10-Q 1 c23861e10vq.htm 10-Q 10-Q
Table of Contents

 
 
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
     
þ   QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 2011
Or
     
o   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                      to                     
Commission file number 000-49839
Idenix Pharmaceuticals, Inc.
(Exact name of registrant as specified in its charter)
     
Delaware   45-0478605
(State or Other Jurisdiction of   (IRS Employer Identification No.)
Incorporation or Organization)    
     
60 Hampshire Street    
Cambridge, MA   02139
(Address of Principal Executive Offices)   (Zip Code)
Registrant’s telephone number, including area code: (617) 995-9800
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
             
Large accelerated filer: o   Accelerated filer: þ   Non-accelerated filer: o   Smaller reporting company: o
        (Do not check if a smaller reporting company)    
Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Exchange Act). Yes o No þ
As of October 24, 2011, the number of shares of the registrant’s common stock, par value $0.001 per share, outstanding was 96,153,387 shares.
 
 

 

 


 

         
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 Exhibit 31.1
 Exhibit 31.2
 Exhibit 32.1
 Exhibit 32.2
 EX-101 INSTANCE DOCUMENT
 EX-101 SCHEMA DOCUMENT
 EX-101 CALCULATION LINKBASE DOCUMENT
 EX-101 LABELS LINKBASE DOCUMENT
 EX-101 PRESENTATION LINKBASE DOCUMENT

 

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IDENIX PHARMACEUTICALS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
                 
    September 30,     December 31,  
    2011     2010  
 
               
ASSETS
Current assets:
               
Cash and cash equivalents
  $ 64,693     $ 46,115  
Restricted cash
    411       411  
Receivables from related party
    1,161       840  
Other current assets
    3,434       2,124  
 
           
Total current assets
    69,699       49,490  
Intangible asset, net
    8,992       9,843  
Property and equipment, net
    5,647       7,179  
Restricted cash
    750       750  
Other assets
    3,701       2,622  
 
           
Total assets
  $ 88,789     $ 69,884  
 
           
 
               
LIABILITIES AND STOCKHOLDERS’ DEFICIT
Current liabilities:
               
Accounts payable
  $ 1,680     $ 2,558  
Accrued expenses
    7,272       11,472  
Deferred revenue
    2,623       2,623  
Deferred revenue, related party
    3,040       3,036  
Other current liabilities
    481       305  
 
           
Total current liabilities
    15,096       19,994  
Other long-term liabilities
    11,286       12,058  
Deferred revenue, net of current portion
    38,373       40,340  
Deferred revenue, related party, net of current portion
    26,343       28,588  
 
           
Total liabilities
    91,098       100,980  
Commitments and contingencies (Note 10)
               
Stockholders’ deficit:
               
Common stock, $0.001 par value; 200,000,000 and 125,000,000 shares authorized at September 30, 2011 and December 31, 2010, respectively; 96,153,387 and 73,091,514 shares issued and outstanding at September 30, 2011 and December 31, 2010, respectively
    96       73  
Additional paid-in capital
    654,495       591,884  
Accumulated other comprehensive income
    690       683  
Accumulated deficit
    (657,590 )     (623,736 )
 
           
Total stockholders’ deficit
    (2,309 )     (31,096 )
 
           
Total liabilities and stockholders’ deficit
  $ 88,789     $ 69,884  
 
           
The accompanying notes are an integral part of these condensed consolidated financial statements.

 

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IDENIX PHARMACEUTICALS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
                 
    Three Months Ended September 30,  
    2011     2010  
 
               
Revenues:
               
Collaboration revenue — related party
  $ 1,982     $ 3,424  
Other revenue
    656       364  
 
           
Total revenues
    2,638       3,788  
Operating expenses:
               
Cost of revenues
    595       566  
Research and development
    10,190       11,637  
General and administrative
    3,900       4,440  
 
           
Total operating expenses
    14,685       16,643  
 
           
Loss from operations
    (12,047 )     (12,855 )
Other income (expense), net
    338       (76 )
 
           
Loss before income taxes
    (11,709 )     (12,931 )
Income tax benefit
          1  
 
           
Net loss
  $ (11,709 )   $ (12,930 )
 
           
 
               
Basic and diluted net loss per common share
  $ (0.12 )   $ (0.18 )
Shares used in computing basic and diluted net loss per common share
    96,133       72,934  
The accompanying notes are an integral part of these condensed consolidated financial statements.

 

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IDENIX PHARMACEUTICALS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
                 
    Nine Months Ended September 30,  
    2011     2010  
 
               
Revenues:
               
Collaboration revenue — related party
  $ 5,715     $ 6,366  
Other revenue
    1,967       1,421  
 
           
Total revenues
    7,682       7,787  
Operating expenses:
               
Cost of revenues
    1,731       1,800  
Research and development
    28,530       35,548  
General and administrative
    12,293       14,308  
Restructuring charges
          2,238  
 
           
Total operating expenses
    42,554       53,894  
 
           
Loss from operations
    (34,872 )     (46,107 )
Other income, net
    1,019       712  
 
           
Loss before income taxes
    (33,853 )     (45,395 )
Income tax expense
    (1 )     (3 )
 
           
Net loss
  $ (33,854 )   $ (45,398 )
 
           
 
               
Basic and diluted net loss per common share
  $ (0.39 )   $ (0.65 )
Shares used in computing basic and diluted net loss per common share
    87,414       69,941  
The accompanying notes are an integral part of these condensed consolidated financial statements.

 

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IDENIX PHARMACEUTICALS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
                 
    Nine Months Ended September 30,  
    2011     2010  
 
               
Cash flows from operating activities:
               
Net loss
  $ (33,854 )   $ (45,398 )
Adjustments to reconcile net loss to net cash used in operating activities:
               
Depreciation and amortization
    3,036       3,688  
Share-based compensation expense
    1,843       2,892  
Revenue adjustment for contingently issuable shares
    (17 )     199  
Other
    164       118  
Changes in operating assets and liabilities:
               
Receivables from related party
    (321 )     (20 )
Other assets
    (2,354 )     (986 )
Accounts payable
    (882 )     113  
Accrued expenses and other current liabilities
    (4,130 )     2,249  
Deferred revenue
    (1,967 )     5,111  
Deferred revenue, related party
    (2,343 )     (3,606 )
Other liabilities
    (780 )     (1,401 )
 
           
Net cash used in operating activities
    (41,605 )     (37,041 )
 
           
Cash flows from investing activities:
               
Purchases of property and equipment
    (752 )     (549 )
Sales of marketable security
          1,476  
 
           
Net cash provided by (used in) investing activities
    (752 )     927  
 
           
Cash flows from financing activities:
               
Proceeds from exercise of common stock options
    685       228  
Proceeds from issuance of common stock to related party
    5,056       99  
Proceeds from issuance of common stock, net of offering costs
    55,169       26,266  
 
           
Net cash provided by financing activities
    60,910       26,593  
Effect of changes in exchange rates on cash and cash equivalents
    25       22  
 
           
Net increase (decrease) in cash and cash equivalents
    18,578       (9,499 )
Cash and cash equivalents at beginning of period
    46,115       46,519  
 
           
Cash and cash equivalents at end of period
  $ 64,693     $ 37,020  
 
           
Supplemental disclosure of cash flow information:
               
Change in value of shares of common stock contingently issuable or issued to related party
  $ (120 )   $ 297  
The accompanying notes are an integral part of these condensed consolidated financial statements.

 

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IDENIX PHARMACEUTICALS, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BUSINESS OVERVIEW
Overview
Idenix Pharmaceuticals, Inc., which we refer to as Idenix, we, us or our, is a biopharmaceutical company engaged in the discovery and development of drugs for the treatment of human viral diseases with operations in the United States and Europe. Currently, our primary research and development focus is on the treatment of patients with hepatitis C virus, or HCV. In July 2011, we initiated enrollment of 100 HCV-infected patients into a 12-week phase IIb clinical trial of our most advanced drug candidate, IDX184, a nucleotide polymerase inhibitor. We will report an interim analysis from this study after the first 30 patients have completed 28 days of treatment. We have initiated dosing of the first 20 patients and are currently enrolling the remaining ten patients. There have been no safety signals to date. Based on the current rate of enrollment, we expect to complete one month dosing of the first 30 patients in December 2011.
In addition to our strategy of developing drugs for the treatment of HCV, we have also developed products and drug candidates for the treatment of patients with hepatitis B virus, or HBV, human immunodeficiency virus type-1, or HIV, and acquired immune deficiency syndrome, or AIDS. We successfully developed and received worldwide marketing approval for telbivudine (Tyzeka®/Sebivo®), a drug for the treatment of HBV that we licensed to Novartis Pharma AG, or Novartis. In 2007, we began receiving royalties from Novartis based on a percentage of net sales of Tyzeka®/Sebivo®. We also discovered and developed through proof-of-concept clinical testing IDX899, a drug candidate from the class of compounds known as non-nucleoside reverse transcriptase inhibitors, or NNRTIs, for the treatment of HIV/AIDS. We licensed our NNRTI compounds, including IDX899, now known as ‘761, to GlaxoSmithKline, or GSK, in February 2009. In October 2009, GSK assigned this license agreement to ViiV Healthcare Company, or ViiV, which is an affiliate of GSK. In February 2011, ViiV informed us that the U.S. Food and Drug Administration, or FDA, placed ‘761 on clinical hold. ViiV has full responsibility for the development of ‘761, including any regulatory interactions.
We are subject to risks common to companies in the biopharmaceutical industry including, but not limited to, the successful development of products, clinical trial uncertainty, regulatory approval, fluctuations in operating results and financial risks, potential need for additional funding, protection of proprietary technology and patent risks, compliance with government regulations, dependence on key personnel and collaboration partners, competition, technological and medical risks and management of growth.
We have incurred losses in each year since our inception and at September 30, 2011, we had an accumulated deficit of $657.6 million. We expect to incur losses over the next several years as we continue to expand our drug discovery and development efforts, specifically, our phase IIb clinical trial of IDX184 initiated in July 2011. As a result of continuing losses, we may seek additional funding through a combination of public or private financing, collaborative relationships or other arrangements and we may seek a partner who will assist in the future development and commercialization of IDX184. In October 2011, we filed a shelf registration statement with the Securities and Exchange Commission, or SEC, for an indeterminate amount of shares of common stock, up to the aggregate of $150.0 million, for future issuance. Any financing requiring the issuance of additional shares of capital stock must first be approved by Novartis so long as Novartis continues to own at least 19.4% of our voting stock. Additional funding may not be available to us or, if available, may not be on terms favorable to us. Further, any additional equity financing may be dilutive to stockholders, other than Novartis, which has the right to maintain its current ownership level. As of October 24, 2011, Novartis owned approximately 35% of our outstanding common stock.
We believe that our current cash, cash equivalents and the expected royalty payments associated with product sales of Tyzeka®/Sebivo® will be sufficient to sustain operations into at least the second quarter of 2012. If we are unable to obtain adequate financing on a timely basis, we could be required to delay, reduce or eliminate one or more of our drug development programs, enter into new collaborative, strategic alliances or licensing arrangements that may not be favorable to us and reduce the number of our employees. More generally, if we are unable to obtain adequate funding, we may be required to scale back, suspend or terminate our business operations.
Basis of Presentation
The condensed consolidated financial statements reflect the operations of Idenix Pharmaceuticals, Inc. and our wholly owned subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation.
The accompanying condensed consolidated financial statements are unaudited and have been prepared by us in accordance with generally accepted accounting principles in the United States of America, or GAAP, for interim reporting. Accordingly, these interim financial statements do not include all the information and footnotes required by GAAP for complete financial statements and should be read in conjunction with the audited consolidated financial statements for the year ended December 31, 2010, which are included in our Annual Report on Form 10-K filed with the SEC on March 7, 2011. These interim financial statements are unaudited, but in the opinion of management, reflect all adjustments (including normal recurring accruals) necessary for a fair statement of the financial position and results of operations for the interim periods presented. The year end consolidated balance sheet data presented for comparative purposes was derived from audited financial statements, but does not include all disclosures required by GAAP.

