registration stage product candidates 11,530 35 % 8,692 37 % 35,692 34 % 29,251 27 % Research and development product candidates 14,352 43 % 4,063 18 % 44,396 42 % 38,944 36 % Total research and development expenses $ 33,314 100 % $ 23,187 100 % $ 105,638 100 % $ 108,409 100 % Our marketed products consist of Angiomax, Cleviprex, Minocin IV, Orbactiv, PreveLeak, ready-to-use Argatroban, Recothrom and certain of our acute care generic drugs. Registration stage product candidates, for which we have submitted or will soon submit applications for regulatory approval, include cangrelor, IONSYS, Raplixa and RPX-602. Research and development stage product candidates include ALN-PCSsc, Carbavance, MDCO-216 and other early stage compounds. Research and development expenses increased by $10.1 million during the three months ended September 30, 2014 compared to the three months ended September 30, 2013. These increases were primarily due to expenses associated with Carbavance which we acquired as part of our acquisition of Rempex in December 2013, Raplixa which we acquired as part of our acquisition of ProFibrix in August 2013 and IONSYS as well as expenses related to increased headcount and overhead expenses incurred in anticipation of approval of our registration stage product candidates. Clinical trial expenses and manufacturing development expenses associated with Carbavance totaled $7.5 million in the three months ended September 30, 2014. Manufacturing development and regulatory filing related costs associated with Raplixa increased by $1.6 million from the third quarter of 2013 and costs associated with IONSYS increased by $1.4 million primarily as a result of a milestone payment made to ALZA related to the acceptance of a regulatory filing. Additional increases of $2.3 million are attributable to higher headcount due to anticipated regulatory approval of registration stage product candidates. These increases were partially offset by decreases in expenses associated with Orbactiv and cangrelor. Research and development expenses associated with Orbactiv decreased by $3.4 million primarily due to completion of clinical, manufacturing, regulatory and statistical activities in the third quarter of 2013 related to the preparation of the NDA for Orbactiv which we submitted in the fourth quarter of 2013. Research and development expenses associated with cangrelor decreased by $0.9 million due to higher manufacturing costs in the third quarter 2013 associated with manufacturing process validation needed for the commercial launch of cangrelor which we had anticipated would occur in 2014. Research and development expenses decreased by $2.8 million during the nine months ended September 30, 2014 compared to the nine months ended September 30, 2013. The decrease is primarily due to an initial license payment of $25.0 million to Alnylam under our license and collaboration agreement in the first quarter of 2013. In addition, expenses associated with Orbactiv and cangrelor decreased by $15.2 million and $7.4 million, respectively, due to higher clinical, manufacturing, regulatory and statistical activities in 2013 related to the preparation of the NDA for Orbactiv which we submitted in the fourth quarter of 2013. These decreases were partially offset by increases in expenses associated with Carbavance, RPX 602, Raplixa and MDCO-216. Clinical trial expenses and manufacturing development expenses associated with Carbavance and RPX 602 increased by $20.1 million and $1.0 million, respectively following our December 2013 acquisition of Rempex. Manufacturing development and regulatory filing related costs associated with Raplixa increased by $12.1 million following our August 2013 acquisition of ProFibrix. Additional increases are related to MDCO-216 as expenses increased by $10.3 million primarily due to manufacturing development scale up. We expect to continue to invest in the development of all our products during the remainder of 2014 and that our research and development expenses will increase in 2014 from their levels in 2013. We expect research and development expenses in 2014 to include costs for global regulatory activities related to IONSYS and Orbactiv in the United States and European Union, and related to Cleviprex, cangrelor and Raplixa outside of the United States; manufacturing development activities for Carbavance, IONSYS, Orbactiv and MDCO-216; and clinical trials of MDCO-216, initiation of a Phase 3 clinical trial of Carbavance, and additional clinical studies for Angiomax, cangrelor, Cleviprex and Orbactiv for use in additional patient populations and lifecycle management activities. Our success in further developing Angiomax and obtaining marketing approvals for Angiomax in additional countries and for additional patient populations, developing and obtaining marketing approvals for Cleviprex and Orbactiv outside the United States, and developing and obtaining marketing approvals for our products in development, is highly uncertain. We cannot predict expenses associated with ongoing data analysis or regulatory submissions, if any. In addition, we cannot reasonably estimate or know the nature, timing and estimated costs of the efforts necessary to continue the development of Angiomax, Cleviprex, Orbactiv and our 37 -------------------------------------------------------------------------------- products in development, the period in which material net cash inflows are expected to commence from further developing Angiomax, Cleviprex and Orbactiv, the timing and estimated costs of obtaining