 

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IDENIX PHARMACEUTICALS, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED
(UNAUDITED)
The preparation of condensed consolidated financial statements in accordance with GAAP requires management to make estimates and judgments that may affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities. On an on-going basis, we evaluate our estimates, judgments and methodologies, including those related to revenue recognition, our collaborative relationships, clinical trial expenses, impairment and amortization of long-lived assets including intangible assets, share-based compensation, income taxes including the valuation allowance for deferred tax assets, contingencies, litigation and restructuring charges. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable, the results of which form the basis for making judgments about the carrying values of assets and liabilities. Actual results may differ from these estimates under different assumptions or conditions.
The results of operations for the interim periods are not necessarily indicative of the results of operations to be expected for any future period or the fiscal year ending December 31, 2011.
Recent Accounting Pronouncements
In June, 2011, the Financial Accounting Standards Board, or FASB, issued Accounting Standard Update No. 2011-5, Presentation of Comprehensive Income. The objective of this amendment is to improve the comparability, consistency and transparency of financial reporting and to increase the prominence of items reported in other comprehensive income. This guidance is effective for fiscal years beginning after December 15, 2011. We do not expect that this guidance will have any material effect on our consolidated financial statements.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Revenue Recognition
Revenue is recognized in accordance with SEC Staff Accounting Bulletin No. 101, Revenue Recognition in Financial Statements, or SAB No. 101, as amended by SEC Staff Accounting Bulletin No. 104, Revenue Recognition, and for revenue arrangements entered into after June 30, 2003, in accordance with the revenue recognition guidance of the FASB. For multiple-element revenue arrangements entered into or materially modified after January 1, 2011, we recognize revenue under Accounting Standard Update No. 2009-13, Multiple-Deliverable Revenue Arrangements, or ASU No. 2009-13. We record revenue provided that there is persuasive evidence that an arrangement exists, delivery has occurred or services have been rendered, the price is fixed or determinable and collectability is reasonably assured.
Our revenues are generated primarily through collaborative research, development and/or commercialization agreements. The terms of these agreements typically include payments to us for non-refundable license fees, milestones, collaborative research and development funding and royalties received from our collaboration partners.
Milestone Payments
Revenue is recognized for payments that are contingent upon the achievement of a milestone in its entirety, in the period in which the milestone is achieved, only if the milestone is substantive and meets all of the following criteria: a) performance consideration earned by achieving the milestone be commensurate with either performance to achieve the milestone or the enhancement of the value of the item delivered as a result of a specific outcome resulting from performance to achieve the milestone; b) it relates to past performance; and c) the payment is reasonable relative to all deliverables and payment terms in the arrangement.
Collaboration Revenue — Related Party
We entered into a collaboration with Novartis relating to the worldwide development and commercialization of our drug candidates in May 2003, which we refer to as the development and commercialization agreement. Under this arrangement, we have received non-refundable license fees, milestones, collaborative research and development funding and royalty payments. This arrangement has several joint committees in which we and Novartis participate. We participate in these committees as a means to govern or protect our interests. The committees span the period from early development of a drug candidate through commercialization of any drug candidate licensed by Novartis. As a result of applying the provisions of SAB No. 101, which was the applicable revenue guidance at the time the collaboration was entered into, our revenue recognition policy attributes revenue to the development period of the drug candidates licensed under the development and commercialization agreement. We have not attributed revenue to our involvement in the committees following the commercialization of the licensed products as we have determined that our participation on the committees, as such participation relates to the commercialization of drug candidates, is protective. Our determination is based in part on the fact that our expertise is, and has been, the discovery and development of drugs for the treatment of human viral diseases. Novartis, on the other hand, has the considerable commercialization expertise and infrastructure necessary for the commercialization of such drug candidates. Accordingly, we believe our obligation post commercialization is inconsequential.

 

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IDENIX PHARMACEUTICALS, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED
(UNAUDITED)
We recognize non-refundable payments over the performance period of our continuing obligations. This period is estimated based on current judgments related to the product development timeline of our licensed drug candidates and is currently estimated to be through May 2021. This policy is described more fully in Note 5.
Royalty revenue consists of revenue earned under our license agreement with Novartis for sales of Tyzeka®/Sebivo®, which is recognized when reported from Novartis. Royalty revenue is equal to a percentage of Tyzeka®/Sebivo® net sales, with such percentage increasing according to specified tiers of net sales. The royalty percentage varies based on the specified territory and the aggregate dollar amount of net sales.
Other Revenue
In February 2009, we entered into a license agreement with ViiV, which we refer to as the ViiV license agreement. Under the ViiV license agreement, we granted ViiV an exclusive worldwide license to develop, manufacture and commercialize our NNRTI compounds, including ‘761, for the treatment of human diseases, including HIV/AIDS. This agreement has performance obligations, including joint committee participation and ViiV’s right to license other NNRTI compounds that we may develop in the future, that we have assessed under the FASB guidance related to multiple element arrangements, prior to the implementation of ASU No. 2009-13. We concluded that this arrangement should be accounted for as a single unit of accounting and recognized using the contingency adjusted performance method. Under this agreement, we received a non-refundable license fee payment and milestone payments from ViiV. These milestone payments did not meet our revenue recognition criteria for immediate recognition. The non-refundable license fee payment and milestone payments received from ViiV were recorded as deferred revenue and are recognized as revenue over the life of the agreement, which is estimated to be 17 years. A cumulative catch-up was recognized for the period from the execution of the license agreement in March 2009 through the period in which the milestone payments were received. In February 2011, ViiV informed us that the FDA placed ‘761 on clinical hold. ViiV has full responsibility for the development of ‘761, including any regulatory interactions.
Cash and Cash Equivalents
We consider all highly liquid investments purchased with a maturity date of 90 days or less at the date of purchase to be cash equivalents.
In connection with certain of our operating lease commitments, we issued letters of credit collateralized by cash deposits that were classified as restricted cash on the condensed consolidated balance sheets. Restricted cash amounts have been classified as current or non-current based on the expected release date of the restrictions.
Fair Value Measurements
Our assets and liabilities that are measured at fair value on a recurring basis as of September 30, 2011 and December 31, 2010 are measured in accordance with FASB guidance. Fair values determined by Level 1 inputs utilize observable data such as quoted prices in active markets. Fair values determined by Level 2 inputs utilize data points other than quoted prices in active markets that are observable either directly or indirectly. Fair values determined by Level 3 inputs utilize unobservable data points in which there is little or no market data, which require the reporting entity to develop its own assumptions.
At September 30, 2011 and December 31, 2010, we had $47.7 million and $17.7 million, respectively, in money market funds that were classified as Level 2 fair value and included as part of cash and cash equivalents in our condensed consolidated balance sheets. There were no Level 3 assets held at fair value at September 30, 2011 or 2010. There were no gross unrealized gains or losses for the three and nine months ended September 30, 2011 or 2010.
Share-Based Compensation
We recognize share-based compensation for employees and directors using a fair value based method that results in expense being recognized in our condensed consolidated financial statements.

 

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IDENIX PHARMACEUTICALS, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED
(UNAUDITED)
3. NET LOSS PER COMMON SHARE
Basic net loss per common share is computed by dividing the net loss available to common stockholders by the weighted average number of common shares outstanding during the period. Diluted net loss per common share is computed by dividing the net loss available to common stockholders by the weighted average number of common shares and other potential common shares then outstanding. Potential common shares consist of common shares issuable upon the assumed exercise of outstanding stock options (using the treasury stock method), the assumed issuance of contingently issuable shares subject to Novartis’ stock subscription rights (Note 5) and restricted stock awards.
                                 
    Three Months Ended September 30,     Nine Months Ended September 30,  
    2011     2010     2011     2010  
    (In Thousands, Except     (In Thousands, Except  
    per Share Data)     per Share Data)  
Basic and diluted net loss per common share:
                               
Net loss
  $ (11,709 )   $ (12,930 )   $ (33,854 )   $ (45,398 )
Basic and diluted weighted average number of common shares outstanding
    96,133       72,934       87,414       69,941  
Basic and diluted net loss per common share
  $ (0.12 )   $ (0.18 )   $ (0.39 )   $ (0.65 )
The following potential common shares were excluded from the calculation of diluted net loss per common share because their effect was anti-dilutive:
                 
    Three and Nine Months Ended  
    September 30,  
    2011     2010  
    (In Thousands)  
 
               
Options
    7,804       6,430  
Contingently issuable shares to related party
    1,714       1,023  
 
           
 
    9,518       7,453  
 
           
In addition to the contingently issuable shares to related party listed in the table above, Novartis could be entitled to additional shares under its stock subscription rights which would be anti-dilutive in future periods based on our current stock price.
4. COMPREHENSIVE LOSS
For the three and nine months ended September 30, 2011 and 2010 comprehensive loss was as follows:
                                 
    Three Months Ended September 30,     Nine Months Ended September 30,  
    2011     2010     2011     2010  
    (In Thousands)     (In Thousands)  
 
                               
Net loss
  $ (11,709 )   $ (12,930 )   $ (33,854 )   $ (45,398 )
Changes in other comprehensive loss:
                               
Foreign currency translation adjustment
    (386 )     235       7       (184 )
 
                       
Total comprehensive loss
  $ (12,095 )   $ (12,695 )   $ (33,847 )   $ (45,582 )
 
                       
5. NOVARTIS RELATIONSHIP
Overview
In May 2003, we entered into a collaboration with Novartis relating to the worldwide development and commercialization of our drug candidates. In May 2003, Novartis also purchased approximately 54% of our common stock. Since this date, Novartis has had the ability to exercise control over our strategic direction, research and development activities and other material business decisions.

 

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IDENIX PHARMACEUTICALS, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED
(UNAUDITED)
Pursuant to the development and commercialization agreement, as amended, we have granted Novartis the option to license any of our development-stage drug candidates, so long as Novartis maintains at least 30% ownership of our common stock. Novartis may exercise this option generally after demonstration of activity and safety in a proof-of-concept clinical trial. If Novartis licenses a drug candidate, it is obligated to fund a portion of the development expenses that we incur in accordance with development plans agreed upon by us and Novartis. Under the development and commercialization agreement, we have granted Novartis an exclusive worldwide license to market and sell drug candidates that Novartis chooses to license from us. The commercialization rights under the development and commercialization agreement also include our right to co-promote or co-market all licensed products in the United States, United Kingdom, France, Germany, Italy and Spain. Under the development and commercialization agreement, we granted Novartis an exclusive worldwide license to market and sell telbivudine (Tyzeka®/Sebivo®), valtorcitabine and valopicitabine.
In 2003, Novartis licensed telbivudine from us under the development and commercialization agreement and we co-developed and co-launched Tyzeka®/Sebivo® for the treatment of HBV. In September 2007, we amended the development and commercialization agreement and we transferred to Novartis our worldwide development, commercialization and manufacturing rights and obligations pertaining to telbivudine in exchange for royalties based on net product sales of Tyzeka®/Sebivo® from Novartis. The royalty percentage increases according to specified tiers of net sales and the percentage varies based on specified territories and the aggregate dollar amounts of net sales. We recognized $1.2 million and $1.1 million as royalty revenue from Novartis’ sales of Tyzeka®/Sebivo® during the three months ended September 30, 2011 and 2010, respectively, and we recognized $3.4 million and $3.0 million as royalty revenue from Novartis’ sales of Tyzeka®/Sebivo® during the nine months ended September 30, 2011 and 2010, respectively. The receivables from related party balances of $1.2 million and $0.8 million at September 30, 2011 and December 31, 2010, respectively, consisted of royalties associated with product sales of Tyzeka®/Sebivo® from Novartis.
In October 2009, Novartis waived its right to license IDX184. As a result, we retain the worldwide rights to develop, commercialize and license IDX184. We may seek a partner that will assist in the future development and commercialization of this drug candidate.
To date, we have received $117.2 million of non-refundable payments from Novartis under the development and commercialization agreement that have been recorded as deferred revenue. The $117.2 million of deferred payments are being recognized over the development period of the licensed drug candidates, which represents the period of our continuing obligations. We estimate this period to be through May 2021 based on current judgments related to the product development timeline of our licensed drug candidates. We review our assessment and judgment on a quarterly basis with respect to the expected duration of the development period of our licensed drug candidates. If the estimated performance period changes, we will adjust the periodic revenue that is being recognized and will record the remaining unrecognized non-refundable payments over the remaining development period during which our performance obligations will be completed. Significant judgments and estimates are involved in determining the estimated development period and different assumptions could yield materially different results. Related to the deferred revenue, we recognized $0.8 million as revenue during each of the three months ended September 30, 2011 and 2010 and we recognized $2.3 million and $3.6 million as revenue during the nine months ended September 30, 2011 and 2010, respectively. These amounts are impacted by Novartis’ stock subscription rights described below.
As mentioned above, in addition to the collaboration, in May 2003, Novartis purchased approximately 54% of our outstanding common stock from our then existing stockholders. The stockholders received $255.0 million in cash from Novartis with an additional aggregate amount of up to $357.0 million contingently payable to these stockholders if we achieve predetermined development milestones relating to specific HCV drug candidates. As of October 24, 2011, Novartis owned approximately 35% of our outstanding common stock.
Stockholders’ Agreement
In connection with Novartis’ purchase of stock from our stockholders, we, Novartis and substantially all of our stockholders at that time entered into a stockholders’ agreement, which we refer to as the stockholders’ agreement. The stockholders’ agreement was amended and restated in 2004 in connection with our initial public offering of our common stock and amended in April 2011 in connection with a subsequent offering of our common stock. The stockholders’ agreement, as amended, provides, among other things, that we will use our reasonable best efforts to nominate for election as a director at least two designees of Novartis for so long as Novartis and its affiliates own at least 30% of our voting stock and that we will use our reasonable best efforts to nominate for election as a director at least one designee of Novartis for so long as Novartis and its affiliates own at least 19.4% of our voting stock. As long as Novartis and its affiliates continue to own at least 19.4% of our voting stock, Novartis will have approval rights over a number of corporate actions that we may take, including the authorization or issuance of additional shares of capital stock and significant acquisitions and dispositions.

 

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IDENIX PHARMACEUTICALS, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED
(UNAUDITED)
Novartis’ Stock Subscription Rights
Under our stock purchase agreement with Novartis, which we refer to as the stock purchase agreement, Novartis has the right to purchase, at par value of $0.001 per share, such number of shares as is required to maintain its percentage ownership of our voting stock if we issue shares of capital stock in connection with the acquisition or in-licensing of technology through the issuance of up to 5% of our stock in any 24-month period. These purchase rights of Novartis remain in effect until the earlier of: a) the date that Novartis and its affiliates own less than 19.4% of our voting stock; or b) the date that Novartis becomes obligated to make the additional contingent payments of $357.0 million to holders of our stock who sold shares to Novartis on May 8, 2003.
In addition to the right to purchase shares of our stock at par value as described above, if we issue any shares of our capital stock, other than in certain situations, Novartis has the right to purchase such number of shares required to maintain its percentage ownership of our voting stock for the same consideration per share paid by others acquiring our stock. Any financing requiring the issuance of additional shares of capital stock must first be approved by Novartis so long as Novartis continues to own at least 19.4% of our voting stock. In April 2010, we received approval from Novartis to issue capital shares pursuant to a financing under an existing shelf registration statement filed with the SEC in September 2008 so long as the issuance of shares did not reduce Novartis’ interest in Idenix below 40%. Pursuant to this shelf registration statement in April 2010, we issued approximately 6.5 million shares of our common stock pursuant to an underwritten offering and received $26.3 million in net proceeds. Novartis did not participate in this offering. In April 2011, we received approval from Novartis to issue capital shares and on April 13, 2011, we issued approximately 21.1 million shares of our common stock pursuant to this shelf registration statement and approximately 1.8 million shares of our common stock to Novartis pursuant to a private placement agreement. The net proceeds of both transactions were $60.2 million. Upon completion of this offering, we fully utilized the shelf registration statement. In conjunction with the issuance of common stock in April 2011, we amended the collaboration with Novartis to provide that: a) Novartis retains the exclusive option to obtain rights to drug candidates developed by us so long as Novartis maintains ownership of at least 30% of our common stock, rather than ownership of at least 40% as was the case prior to the amendment; b) we will use reasonable best efforts to nominate for election as directors at least two designees of Novartis so long as Novartis maintains ownership of at least 30% of our common stock, rather than ownership of at least 35% as was the case prior to the amendment; and c) Novartis’ consent is required for the selection and appointment of our chief financial officer so long as Novartis owns at least 30% of our common stock, rather than ownership of at least 40% as was the case prior to the amendment. As of October 24, 2011, Novartis owned approximately 35% of our outstanding common stock.
In connection with the closing of our initial public offering in July 2004, Novartis terminated a common stock subscription right with respect to approximately 1.4 million shares of common stock issuable by us as a result of the exercise of stock options granted after May 8, 2003 pursuant to the 1998 equity incentive plan. In exchange for Novartis’ termination of such right, we issued 1.1 million shares of common stock to Novartis for a purchase price of $0.001 per share. The fair value of these shares was determined to be $15.4 million at the time of issuance. As a result of the issuance of these shares, Novartis’ rights to purchase additional shares as a result of future option grants and stock issuances under the 1998 equity incentive plan were terminated and no additional adjustments to revenue and deferred revenue will be required. Prior to the termination of the stock subscription rights under the 1998 equity incentive plan, as we granted options that were subject to this stock subscription right, the fair value of our common stock that would be issuable to Novartis, less par value, was recorded as an adjustment of the non-refundable payments received from Novartis. We remain subject to potential revenue adjustments with respect to grants of options and stock awards under our stock incentive plans other than the 1998 equity incentive plan.
Upon the grant of options and stock awards under our stock incentive plans, with the exception of the 1998 equity incentive plan, the fair value of our common stock that would be issuable to Novartis, less the exercise price, if any is payable by the option or award holder, is recorded as a reduction of the non-refundable payments associated with the Novartis collaboration. The amount is attributed proportionately between cumulative revenue recognized through the current date and the remaining amount of deferred revenue. These amounts will be adjusted through the date that Novartis elects to purchase the shares to maintain its percentage ownership based upon changes in the value of our common stock and in Novartis’ percentage ownership.
As of September 30, 2011, the aggregate impact of Novartis’ stock subscription rights has reduced the non-refundable payments by $18.2 million, which has been recorded as additional paid-in capital. Of this amount, $4.5 million has been recorded as a reduction of deferred revenue with the remaining amount of $13.7 million recorded as a reduction of license fee revenue. For the three and nine months ended September 30, 2011, there was no cumulative significant impact of Novartis’ stock subscription rights to additional paid-in capital, deferred revenue or license fee revenue as the value of Novartis’ stock subscription rights at September 30, 2011 was comparable with the values at June 30, 2011 and December 31, 2010, respectively.
Manufacturing and Supply Agreement
Under the master manufacturing and supply agreement, dated May 8, 2003, with Novartis, which we refer to as the manufacturing and supply agreement, we appointed Novartis to manufacture or have manufactured the clinical supply of the active pharmaceutical ingredient, or API, for each drug candidate licensed under the development and commercialization agreement and certain other drug candidates. The cost of the clinical supply will be treated as a development expense, allocated between us and Novartis in accordance with the agreement. We have the ability to appoint Novartis or a third-party to manufacture the commercial supply of the API based on a competitive bid process in which Novartis has the right to match the best third-party bid. Novartis will perform the finishing and packaging of the API into the final form for sale.