marketing approvals for Angiomax in additional countries and additional patient populations, the timing and estimated costs of obtaining marketing approvals for Cleviprex and Orbactiv outside the United States, or the timing and estimated costs of developing and obtaining marketing approvals for our products in development, due to the numerous risks and uncertainties associated with developing and commercializing drugs, including the uncertainty of: • the scope, rate of progress and cost of our clinical trials and other research and development activities; • future clinical trial results; • the terms and timing of any collaborative, licensing and other arrangements that we may establish; • the cost and timing of regulatory approvals; • the cost and timing of establishing and maintaining sales, marketing and distribution capabilities; • the cost of establishing and maintaining clinical and commercial supplies of our products and our product candidates; • the effect of competing technological and market developments; and • the cost of filing, prosecuting, defending and enforcing any patent claims and other intellectual property rights. Selling, General and Administrative Expenses: Three Months Ended September 30, Nine Months Ended September 30, 2014 2013 Change $ Change % 2014 2013 Change $ Change % (in thousands) (in thousands) Selling, general and administrative expenses $ 82,662 $ 62,528 $ 20,134 32.2 % $ 235,928 $ 178,954 $ 56,974 31.8 % The increase in selling, general and administrative expenses of approximately $20.1 million in the three months ended September 30, 2014 as compared to the three months ended September 30, 2013 reflects a $4.5 million increase in selling, marketing and promotional expense and a $15.7 million increase in general corporate and administrative expenses. Selling, marketing and promotional expenses increased by $4.5 million, in the three months ended September 30, 2014 as compared to the three months ended September 30, 2013 primarily to support the commercialization of our growing infectious disease portfolio. General corporate and administrative expenses increased by $15.7 million, in the three months ended September 30, 2014 as compared to the three months ended September 30, 2013, primarily due to an increase of $8.9 million due in corporate infrastructure spend to support our growing product portfolio resulting from our acquisition of Profibrix, Rempex and Tenaxis, a $4.1 million increase in accretion costs associated with the fair value adjustments of the contingent consideration due to the former equityholders of Targanta, Incline, ProFibrix, Rempex and Tenaxis, an increase of $2.1 million in share-based compensation costs and an increase of $1.5 million in legal costs. The increase in selling, general and administrative expenses of approximately $57.0 million in the nine months ended September 30, 2014 as compared to the nine months ended September 30, 2013 reflects a $12.5 million increase in selling, marketing and promotional expense and a $44.5 million increase in general corporate and administrative expenses. Selling, marketing and promotional expenses increased by $12.5 million in the nine months ended September 30, 2014 as compared to the nine months ended September 30, 2013, primarily due to support the commercialization of our growing infectious disease portfolio. General corporate and administrative expenses increased by $44.5 million in the nine months ended September 30, 2014 as compared to the nine months ended September 30, 2013, primarily due to increases of $28.9 million in accretion costs associated with the fair value adjustments of the contingent consideration due to the former equityholders of Targanta, Incline, ProFibrix, Rempex and Tenaxis, an increase of $23.5 million in corporate infrastructure costs to support our growing product portfolio 38 -------------------------------------------------------------------------------- resulting from our acquisitions of ProFibrix and Rempex in the second half of 2013, an increase of $6.8 million in share-based compensation costs, and an increase in legal costs of $1.1 million. These increases were partially offset by decreases in deal-related costs of $6.5 million in connection with our 2013 acquisitions, a decrease of $5.0 million reflecting an arbitration award that we paid to Eagle in July 2013, and a decrease of $4.3 million in employee severance and other employee related termination costs associated with our 2013 reduction-in-force. Co-promotion and Profit-Share Income: Three Months Ended September 30, Nine Months Ended September 30, 2014 2013 Change $ Change % 2014 2013 Change $ Change % (in thousands) (in thousands)Co-promotion and profit share income $ 2,864 $ 4,423 $ (1,559 ) (35.2 )% $ 16,210 $ 12,241 $ 3,969 32.4 % During the three months ended September 30, 2014 and September 30, 2013, we recorded co-promotion and profit share income of approximately $2.9 million and $4.4 million, respectively. During the nine months ended September 30, 2014 and September 30, 2013, we recorded co-promotion and profit share income of approximately $16.2 million and $12.2 million, respectively. Co-promotion and profit share income in the nine months ended September 30, 2014 was higher due to co-promotion income from our agreement with BSX during 2014, an increase in the profit share income from our license agreement with Eagle related to ready-to-use Argatroban and an increase in co-promotion income from BRILINTA. Loss in equity of investment: Three Months Ended September 30, Nine Months Ended September 30, 2014 2013 Change $ Change % 2014 2013 Change $ Change % (in thousands) (in thousands)Loss in equity investment $ (1,184 ) $ - $ (1,184 ) (100.0 )% $ (1,184 ) $ - $ (1,184 ) (100.0 )% During September 2014, we acquired additional shares of preferred stock of Annovation. The loss in equity investment for the three and nine months ended September 30, 2014, was primarily due to accounting for our additional investment in Annovation in September 2014 under the equity method of accounting. Interest Expense: Three Months Ended September 30, Nine Months Ended September 30, 2014 2013 Change $ Change % 2014 2013 Change $ Change % (in thousands) (in thousands)Interest expense $ (3,958 ) $ (3,765 ) $ (193 ) 5.1 % $ (11,710 ) $ (11,143 ) $ (567 ) 5.1 % During the three months ended September 30, 2014 and the three months ended September 30, 2013, we recorded interest expense of $4.0 million and $3.8 million, respectively, and for the nine months ended September 30, 2014 and the nine months ended September 30, 2013 we recorded interest expense of $11.7 million and $11.1 million, respectively. For all periods interest expense recorded was related to the Notes. Investment impairment: Three Months Ended September 30, Nine Months Ended September 30, 2014 2013 Change $ Change % 2014 2013 Change $ Change % (in thousands) (in thousands) Investment impairment $ (7,500 ) $ - $ (7,500 ) * $ (7,500 ) $ - $ (7,500 ) * 39--------------------------------------------------------------------------------During the three and nine months ending September 30, 2014, we recorded an investment impairment charge of $7.5 million representing an other-than temporary decline in the value of our investment in the common stock of GeNO, LLC. Other (expense) income: Three Months Ended September 30, Nine Months Ended September 30, 2014 2013 Change $ Change % 2014 2013 Change $ Change % (in thousands) (in thousands) Other (expense) income $ (53 ) $ 383 $ (436 ) * $ (24 ) $ 1,186 $ (1,210 ) * *Represents a change in excess of 100%. Other (expense) income, which is comprised of interest income and gains and losses on foreign currency transactions decreased by $0.4 million for the three months ended September 30, 2014. This decrease was primarily due to losses on foreign currency transactions in the three months ended September 30, 2014. Other (expense) income decreased by $1.2 million for the nine months ended September 30, 2014. This decrease was primarily due to losses on foreign currency transactions in the nine months ended September 30, 2014. Benefit (Provision) for Income Tax: Three Months Ended September 30, Nine Months Ended September 30, 2014 2013 Change $ Change % 2014 2013 Change $ Change % (in thousands) Benefit (provision) for income tax $ 5,693 $ (16,068 ) $ 21,761 * $ 7,026 $ (17,163 ) $ 24,189 * *Represents a change in excess of 100%. We recorded a $5.7 million benefit for income taxes and a $16.1 million provision for income taxes for the three months ended September 30, 2014 and 2013, respectively, based on loss before taxes of $22.5 million and income before taxes of $23.8 million for the same periods. Our effective income tax rates for the three months ended September 30, 2014 and 2013 were approximately (25.3)% and 67.5%, respectively. The decrease in effective tax rate was primarily driven by a decrease in pre-tax income offset by an increase in the non-cash tax impact arising from changes in contingent consideration related to our acquisitions of Targanta, Incline, ProFibrix, Rempex and Tenaxis. The decrease in effective rate is also offset by higher tax losses in foreign jurisdictions, driven primarily by the acquisition of ProFibrix from which we are unable to record a benefit. We recorded a $7.0 million benefit for income taxes for the nine months ended September 30, 2014 compared to $17.2 million provision for the nine months ended September 30, 2013, respectively, based on loss before taxes of $34.0 million and income before taxes of $31.3 million for the same periods. Our effective income tax rates for the nine months ended September 30, 2014 and 2013 were (20.7)% and 54.8%, respectively, with the decrease in effective tax rate the result of a decrease in pre-tax income and a discrete tax benefit related to the effective settlement of an uncertain tax position. The decrease in effective tax rate was offset by an increase in the non-cash tax impact arising from changes in contingent consideration related to our acquisitions of Targanta, Incline, ProFibrix, Rempex and Tenaxis and higher tax losses in foreign jurisdictions from which we are unable to record a benefit, driven primarily by the acquisition of ProFibrix. We expect that our full year 2014 effective tax rate will be lower than 2013 due to anticipated decrease in pre-taxable income compared to 2013. It is possible that our full year effective tax rate could change because of discrete events, our mix of U.S. to foreign earnings, specific transactions or the receipt of new information affecting our current projections. We will continue to evaluate our future ability to realize our deferred tax assets on a periodic basis in light of changing facts and circumstances. These include but are not limited to projections of future taxable income, tax legislation, rulings by relevant tax authorities, the progress of ongoing tax audits, the regulatory approval of products currently under development and the ability to achieve future anticipated revenues. 