 

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IDENIX PHARMACEUTICALS, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED
(UNAUDITED)
Product Sales Arrangement
In connection with the drug candidates that Novartis licenses from us, with the exception of Tyzeka®/Sebivo®, we have retained the right to co-promote or co-market all licensed products in the United States, United Kingdom, France, Germany, Italy and Spain. In the United States, we would act as the lead commercial party and record revenue from product sales and share equally the net benefit from co-promotion from the date of product launch. In the United Kingdom, France, Germany, Italy and Spain, Novartis would act as the lead commercial party, record revenue from product sales and would share with us the net benefit from co-promotion and co-marketing. The net benefit is defined as net product sales minus related cost of sales. The amount of the net benefit that would be shared with us would start at 15% for the first 12-month period following the date of launch, increasing to 30% for the second 12-month period following the date of launch and 50% thereafter. In other countries, we would effectively sell products to Novartis for their further sale to third-parties. Novartis would pay us for such products at a price that is determined under the terms of our manufacturing and supply agreement with Novartis and we would receive a royalty payment from Novartis on net product sales.
6. ViiV HEALTHCARE COMPANY AND GLAXOSMITHKLINE COLLABORATION
In February 2009, we entered into a license agreement which granted GSK an exclusive worldwide license to develop, manufacture and commercialize our NNRTI compounds, including ‘761, for the treatment of human diseases, including HIV/AIDS. We also entered into a stock purchase agreement with GSK in February 2009, which we refer to as the GSK stock purchase agreement. Under the GSK stock purchase agreement, GSK purchased approximately 2.5 million shares of our common stock at an aggregate purchase price of $17.0 million, or a per share price of $6.87. These agreements became effective in March 2009. In October 2009, GSK assigned this license agreement to ViiV, an affiliate of GSK.
In March 2009, we received $34.0 million related to this collaboration, which consisted of a $17.0 million license fee payment under the ViiV license agreement and $17.0 million under the GSK stock purchase agreement. In May 2010, we received a $6.5 million milestone payment related to the achievement of a preclinical operational milestone and in November 2010, we received a $20.0 million milestone payment for the initiation of a phase IIb clinical study related to the development of ‘761. These milestone payments did not meet our revenue recognition criteria for immediate recognition and are being recognized over the term of the agreement. Pursuant to the ViiV license agreement, we could also potentially receive up to $390.0 million in additional milestone payments as well as double-digit tiered royalties on worldwide product sales. The parties have agreed that if ViiV, its affiliates or its sublicensees desire to develop ‘761 for an indication other than HIV, or if ViiV intends to develop any other licensed compound for any indication, the parties will mutually agree on a separate schedule of milestone and royalty payments prior to the start of development.
The ViiV license agreement has performance obligations, including joint committee participation and ViiV’s right to license other NNRTI compounds that we may develop in the future, that we have assessed under the FASB guidance related to multiple element arrangements, prior to the implementation of ASU No. 2009-13. We concluded that this arrangement should be accounted for as a single unit of accounting and recognized using the contingency adjusted performance method. The $43.5 million payments from ViiV were recorded as deferred revenue and are being recognized as revenue over the life of the agreement, which is estimated to be 17 years. A cumulative catch-up was recognized for the period from the execution of the license agreement in March 2009 through the period in which milestone payments were received. We recognized $0.7 million and $0.4 million of collaboration revenue for the three months ended September 30, 2011 and 2010, respectively, and recognized $2.0 million and $1.4 million of collaboration revenue for the nine months ended September 30, 2011 and 2010, respectively. We recorded $36.7 million and $38.7 million of deferred revenue as of September 30, 2011 and December 31, 2010, respectively, related to payments received from ViiV.
In February 2011, ViiV informed us that the FDA placed ‘761 on clinical hold. ViiV has full responsibility for the development of ‘761, including any regulatory interactions.
7. INTANGIBLE ASSET, NET
Our intangible asset relates to a settlement agreement entered into by and among us along with our former chief executive officer in his individual capacity, the Universite Montpellier II, or the University of Montpellier, Le Centre National de la Recherche Scientifique, or CNRS, the Board of Trustees of the University of Alabama on behalf of the University of Alabama at Birmingham, or UAB, the University of Alabama at Birmingham Research Foundation, or UABRF, and Emory University as described more fully in Note 10. The settlement agreement, entered into in July 2008 and effective as of June 1, 2008, included a full release of all claims, contractual or otherwise, by the parties.

 

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IDENIX PHARMACEUTICALS, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED
(UNAUDITED)
Pursuant to the settlement agreement, we paid UABRF (on behalf of UAB and Emory University) a $4.0 million upfront payment and will make additional payments to UABRF equal to 20% of all royalty payments received by us from Novartis based on worldwide sales of telbivudine, subject to minimum payment obligations aggregating $11.0 million. We are amortizing $15.0 million related to this settlement payment to UAB and related entities over the life of the agreement, or August 2019.
The following table is a rollforward of our intangible asset as shown in our condensed consolidated balance sheets:
                 
    September 30,     December 31,  
    2011     2010  
    (In Thousands)  
 
               
Beginning balance
  $ 9,843     $ 11,069  
Amortization expense
    (851 )     (1,226 )
 
           
Ending balance
  $ 8,992     $ 9,843  
 
           
As of September 30, 2011 and December 31, 2010, accumulated amortization was $6.0 million and $5.2 million, respectively. Amortization expense for this asset is anticipated to be $1.1 million per year through September 30, 2016 and a total of $3.5 million thereafter through 2019, which is the term of the expected economic benefit of the asset.
8. ACCRUED EXPENSES
Accrued expenses consisted of the following:
                 
    September 30,     December 31,  
    2011     2010  
    (In Thousands)  
 
               
Research and development contract costs
  $ 1,668     $ 1,948  
Payroll and benefits
    2,730       3,232  
Professional fees
    647       797  
Short-term portion of accrued settlement payment
    856       1,086  
Severance payments
          2,297  
Other
    1,371       2,112  
 
           
 
  $ 7,272     $ 11,472  
 
           
On October 28, 2010, our former chief executive officer resigned from his positions as chairman of the board of directors, president and chief executive officer and received severance payments of approximately $2.3 million, which were paid as of June 30, 2011.
9. SHARE-BASED COMPENSATION
The following table shows share-based compensation expense as reflected in our condensed consolidated statements of operations:
                                 
    Three Months Ended September 30,     Nine Months Ended September 30,  
    2011     2010     2011     2010  
    (In Thousands)     (In Thousands)  
 
                               
Research and development
  $ 269     $ 308     $ 820     $ 942  
General and administrative
    345       646       1,023       1,950  
 
                       
Total share-based compensation expense
  $ 614     $ 954     $ 1,843     $ 2,892  
 
                       

 

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IDENIX PHARMACEUTICALS, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED
(UNAUDITED)
The table below illustrates the fair value per share and Black-Scholes option pricing model with the following assumptions used for grants issued during the three and nine months ended September 30, 2011 and 2010:
                                 
    Three Months Ended September 30,     Nine Months Ended Septemeber 30,  
    2011     2010     2011     2010  
 
                               
Weighted average fair value of options
  $ 2.62     $ 3.06     $ 2.15     $ 1.74  
Risk-free interest rate
    0.99 %     1.60 %     2.07 %     2.37 %
Expected dividend yield
                       