40 --------------------------------------------------------------------------------Liquidity and Capital Resources Sources of Liquidity Since our inception, we have financed our operations principally through revenues from sales of Angiomax, the sale of common stock, convertible promissory notes and warrants and interest income. Cash Flows As of September 30, 2014, we had $356.2 million in cash and cash equivalents, as compared to $376.7 million as of December 31, 2013. The decrease in cash and cash equivalents in the nine months ended September 30, 2014 was primarily due to $83.6 million of net cash used in investing activities, partially offset by $47.2 million of net cash provided in operating activities and $15.4 million of net cash provided by financing activities. Net cash provided by operating activities was $47.2 million in the nine months ended September 30, 2014, compared to net cash provided by operating activities of $49.6 million in the nine months ended September 30, 2013. The cash provided by operating activities in the nine months ended September 30, 2014 primarily relates to non-cash items of $110.9 million offset by a net loss of $27.0 million and $36.7 million of changes in working capital items. Non-cash items consist of depreciation and amortization, asset impairment charges, amortization of debt discount, share-based compensation expense, deferred tax provision and excess tax benefit from share-based compensation arrangements, undistributed loss on our equity method investment and adjustments in contingent purchase price. The changes in working capital items reflects a decrease in accounts payable and an increase in accounts receivable totaling $36.4 million primarily due to timing of payments of certain corporate expenses and customer payments, a decrease of $3.5 million in accrued expenses, a decrease of $3.3 million in other liabilities and a decrease of $2.4 million in deferred revenue, partially offset by an decrease of $12.1 million in inventory. The cash provided by operating activities in the nine months ended September 30, 2013 included net income of $14.2 million and non-cash items of $35.0 million consisting primarily of depreciation and amortization, amortization of debt discount, share-based compensation expense, deferred tax provision and excess tax benefit from share-based compensation arrangements, as well as a $0.4 million increase resulting from changes in working capital items. The changes in working capital items reflect an increase in accounts payable and accrued expenses of $33.4 million primarily due to payments of certain corporate expenses, an increase in accounts receivable of $17.8 million, which was due in part to the timing of receipts and related sales volume, an increase in inventory of $15.1 million, and an increase in prepaid and other current assets of $2.2 million. During the nine months ended September 30, 2014, $83.6 million in net cash was used in investing activities, including $58.9 million for the purchase of Tenaxis, $15.0 million in milestone payments paid to third parties upon FDA approval of Orbactiv, $6.1 million for the purchase of fixed assets and $3.6 million for additional equity investment in Annovation. During the nine months ended September 30, 2013, $360.5 million in net cash was used in investing activities, which reflected $402.6 million incurred in connection with our Incline, ProFibrix and Recothrom transactions, consisting of $186.7 million used in the acquisition of Incline and $115.0 million used for the Recothrom transaction, and $100.9 million used for the ProFibrix transaction, $7.7 million used for the purchase of fixed assets, partially offset by $50.7 million in proceeds from the maturity and sale of available for sale securities. Net cash provided by financing activities was $15.4 million in the nine months ended September 30, 2014, which reflected $13.7 million of proceeds from option exercises and $1.7 million in excess tax benefits and purchases of stock under our employee stock purchase plan. Net cash provided by financing activities was $254.7 million in the nine months ended September 30, 2013, which reflected $189.6 million in net proceeds from our equity offering, $59.2 million of proceeds from option exercises and $6.0 million in excess tax benefits and purchases of stock under our employee stock purchase plan. Funding Requirements We expect to devote substantial financial resources to our research and development efforts, clinical trials, nonclinical and preclinical studies and regulatory approvals and to our commercialization and manufacturing programs associated with our products and our products in development. We also will require cash to pay interest on the $275.0 million aggregate principal amount of Notes and to make principal payments on the Notes at maturity or upon conversion. In addition, as part of our business development strategy, we generally structure our license agreements and acquisition agreements so that a significant portion of the total license 41 -------------------------------------------------------------------------------- or acquisition cost is contingent upon the successful achievement of specified development, regulatory or commercial milestones. As a result, we will require cash to make payments upon achievement of these milestones under the license agreements and other acquisition agreements to which we are a party. We anticipate making a payment of approximately $80.0 to $85.0 million to BMS during the first quarter of 2015 in connection with our acquisition of assets and assumption of liabilities related to Recothrom. In