Expected option term (in years)
    5.20       5.14       5.20       5.14  
Expected volatility
    74.8 %     70.2 %     75.0 %     69.1 %
The expected option term and expected volatility were determined by examining the expected term and expected volatility of our stock.
The following table summarizes option activity under the equity incentive plans:
                 
            Weighted  
    Number of     Average Exercise  
    Shares     Price per Share  
Options outstanding at December 31, 2010
    7,031,736     $ 6.61  
Granted
    1,281,800     $ 3.42  
Cancelled
    (311,358 )   $ 6.39  
Exercised
    (198,666 )   $ 3.45  
 
             
Options outstanding at September 30, 2011
    7,803,512     $ 6.17  
 
             
Options exercisable at September 30, 2011
    5,886,662     $ 6.98  
We had an aggregate of $4.4 million of share-based compensation expense as of September 30, 2011 remaining to be amortized over a weighted average expected term of 2.66 years.
10. COMMITMENTS AND CONTINGENCIES
Product and Drug Candidates
In connection with the resolution of matters relating to certain of our HCV drug candidates, we entered into a settlement agreement in May 2004 with UAB which provides for a milestone payment of $1.0 million to UAB upon receipt of regulatory approval in the United States to market and sell certain HCV products invented or discovered by our former chief executive officer during the period from November 1, 1999 to November 1, 2000. This settlement agreement also provides that if such HCV products were approved and commercialized, we will pay UAB an amount equal to 0.5% of worldwide net sales of such HCV products with a minimum sales-based payment equal to $12.0 million. Currently, there are no such HCV products approved and therefore there was no related liability recorded as of September 30, 2011.
We have potential payment obligations under the license agreement with the Universita degli Studi di Cagliari, or the University of Cagliari, pursuant to which we have the exclusive worldwide right to make, use and sell certain HCV and HIV technologies. We made certain payments to the University of Cagliari under these arrangements based on the payments we received under the ViiV and GSK collaboration. We are also liable for certain payments to the University of Cagliari if we receive license fees or milestone payments with respect to such technology from Novartis, ViiV or another collaborator.
Pursuant to the license agreement between us and UAB, we were granted an exclusive license to the rights that UABRF, an affiliate of UAB, Emory University and CNRS have to a 1995 U.S. patent application and progeny thereof and counterpart patent applications in Europe, Canada, Japan and Australia that cover the use of certain synthetic nucleosides for the treatment of HBV. In July 2008, we entered into a settlement agreement with UAB, UABRF and Emory University relating to our telbivudine technology. Pursuant to this settlement agreement, all contractual disputes relating to patents covering the use of certain synthetic nucleosides for the treatment of HBV and all litigation matters relating to patents and patent applications related to the use of ß-L-2’-deoxy-nucleosides for the treatment of HBV assigned to one or more of Idenix, CNRS and the University of Montpellier and which cover the use of Tyzeka®/Sebivo® (telbivudine) for the treatment of HBV have been resolved. UAB also agreed to abandon certain continuation patent applications it filed in July 2005. Under the terms of the settlement agreement, we paid UABRF (on behalf of UAB and Emory University) a $4.0 million upfront payment and will make additional payments to UABRF equal to 20% of all royalty payments received by us from Novartis based on worldwide sales of telbivudine, subject to minimum payment obligations aggregating $11.0 million. Our payment obligations under the settlement agreement will expire in August 2019. The settlement agreement was effective on June 1, 2008 and included mutual releases of all claims and covenants not to sue among the parties. It also included a release from a third-party scientist who had claimed to have inventorship rights in certain Idenix/CNRS/University of Montpellier patents.

 

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IDENIX PHARMACEUTICALS, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED
(UNAUDITED)
In May 2003, we and Novartis entered into an amended and restated agreement with CNRS and the University of Montpellier pursuant to which we worked in collaboration with scientists from CNRS and the University of Montpellier to discover and develop technologies relating to antiviral substances, including telbivudine. This cooperative agreement expired in December 2006, but we retain rights to exploit the patents derived from the collaboration. Under the cooperative agreement, we are obligated to make royalty payments for products derived from such patents, including products for HBV, HCV, and HIV.
Legal Contingencies
In December 2001, we retained the services of Clariant (subsequently acquired by Archimica Group), a provider of manufacturing services in the specialty chemicals industry, in the form of a multi-project development and supply agreement. Under the terms of the agreement with Clariant, we would, on an “as needed” basis, utilize the Clariant process development and manufacture services in the development of certain of our drug candidates, including telbivudine. After reviewing respective bids from both Novartis and Clariant, the joint Idenix and Novartis manufacturing committee decided to proceed with Novartis as the primary manufacturer of telbivudine. In late 2007, we transferred full responsibility to Novartis for the development, commercialization and manufacturing of telbivudine. As a result, in January 2008, we exercised our right under the agreement with Clariant to terminate the agreement effective July 2008. In February 2008, Clariant asserted that they should have been able to participate in the manufacturing process for telbivudine as a non-primary supplier and as a result are due an unspecified amount. We do not agree with Clariant’s assertion. No estimate of a potential loss can be made and therefore we have not recorded a liability associated with this potential contingent matter. Clariant has not initiated legal proceedings. If legal proceedings are initiated, we intend to vigorously defend against such lawsuit.
We have been involved in a dispute with the City of Cambridge, Massachusetts and its License Commission pertaining to the level of noise emitted from certain rooftop equipment at our research facility located at 60 Hampshire Street in Cambridge. The License Commission has claimed that we are in violation of the local noise ordinance pertaining to sound emissions, based on a complaint from neighbors living adjacent to the property. We have contested this alleged violation before the License Commission, as well as the Middlesex County, Massachusetts, Superior Court. In July 2010, the License Commission granted us a special variance from the requirements of the local noise ordinance for a period of one-year, effective as of July 1, 2010. In August 2011, the License Commission granted an extension of the July 2010 variance until August 2012. We may, however, be required to cease certain activities at the building if: a) the noise emitted from certain rooftop equipment at our research facility exceeds the levels permitted by the special variance; b) the parties are unable to resolve this matter through negotiations and remedial action after August 2012; or c) a future legal challenge to the position of the City of Cambridge and the License Commission is unsuccessful. In any such event, we could be required to relocate to another facility which could interrupt some of our business activities and could be time consuming and costly. No estimate of a potential loss can be made and therefore we have not recorded a liability associated with this potential contingent matter.
Indemnification
We have agreed to indemnify Novartis and its affiliates against losses suffered as a result of any breach of representations and warranties in the development and commercialization agreement and the stock purchase agreement. Under the development and commercialization agreement and the stock purchase agreement, we made numerous representations and warranties to Novartis regarding our HBV and HCV drug candidates, including representations regarding our ownership of the inventions and discoveries described above. If one or more of the representations or warranties were not true at the time they were made to Novartis, we would be in breach of one or both of these agreements. In the event of a breach by us, Novartis has the right to seek indemnification from us and, under certain circumstances, us and our stockholders who sold shares to Novartis, which include some of our directors and officers, for damages suffered by Novartis as a result of such breach. While it is possible that we may be required to make payments pursuant to the indemnification obligations we have under the development and commercialization agreement and stock purchase agreement, we cannot reasonably estimate the amount of such payments or the likelihood that such payments would be required.
Under the ViiV license agreement and the GSK stock purchase agreement, we have agreed to indemnify ViiV, GSK and their respective affiliates against losses suffered as a result of our breach of representations and warranties in these agreements. We made numerous representations and warranties to both parties regarding our NNRTI program, including ‘761, as well as representations regarding our ownership of inventions and discoveries. If one or more of these representations or warranties were not true at the time we made them, we would be in breach of these agreements. In the event of a breach by us, the parties have the right to seek indemnification from us for damages suffered as a result of such breach. While it is possible that we may be required to make payments pursuant to the indemnification obligations we have under these agreements, we cannot reasonably estimate the amount of such payments or the likelihood that such payments would be required.

 

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ITEM 2.   Management’s Discussion and Analysis of Financial Condition and Results of Operations
This report contains “forward-looking statements” within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended. For this purpose, any statements contained herein regarding our strategy, future operations, financial position, future revenues, projected costs and expenses, prospects, plans and objectives of management, other than statements of historical facts, are forward-looking statements. The words “anticipate”, “believe”, “estimate”, “intend”, “may”, “plan”, “will”, “would” and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words. Such statements reflect our current views with respect to future events. Because these forward-looking statements involve known and unknown risks and uncertainties, actual results, performance or achievements could differ materially from those expressed or implied by these forward-looking statements for a number of important reasons, including those discussed under “Critical Accounting Policies and Estimates”, “Risk Factors”, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and elsewhere in this Quarterly Report on Form 10-Q. We cannot guarantee any future results, levels of activity, performance or achievements. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those described in this Form 10-Q as anticipated, believed, estimated or expected. The forward-looking statements contained in this Quarterly Report on Form 10-Q represent our estimates as of the date of this Quarterly Report on Form 10-Q (unless another date is indicated) and should not be relied upon as representing our expectations as of any other date. While we may elect to update these forward-looking statements, we specifically disclaim any obligation to do so.
Overview
Idenix Pharmaceuticals, Inc., which we reference together with our wholly owned subsidiaries as Idenix, we, us or our, is a biopharmaceutical company engaged in the discovery and development of drugs for the treatment of human viral diseases with operations in the United States and Europe. Currently, our primary research and development focus is on the treatment of patients with hepatitis C virus, or HCV. Our HCV discovery program is focused on multiple classes of drugs, which include nucleoside/nucleotide polymerase inhibitors and NS5A inhibitors. Our strategic goal is to develop all oral combinations of direct-acting antiviral, or DAA, drug candidates that should eliminate the need for interferon and/or ribavirin with the current treatment for HCV. Our objective is to develop low dose, once- or twice-daily agents with broad genotypic activity that have low potential for drug-drug interaction, high tolerability and are designed for use in multiple combination regimens. We will seek to build a combination development strategy, both internally and with partners, to advance the future of HCV treatments. We believe that nucleosides/nucleotides will have a significant role in a combination DAA strategy for the treatment of HCV and therefore we are currently concentrating a substantial amount of our discovery efforts on this class of drugs. We believe we have strong nucleoside/nucleotide scientific expertise within our organization and should be able to leverage our intellectual patent portfolio to develop additional novel nucleoside/nucleotide drug candidates.
In addition to our strategy of developing drugs for the treatment of HCV, we have also developed products and drug candidates for the treatment of patients with hepatitis B virus, or HBV, human immunodeficiency virus type-1, or HIV, and acquired immune deficiency syndrome, or AIDS. We successfully developed and received worldwide marketing approval for telbivudine (Tyzeka®/Sebivo®), a drug for the treatment of HBV that we licensed to Novartis Pharma AG, or Novartis. In 2007, we began receiving royalties from Novartis based on a percentage of net sales of Tyzeka®/Sebivo®. We also discovered and developed through proof-of-concept clinical testing IDX899, a drug candidate from the class of compounds known as non-nucleoside reverse transcriptase inhibitors, or NNRTIs, for the treatment of HIV/AIDS. We licensed our NNRTI compounds, including IDX899, now known as ‘761, to GlaxoSmithKline, or GSK, in February 2009. This agreement, which we refer to as the ViiV license agreement, was assigned to ViiV Healthcare Company, or ViiV, which is an affiliate of GSK. In February 2011, ViiV informed us that the U.S. Food and Drug Administration, or FDA, placed ‘761 on clinical hold. ViiV has full responsibility for the development of ‘761, including any regulatory interactions.
In September 2010, the FDA placed two of our HCV drug candidates, IDX184 and IDX320, on clinical hold. The hold was imposed due to three serious adverse events of elevated liver function tests that were detected during post drug exposure safety visits following a 14-day drug-drug interaction study of a combination of IDX184 and IDX320 in 20 healthy volunteers. We believe the hepatotoxicity observed in this drug-drug interaction study was caused by IDX320 and therefore discontinued the clinical development of this drug candidate. In February 2011, the full clinical hold on IDX184 was removed. The program was placed on partial clinical hold, which allows us to initiate a phase IIb 12-week clinical trial of IDX184 in combination with pegylated interferon and ribavirin, or Peg-IFN/RBV. In July 2011, we initiated enrollment of 100 HCV-infected patients into the phase IIb clinical trial of IDX184 and have begun dosing patients in this clinical trial.
The phase IIb clinical trial of IDX184 is double-blind and will include 100 treatment-naïve HCV genotype 1-infected patients. Fifty patients will be randomized to 50 mg of IDX184 and 50 patients to 100 mg of IDX184, each for 12 weeks in combination with Peg-IFN/RBV. Patients will receive an additional 12 or 36 weeks of Peg-IFN/RBV, depending on the virologic response. We will provide an interim analysis of the first 30 patients following 28 days of treatment to a data safety monitoring board, or DSMB, and to the FDA. Once the interim analysis of the 28 day data on the first 30 patients has been reviewed by the DSMB, we will dose the remaining patients in the trial. An additional interim analysis will be provided to the DSMB after 60 patients have been treated for 28 days.

 

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The following table summarizes key information regarding our pipeline of HCV drug candidates as well as Tyzeka®/Sebivo® and ‘761:
         
    Product/Drug    
Indication   Candidates/Programs   Description
 
       
HCV
  Nucleoside/Nucleotide
Polymerase Inhibitors
(IDX184)
  In the second quarter of 2011, we completed a one-month single dose bioavailability study in healthy volunteers of a tablet formulation of IDX184. Using the new formulation, in July of 2011, we initiated the phase IIb clinical trial of IDX184 in 100 HCV genotype 1-infected patients. We will report an interim analysis from this study after the first 30 patients have completed 28 days of treatment. We have initiated dosing of the first 20 patients and are currently enrolling the remaining ten patients. There have been no safety signals to date. Based on the current rate of enrollment, we expect to complete one month dosing of the first 30 patients in December 2011.
 
       
 
      Currently, our discovery efforts are concentrated on this class of drugs to develop additional novel nucleoside/nucleotide drug candidates. We have identified and are advancing in preclinical development additional highly potent nucleotide polymerase inhibitors, including purine and pyrimidine compounds. We are also pursuing several innovative prodrug approaches to preferentially deliver these agents to the liver.
 
       
 
  NS5A Inhibitors
(IDX719)
  We selected IDX719 as our lead candidate for our NS5A program. In preclinical studies, IDX719 has shown potent and broad genotypic activity. We anticipate submitting an investigational new drug, or IND, or a clinical trial application, or CTA, by year end 2011 and beginning clinical studies in early 2012.
 
       
 
  Protease Inhibitors
(IDX077 and IDX791)
  We have elected not to devote significant resources to the protease inhibitors discovery program at this time and have reallocated these resources to the discovery and development of additional nucleoside/nucleotide drug candidates. We will continue to evaluate potential partnerships and licensing agreements for these drug candidates and related intellectual property.
 
       
 
  Non-Nucleoside
Polymerase Inhibitor
(IDX375)
  In the first quarter of 2011, we completed a three-day proof-of-concept study of IDX375 in treatment-naïve genotype 1-infected patients. After three days of dosing with 100 mg, 200 mg and 400 mg of IDX375 administered twice a day, mean HCV viral load reductions were 1.3, 2.3 and 2.7 log10 IU/mL, respectively. We have elected not to continue clinical development of this drug candidate at this time and have reallocated these resources to the discovery and development of additional nucleoside/nucleotide drug candidates. We will continue to evaluate potential partnerships and licensing agreements for this drug candidate and related intellectual property.
 
       
HBV
  Tyzeka®/Sebivo® (telbivudine)
(L-nucleoside)
  Novartis has worldwide development, commercialization and manufacturing rights and obligations related to telbivudine (Tyzeka®/Sebivo®). We receive royalty payments equal to a percentage of net sales of Tyzeka®/Sebivo®.
 
       
HIV
  Non-Nucleoside Reverse Transcriptase Inhibitor
(‘761)
  In February 2009, we granted ViiV an exclusive worldwide license to develop, manufacture and commercialize ‘761. In the fourth quarter of 2010, ViiV initiated a phase IIb clinical study of ‘761 in HIV-infected patients. In February 2011, ViiV informed us that the FDA placed ‘761 on clinical hold. ViiV has full responsibility for the development of ‘761, including any regulatory interactions.
All of our drug candidates are currently in preclinical or clinical development. To commercialize any of our drug candidates, we will be required to obtain marketing authorization approvals after successfully completing preclinical studies and clinical trials of such drug candidates. Our current estimates for additional research and development expenses are subject to risks and uncertainties associated with research, development, clinical trials and the FDA and foreign regulatory review and approval processes. The time and cost to complete development of our drug candidates may vary significantly and depends upon a number of factors, including the requirements mandated by the FDA and other regulatory agencies, the success of our clinical trials, the availability of financial resources, and our collaborations, particularly with Novartis and its participation in the manufacturing and clinical development of our drug candidates.

 

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Novartis has the option to license our development-stage drug candidates after demonstration of activity and safety in a proof-of-concept clinical trial so long as Novartis maintains at least 30% ownership of our common stock pursuant to our development, license and commercialization agreement with Novartis, as amended, which we refer to as the development and commercialization agreement. If Novartis licenses any of our drug candidates, Novartis is obligated to fund development expenses that we incur in accordance with development plans agreed upon by us and Novartis. In October 2009, Novartis waived its option to license IDX184. As a result, we retain the worldwide rights to develop, manufacture, commercialize and license IDX184. We may seek a partner who will assist in the future development and commercialization of this drug candidate.
We have incurred significant losses each year since our inception in May 1998 and at September 30, 2011, we had an accumulated deficit of $657.6 million. Historically, we have generated losses principally from costs associated with research and development activities, including clinical trial costs, and general and administrative activities. As a result of planned expenditures for future discovery and development activities, we expect to incur additional losses for the foreseeable future. We believe that our current cash, cash equivalents and the expected royalty payments associated with product sales of Tyzeka®/Sebivo® will be sufficient to sustain operations into at least the second quarter of 2012.
Results of Operations
Comparison of Three Months Ended September 30, 2011 and 2010
Revenues
Revenues for the three months ended September 30, 2011 and 2010 were as follows:
                 
    Three Months Ended September 30,  
    2011     2010  
    (In Thousands)  
Collaboration revenue — related party:
               
License fee revenue
  $ 821     $ 2,355  
Royalty revenue
    1,161       1,069  
 
           
 
    1,982       3,424  
 
               
Other revenue:
               
Collaboration revenue
    656       354  
Government grants
          10  
 
           
Total revenues
  $ 2,638     $ 3,788  
 
           
Collaboration revenue — related party consisted of revenues associated with our collaboration with Novartis for the worldwide development and commercialization of our drug candidates. Collaboration revenue — related party was comprised of the following:
    license and other fees received from Novartis for the license of our HBV and HCV drug candidates, net of changes for Novartis’ stock subscription rights, which are being recognized over the development period of our licensed drug candidates; and
    royalty payments associated with product sales of Tyzeka®/Sebivo® made by Novartis.
Collaboration revenue — related party was $2.0 million in the three months ended September 30, 2011 compared to $3.4 million in the same period in 2010. The $1.4 million change was due to additional revenue recognized in 2010 related to the impact of Novartis’ stock subscription rights.
Payments received under the ViiV and GSK collaboration are classified as collaboration revenue under other revenue in our condensed consolidated statements of operations. Collaboration revenue was $0.7 million in the three months ended September 30, 2011 which was substantially unchanged as compared to the same period in 2010.
Cost of Revenues
Cost of revenues were $0.6 million in the three months ended September 30, 2011 which was substantially unchanged as compared to the same period in 2010.