addition, to the extent we elect to exercise our option to purchase all of the outstanding equity of Annovation, following the completion of the proof of concept study for ABP-700 which we expect to be completed by the end of the first quarter of 2015, we will be obligated to pay an aggregate of approximately $35.3 million in cash to Annovation's equityholders, less the pro rata portion allocable to certain shares of Annovation's capital stock held by us, as well as up to $26.3 million upon achievement of certain clinical and regulatory milestones. We may also have to make contingent cash payments upon the achievement of specified development, regulatory or commercial milestones of up to: • $49.4 million due to the former equityholders of Targanta and up to $25.0 million in additional payments to other third parties for the Targanta transaction; • $205.0 million due to the former equityholders of Incline and up to $113.0 million in additional payments to other third parties for the Incline transaction; •$140.0 million for the ProFibrix transaction; •$334.0 million for the Rempex transaction; •$112.0 million for the Tenaxis transaction; •$180.0 million for the license and collaboration agreement with Alnylam; •$422.0 million due to our licensing of MDCO-216 from Pfizer Inc., or Pfizer; and • $54.5 million due to our licensing of cangrelor from AstraZeneca. Our total potential option and milestone payment obligations related to development, regulatory and commercial milestones for our products and products in development and our options to acquire assets or businesses under our license agreements and acquisition agreements, assuming all milestones are achieved in accordance with the terms of these agreements and that we choose to exercise our option to acquire Annovation, would be approximately $1,781.0 million. Of this amount, approximately $209.0 million relates to development milestones, $472.0 million relates to regulatory approval milestones, $980.0 million relates to commercial milestones and $120.0 million relates to the acquisition of assets and assumption of liabilities related to Recothrom and the potential acquisition of Annovation. Based on our earliest anticipated timeline for the achievement of development, regulatory and commercial milestones and for the acquisition of assets and assumption of liabilities related to Recothrom, but excluding the potential acquisition of Annovation and associated milestones, as to the next calendar year, we would expect to make total option and milestone payments under our license agreements and acquisition agreements of up to $380.0 million during 2015. The majority of our anticipated 2015 payments relate to the achievement of regulatory approval milestones for cangrelor, IONSYS, Raplixa, RPX-602 and PreveLeak during 2015, and the remainder of these payments relate to the achievement of development and commercial milestones for our other products in development and the acquisition, and potential acquisition, of assets and businesses during 2015. If we exercise our option to acquire Annovation, we expect that we will pay up to $35.3 million in connection with the exercise of our option during 2015. Our future capital requirements will depend on many factors, including: • the extent to which Angiomax is commercially successful globally; • our ability to maintain market exclusivity for Angiomax in the United States through the enforcement of the '727 patent and the '343 patent during the period following the expiration of the patent term of the '404 patent on December 15, 2014 and the six month pediatric exclusivity on June 15, 2015 through at least May 1, 2019, the date on which we agreed APP may sell a generic version of Angiomax. If we lose our appeal of the adverse court decision we received in our patent infringement litigation with Hospira or if Mylan prevails in an appeal of the court decision we received in our patent infringement litigation with Mylan, or if we receive an adverse decision in any other patent infringement litigation relating to the '727 patent or the '343 patent, Angiomax could be subject to generic competition prior to May 1, 2019, and possibly as early as June 15, 2015; 42--------------------------------------------------------------------------------• the extent to which our submissions and planned submissions for regulatory approval of products in development are approved on a timely basis, if at all; • the extent to which our products other than Angiomax and our products in development are commercially successful in the United States; • the extent to which our global collaboration with AstraZeneca, including our four-year co-promotion arrangement for BRILINTA in the United States, and our co-promotion agreement with BSX for its Promus PREMIER Stent System, are successful; • the extent to which we are successful in our efforts to commercialize our products and products in development, if and when approved, outside the United States; • the consideration paid by us and to be paid by us in connection with acquisitions and licenses of development-stage compounds, clinical-stage product candidates, approved products, or businesses, and in connection with other strategic arrangements; • the progress, level, timing and cost of our research and development activities related to our clinical trials and non-clinical studies with respect to Angiomax, Cleviprex, Orbactiv and our products in development; • the cost and outcomes of regulatory submissions and reviews for approval of our approved products in additional countries and for additional indications, and of our products in development globally; • whether we develop and commercialize our products in development on our own or through licenses and collaborations with third parties and the terms and timing of such arrangements, if any; • the continuation or termination of third-party manufacturing, distribution and sales and marketing arrangements; • the size, cost and effectiveness of our sales and marketing programs globally; • the amounts of our payment obligations to third parties as to our products and products in development; and • our ability to defend and enforce our intellectual property rights. We believe that our cash on hand and the cash we generate from our operations will be sufficient to meet our ongoing funding requirements, including our obligations with respect to the Notes and under the license agreements and other acquisition agreements to which we are a party, but excluding any future material acquisition activity, assuming we maintain market exclusivity for Angiomax in the United States through May 2019. If our existing cash resources, together with revenues that we generate from sales of our products and other sources, are insufficient to satisfy our funding requirements due to lower than anticipated sales of our marketed products, particularly if Angiomax becomes subject to generic competition earlier than May 1, 2019, or higher than anticipated costs globally, we likely will need to sell additional equity or debt securities or seek additional financing through other arrangements to increase our cash resources. Any sale of additional equity or debt securities may result in dilution to our stockholders. Debt financing may involve covenants limiting or restricting our ability to take specific actions, such as incurring additional debt or making capital expenditures. Moreover, our ability to obtain additional debt financing may be limited by the Notes, market conditions or otherwise. We cannot be certain that public or private financing will be available in amounts or on terms acceptable to us, if at all. Further, we may seek additional financing to fund our acquisitions of development stage compounds, clinical stage product candidates and approved products and/or the companies that have such products, and we may not be able to obtain such financing on terms acceptable to us or at all. If we seek to raise funds through collaboration or licensing arrangements with third parties, we may be required to relinquish rights to products, product candidates or technologies that we would not otherwise relinquish or grant licenses on terms that may not be favorable to us. If we are unable to obtain additional financing, we may be required to delay, reduce the scope of, or eliminate one or more of our planned research, development and commercialization activities, which could harm our financial condition and operating results. Certain Contingencies 43 -------------------------------------------------------------------------------- We may be, from time to time, a party to various disputes and claims arising from normal business activities. We accrue for loss contingencies when information available indicates that it is probable that a liability has been incurred and the amount of such loss can be reasonably estimated. Currently, we are party to the legal proceedings described in Part II, Item 1, Legal Proceedings, of this quarterly report on Form 10-Q, which include both patent litigation matters and class action litigation. We have assessed such legal proceedings and do not believe that it is probable that a liability has been incurred and the amount of such liability can be reasonably estimated. As a result, we have not recorded a loss contingency related to these legal proceedings. Contractual Obligations Our long-term contractual obligations include commitments and estimated purchase obligations entered into in the normal course of business. These include commitments related to royalties, milestone payments, option exercise and other contingent payments due under our license and acquisition agreements, purchases of inventory of our products, research and development service agreements, income tax contingencies, operating leases, selling, general and administrative obligations and increases to our restricted cash in connection with our lease of our principal office space in Parsippany, New Jersey as of September 30, 2014. In addition to the specified contractual obligations set forth in the contractual obligations table included in our annual report on Form 10-K for the year ended December 31, 2013, the following obligations were incurred during 2014: • Under the terms of our agreement with Tenaxis, we have agreed to pay to the Tenaxis equityholders milestone payments subsequent to the closing, if we achieve certain regulatory approval milestones and commercial net sales milestones with respect to PreveLeak, at the times and on the conditions set forth in the merger agreement. In the event that all of the milestones set forth in the merger agreement are achieved in accordance with the terms of the merger agreement, we will pay the Tenaxis equityholders up to an additional $112.0 million in cash in the aggregate. • On October 1, 2014, we entered into an agreement to lease 63,000 square feet of office space with ARE-SD Region No. 35, LLC, or ARE, for new office and laboratory space in San Diego for a term of 144 months. The agreement is for the build out of the space with a targeted commencement date in September of 2016. The lease will