 

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Research and Development Expenses
Research and development expenses were $10.2 million in the three months ended September 30, 2011 as compared to $11.6 million in the same period in 2010. The decrease of $1.4 million was primarily due to $3.3 million of lower expenses related to devoting fewer resources our protease inhibitor and non-nucleoside polymerase inhibitor programs in 2011 partially offset by a $1.8 million increase in expenses related to preclinical development of our NS5A drug candidates.
General and Administrative Expenses
General and administrative expenses were $3.9 million in the three months ended September 30, 2011 as compared to $4.4 million in the same period in 2010. The decrease of $0.5 million was mainly due to lower salaries and personnel related costs, primarily due to reduced headcount.
Other Income (Expense), Net
Other income, net was $0.3 million in the three months ended September 30, 2011 and was primarily comprised of research and development credits. This amount was substantially unchanged as compared to the same period in 2010.
Income Tax Benefit
There was no income tax benefit in the three months ended September 30, 2011 which was substantially unchanged as compared to the same period in 2010.
Comparison of Nine Months Ended September 30, 2011 and 2010
Revenues
Revenues for the nine months ended September 30, 2011 and 2010 were as follows:
                 
    Nine Months Ended September 30,  
    2011     2010  
    (In Thousands)  
Collaboration revenue — related party:
               
License fee revenue
  $ 2,361     $ 3,406  
Royalty revenue
    3,354       2,960  
 
           
 
    5,715       6,366  
 
               
Other revenue:
               
Collaboration revenue
    1,967       1,390  
Government grants
          31  
 
           
Total revenues
  $ 7,682     $ 7,787  
 
           
Collaboration revenue — related party was $5.7 million in the nine months ended September 30, 2011 as compared to $6.4 million in the same period in 2010. The $0.7 million change was primarily due to additional -revenue recognized in 2010 related to the impact of Novartis’ stock subscription rights.
Collaboration revenue recognized under the ViiV and GSK collaboration was $2.0 million in the nine months ended September 30, 2011 compared to $1.4 million in 2010. The increase of $0.6 million was due mainly to the recognition of additional revenue related to the $20.0 million milestone payment received in November 2010.
Cost of Revenues
Cost of revenues were $1.7 million in the nine months ended September 30, 2011 which was substantially unchanged as compared to the same period in 2010.
Research and Development Expenses
Research and development expenses were $28.5 million in the nine months ended September 30, 2011 as compared to $35.5 million in the same period in 2010. The decrease of $7.0 million was primarily due to $5.5 million of lower expenses related to devoting fewer resources to our protease inhibitor and non-nucleoside polymerase inhibitor programs in 2011. Additionally, expenses decreased $2.6 million related to the timing of clinical trials; in January 2010 we initiated a phase IIa clinical trial of IDX184, whereas in July 2011 we initiated a phase IIb clinical trial of IDX184. Salaries and personnel related costs decreased $0.8 million in 2011 compared to 2010, primarily due to reduced headcount, as well as a $0.6 million adjustment to the 2010 bonus liability, which was paid in 2011. Offsetting these amounts was an increase of $3.7 million related to the preclinical development of our NS5A drug candidates.

 

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We expect our research and development expenses for 2011 to be consistent with the amount incurred in 2010. We expect to incur additional expenses related to the ongoing phase IIb clinical trial for IDX184 offset by lower expenses related to devoting fewer resources to our protease inhibitor and non-nucleoside polymerase inhibitor programs in 2011. We may seek a partner that will assist in the further development and commercialization of IDX184, which would reduce future costs associated with IDX184.
We will continue to devote substantial resources to our research and development activities, expand our research pipeline and engage in future development activities as we continue to advance our drug candidates and explore collaborations with other entities that we believe will create shareholder value.
General and Administrative Expenses
General and administrative expenses were $12.3 million in the nine months ended September 30, 2011 as compared to $14.3 million in the same period in 2010. The decrease of $2.0 million was mainly due to $1.4 million of lower salaries and personnel related costs primarily due to reduced headcount, as well as a $0.3 million adjustment to the 2010 bonus liability, which was paid in 2011.
We expect general and administrative expenses in 2011 to be lower than expenses incurred in 2010 mainly due to the absence of the severance expense related to our former chief executive officer’s resignation.
Restructuring Charges
During the first quarter of 2010, we recorded charges of $2.2 million for employee severance costs related to reductions in the workforce in our United States and France facilities in connection with our ongoing cost saving initiatives. All significant severance amounts were paid in 2010.
Other Income, Net
Other income, net was $1.0 million in the nine months ended September 30, 2011 and was primarily comprised of research and development credits. This amount was substantially unchanged as compared to the same period in 2010.
Income Tax Expense
Income tax expense was less than $0.1 million in the nine months ended September 30, 2011 which was substantially unchanged as compared to the same period in 2010.
Liquidity and Capital Resources
Since our inception in 1998, we have financed our operations with proceeds obtained in connection with license and development arrangements and equity financings. The proceeds include:
    license, milestone, royalty and other payments from Novartis;
    license, milestone and stock purchase payments from ViiV and GSK;
    reimbursements from Novartis for costs we have incurred subsequent to May 8, 2003 in connection with the development of Tyzeka®/Sebivo®, valtorcitabine and valopicitabine;
    sales of Tyzeka® in the United States through September 30, 2007;
    net proceeds from Sumitomo Pharmaceuticals Co., Ltd., or Sumitomo, for reimbursement of development costs;
    net proceeds from private placements of our convertible preferred stock in 1998, 1999 and 2001;
    net proceeds from public or underwritten offerings in July 2004, October 2005, August 2009, April 2010 and April 2011;
    net proceeds from private placements of our common stock concurrent with our 2004, 2005 and 2011 public offerings; and
    proceeds from the exercise of stock options granted pursuant to our equity compensation plans.

 

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Any financing requiring the issuance of additional shares of capital stock must first be approved by Novartis for so long as Novartis continues to own at least 19.4% of our voting stock. In April 2010, we received approval from Novartis to issue capital shares pursuant to financing transactions under an existing shelf registration statement filed with the Securities and Exchange Commission, or SEC, in September 2008 so long as the issuance of shares did not reduce Novartis’ interest in Idenix below 40%. Pursuant to this shelf registration statement in April 2010, we issued approximately 6.5 million shares of our common stock pursuant to an underwritten offering and received $26.3 million in net proceeds. Novartis did not participate in this offering. In April 2011, we received approval from Novartis to issue capital shares and on April 13, 2011, we issued approximately 21.1 million shares of our common stock pursuant to this shelf registration statement and approximately 1.8 million shares of our common stock to Novartis pursuant to a private placement agreement. The net proceeds of both transactions were $60.2 million. Upon completion of this offering, we fully utilized the shelf registration statement.
We have incurred losses in each year since our inception and at September 30, 2011, we had an accumulated deficit of $657.6 million. We expect to incur losses over the next several years as we continue to expand our drug discovery and development efforts, specifically, our phase IIb clinical study of IDX184 initiated in July 2011. As a result, we may seek additional funding through a combination of public or private financing, collaborative relationships or other arrangements and we may seek a partner who will assist in the future development and commercialization of IDX184. In October 2011, we filed a shelf registration statement with the SEC for an indeterminate amount of shares of common stock, up to the aggregate of $150.0 million, for future issuance. As previously noted, any financing requiring the issuance of additional shares of capital stock must first be approved by Novartis so long as Novartis continues to own at least 19.4% of our voting stock. As of October 24, 2011, Novartis owned approximately 35% of our outstanding common stock. Additional funding may not be available to us or, if available, may not be on terms favorable to us. Further, any additional equity financing may be dilutive to stockholders, other than Novartis, which has the right to maintain its current ownership level.
We believe that our current cash, cash equivalents and the expected royalty payments associated with product sales of Tyzeka®/Sebivo® will be sufficient to sustain operations into at least the second quarter of 2012. If we are unable to obtain adequate financing on a timely basis, we could be required to delay, reduce or eliminate one or more of our drug development programs, enter into new collaborative, strategic alliances or licensing arrangements that may not be favorable to us and reduce the number of our employees. More generally, if we are unable to obtain adequate funding, we may be required to scale back, suspend or terminate our business operations.
We had total cash and cash equivalents of $64.7 million and $46.1 million as of September 30, 2011 and December 31, 2010, respectively. Our investment policy seeks to manage these assets to achieve our goals of preserving principal and maintaining adequate liquidity. As of September 30, 2011, all of our investments were in government agency and treasury money market instruments.
Net cash used in operating activities was $41.6 million and $37.0 million in the nine months ended September 30, 2011 and 2010, respectively. The $4.6 million net change was due to decreases in accrued expenses and the receipt of a milestone payment under the ViiV license agreement in 2010, offset by lower operating expenses incurred in 2011.
Net cash used in investing activities was $0.8 million and net cash provided by investing activities was $0.9 million in the nine months ended September 30, 2011 and 2010, respectively. The $1.7 million net change was primarily due to the sale of a marketable security in 2010.
Net cash provided by financing activities was $60.9 million and $26.6 million in the nine months ended September 30, 2011 and 2010, respectively. The increase of $34.3 million was primarily due to the receipt of proceeds from the underwritten offering in April 2011 of $60.2 million as compared to the underwritten offering in April 2010 of $26.3 million.
Contractual Obligations and Commitments
Set forth below is a description of our contractual obligations as of September 30, 2011:
                                         
    Payments Due by Period  
            Less Than                     After 5  
Contractual Obligations   Total     1 Year     1-3 Years     4-5 Years     Years  
    (In Thousands)  
 