qualify for operating lease treatment with recorded rent expense from commencement date to expiration of $245,466 per month, with adjustments for customary triple-net lease operating expenses. • In addition to the October 1, 2014 operating lease with ARE described above, we entered into a separate operating lease with ARE for 30,936 square feet of office and laboratory space in San Diego to commence on January 1, 2015. The base rent for this operating lease will be for $64,000 per month, we will be responsible for customary triple-net lease operating expenses. The lease will expire on the 1st day of delivery of the 63,000 square feet facility. • As of September 30, 2014, we had inventory-related purchase commitments totaling $33.1 million in 2015 for Orbactiv bulk drug substance. There were no other material changes outside the ordinary course of business to the specified contractual obligations set forth in the contractual obligations table included in our annual report on Form 10-K for the year ended December 31, 2013. Application of Critical Accounting Estimates The discussion and analysis of our financial condition and results of operations is based on our unaudited consolidated financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles, or GAAP, for interim financial information and with the instructions to Form 10-Q. Accordingly, they do not include all the information and footnotes required by GAAP for complete financial statements. The preparation of these financial statements requires us to make estimates and judgments that affect our reported assets and liabilities, revenues and expenses, and other financial information. Actual results may differ significantly from these estimates under different assumptions and conditions. In addition, our reported financial condition and results of operations could vary due to a change in the application of a particular accounting standard. We regard an accounting estimate or assumption underlying our financial statements as a "critical accounting estimate" where: • the nature of the estimate or assumption is material due to the level of subjectivity and judgment necessary to account for highly uncertain matters or the susceptibility of such matters to change; and • the impact of the estimates and assumptions on financial condition or operating performance is material. 44-------------------------------------------------------------------------------- Our significant accounting policies are more fully described in note 2 of our unaudited consolidated financial statements in this quarterly report on Form 10-Q and note 2 of our consolidated financial statements in our annual report on Form 10-K for the year ended December 31, 2013. Not all of these significant accounting policies, however, require that we make estimates and assumptions that we believe are "critical accounting estimates." We have discussed our accounting policies with the audit committee of our board of directors, and we believe that our estimates relating to revenue recognition, inventory, share-based compensation, income taxes, in-process research and development, contingent purchase price from business combinations and impairment of long-lived asset described under the caption "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - Application of Critical Accounting Estimates" in our annual report on Form 10-K for the year ended December 31, 2013 are "critical accounting estimates." Please refer to note 2, "Significant Accounting Policies," in the accompanying notes to the condensed consolidated financial statements for a discussion on changes to certain accounting policies during the nine months ended September 30, 2014. Recent Accounting Pronouncements Refer to Note 2, "Significant Accounting Policies," in the accompanying notes to the condensed consolidated financial statements for a discussion of recent accounting pronouncements. There were no new accounting pronouncements adopted during the nine months ended September 30, 2014 that had a material effect on our financial statements. Forward-Looking Information This quarterly report on Form 10-Q includes forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act. For this purpose, any statements contained herein regarding our strategy, future operations, financial position, future revenue, projected costs, prospects, plans and objectives of management, other than statements of historical facts, are forward-looking statements. The words "anticipates," "believes," "estimates," "expects," "intends," "may," "plans," "projects," "will," "would" and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words. We cannot guarantee that we actually will achieve the plans, intentions or expectations expressed or implied in our forward-looking statements. There are a number of important factors that could cause actual results, levels of activity, performance or events to differ materially from those expressed or implied in the forward-looking statements we make. These important factors include our "critical accounting estimates" described in Part I, Item 2 of this quarterly report on Form 10-Q and the factors set forth under the caption "Risk Factors" in Part II, Item 1A of this quarterly report on Form 10-Q. Although we may elect to update forward-looking statements in the future, we specifically disclaim any obligation to do so, even if our estimates change, and readers should not rely on those forward-looking statements as representing our views as of any date subsequent to the date of this quarterly report on Form 10-Q. |