                                       
Operating leases
  $ 8,506     $ 2,819     $ 3,908     $ 1,424     $ 355  
Settlement payments and other agreements
    1,860       1,230       446       184        
Long-term obligations
    7,857             538             7,319  
 
                             
Total contractual obligations
  $ 18,223     $ 4,049     $ 4,892     $ 1,608     $ 7,674  
 
                             

 

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Included in the table above is $8.4 million related to a settlement agreement we entered into in July 2008 with the University of Alabama at Birmingham, or UAB, the University of Alabama at Birmingham Research Foundation, or UABRF, an affiliate of UAB, and Emory University relating to our telbivudine technology. Pursuant to this settlement agreement, all contractual disputes relating to patents covering the use of certain synthetic nucleosides for the treatment of HBV and all litigation matters relating to patents and patent applications related to the use of ß-L-2’-deoxy-nucleosides for the treatment of HBV assigned to one or more of Idenix, Le Centre National de la Recherche Scientifique, or CNRS, and the Universite Montpellier II, or the University of Montpellier, and which cover the use of Tyzeka®/Sebivo® (telbivudine) for the treatment of HBV have been resolved. Under the terms of the settlement agreement, we paid UABRF (on behalf of UAB and Emory University) a $4.0 million upfront payment and will make additional payments to UABRF equal to 20% of all royalty payments received by us from Novartis based on worldwide sales of telbivudine, subject to minimum payment obligations aggregating $11.0 million. Our payment obligations under the settlement agreement will expire in August 2019. The settlement agreement was effective on June 1, 2008 and included mutual releases of all claims and covenants not to sue among the parties. It also included a release from a third-party scientist who had claimed to have inventorship rights in certain Idenix/CNRS/University of Montpellier patents.
In connection with certain of our operating leases, we have two letters of credit with a commercial bank totaling $1.2 million which expire at varying dates through December 31, 2013.
As of September 30, 2011, we had $3.1 million of long-term liabilities recorded. These liabilities and certain potential payment obligations relating to our HBV, HCV and HIV product and drug candidates that are described below are excluded from the contractual obligations table above as we cannot make a reliable estimate of the period in which the cash payments may be made.
In May 2004, we entered into a settlement agreement with UAB which provides for a milestone payment of $1.0 million to UAB upon receipt of regulatory approval in the United States to market and sell certain HCV products invented or discovered by our former chief executive officer during the period from November 1, 1999 to November 1, 2000. This settlement agreement also provides that if such HCV products were approved and commercialized, we will pay UAB an amount equal to 0.5% of worldwide net sales of such HCV products with a minimum sales-based payment equal to $12.0 million. Currently, there are no such HCV products approved and therefore there was no related liability recorded as of September 30, 2011.
We have potential payment obligations under the license agreement with the Universita degli Studi di Cagliari, or the University of Cagliari, pursuant to which we have the exclusive worldwide right to make, use and sell certain HCV and HIV technologies. We made certain payments to the University of Cagliari under these arrangements based on the payment we received under the ViiV and GSK collaboration. We are also liable for certain payments to the University of Cagliari if we receive license fees or milestone payments with respect to such technology from Novartis, ViiV or another collaborator.
In May 2003, we and Novartis entered into an amended and restated agreement with CNRS and the University of Montpellier pursuant to which we worked in collaboration with scientists from CNRS and the University of Montpellier to discover and develop technologies relating to antiviral substances, including telbivudine. This cooperative agreement expired in December 2006, but we retain rights to exploit the patents derived from the collaboration. Under the cooperative agreement, we are obligated to make royalty payments for products derived from such patents.
In March 2003, we entered into a final settlement agreement with Sumitomo, under which the rights to develop and commercialize telbivudine in Japan, China, South Korea and Taiwan previously granted to Sumitomo were returned to us. This settlement agreement provides for a $5.0 million milestone payment to Sumitomo if and when the first commercial sale of telbivudine occurs in Japan for the treatment of HBV. As part of the development and commercialization agreement, Novartis will reimburse us for any such payment made to Sumitomo.
In December 2001, we retained the services of Clariant (subsequently acquired by Archimica Group), a provider of manufacturing services in the specialty chemicals industry, in the form of a multiproject development and supply agreement. Under the terms of the agreement with Clariant, we would, on an “as needed” basis, utilize the Clariant process development and manufacture services in the development of certain of our drug candidates, including telbivudine. After reviewing respective bids from both Novartis and Clariant, the joint manufacturing committee decided to proceed with Novartis as the primary manufacturer of telbivudine. In late 2007, we transferred full responsibility to Novartis for the development, commercialization and manufacturing of telbivudine. As a result, in January 2008, we exercised our right under the agreement with Clariant to terminate effective July 2008. In February 2008, Clariant asserted that they should have been able to participate in the manufacturing process for telbivudine as a non-primary supplier and as a result are due an unspecified amount. We do not agree with Clariant’s assertion and therefore have not recorded a liability associated with this potential contingent matter. Clariant has not initiated legal proceedings. If legal proceedings are initiated, we intend to vigorously defend against such lawsuit.
Off-Balance Sheet Arrangements
We currently have no off-balance sheet arrangements.

 

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Critical Accounting Policies and Estimates
Our discussion and analysis of our financial condition and results of operations are based on our condensed consolidated financial statements, which have been prepared in accordance with generally accepted accounting principles in the United States of America. The preparation of the condensed consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. On an ongoing basis, we evaluate our estimates and judgments, including those related to revenue recognition, accrued expenses and share-based compensation. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
Our significant accounting policies are more fully described in Note 2 to our consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2010.
Recent Accounting Pronouncements
In June, 2011, the Financial Accounting Standards Board issued Accounting Standard Update No. 2011-5, Presentation of Comprehensive Income. The objective of this amendment is to improve the comparability, consistency and transparency of financial reporting and to increase the prominence of items reported in other comprehensive income. This guidance is effective for fiscal years beginning after December 15, 2011. We do not expect that this guidance will have any material effect on our consolidated financial statements.
Item 3.   Quantitative and Qualitative Disclosures About Market Risk
Interest Rate Risk
Changes in interest rates may impact our financial position, operating results or cash flows. The primary objective of our investment activities is to preserve capital while maintaining liquidity until it is required to fund operations. To minimize risk, we maintain our operating cash in commercial bank accounts. We invest our cash in high quality financial instruments, primarily government agency and treasury money market instruments. Due to the conservative nature of these instruments, we do not believe that we have a material exposure to interest rate risk.
Foreign Currency Exchange Rate Risk
Our foreign currency transactions include agreements denominated, wholly or partly, in foreign currencies, European subsidiaries that are denominated in foreign currencies and royalties earned based on worldwide product sales of Sebivo® by Novartis. As a result of these foreign currency transactions, our financial position, results of operations and cash flows can be affected by market fluctuations in foreign currency exchange rates. We have not entered into any derivative financial instruments to reduce the risk of fluctuations in currency exchange rates.
Item 4.   Controls and Procedures
Disclosure Controls and Procedures
We have conducted an evaluation under the supervision and with the participation of our management, including our chief executive officer and chief financial officer (our principal executive officer and principal financial officer, respectively), regarding the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, or the Exchange Act) as of the end of the period covered by this report. Based on such evaluation, our chief executive officer and chief financial officer concluded that, as of September 30, 2011, our disclosure controls and procedures are effective.
Changes in Internal Control over Financial Reporting
There was no change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the quarter ended September 30, 2011 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
PART II. OTHER INFORMATION
Item 1.   Legal Proceedings
See Part I, Item 3 of our Annual Report on Form 10-K for the year ended December 31, 2010 and Note 10 of this quarterly report for discussions of our legal proceedings.

 

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Item 1A.   Risk Factors
Our business faces many risks. The risks described below may not be the only risks we face. Additional risks we do not yet know of or which we currently believe are immaterial may also impair our business operations. If any of the events or circumstances described in the following risks actually occurs, our business, financial condition or results of operations could suffer and the trading price of our common stock could decline. The following risks should be considered, together with all of the other information in our Annual Report on Form 10-K for the year ended December 31, 2010, before deciding to invest in our securities.
Factors Related to Our Business
The FDA placed one of our drug candidates, IDX184, on partial clinical hold and our business may be adversely affected if we are not able to continue to pursue development of IDX184 or if we are significantly delayed in developing IDX184.
Our primary research and development focus is the treatment of patients with HCV. Our most advanced compound under development is IDX184, a nucleotide polymerase inhibitor. Our other drug candidates for the treatment of HCV are in preclinical and early clinical stages of development. In the third quarter of 2010, we completed a dose-ranging phase IIa trial evaluating IDX184 in combination with Peg-IFN/RBV. Following a 14-day drug-drug interaction study of a combination of IDX184 and IDX320 in healthy volunteers, in September 2010, the FDA placed IDX184 and IDX320 on clinical hold due to three serious adverse events of elevated liver function tests that were detected during post drug exposure safety visits. We believe the hepatotoxicity observed in this drug-drug interaction study was caused by IDX320 and therefore discontinued the clinical development of this drug candidate. In February 2011, the full clinical hold on IDX184 was removed. The program was placed on partial clinical hold, which allows us to initiate a phase IIb 12-week clinical trial of IDX184 in combination with Peg-IFN/RBV with safety evaluations of the patients that will be shared with the FDA at certain intervals in the trial. We initiated this clinical trial in July 2011, however, if we are not able to continue development of IDX184, or if our progress in development of IDX184 is slowed significantly due to the partial clinical hold, our business may be adversely affected.
Our product candidates may exhibit undesirable side effects when used alone or in combination with other approved pharmaceutical products or investigational agents, which may delay or preclude their further development or regulatory approval, or limit their use if approved.
Throughout the drug development process, we must continually demonstrate the safety and tolerability of our product candidates in order to obtain regulatory approval to advance their clinical development or to market them. Even if our product candidates demonstrate biologic activity and clinical efficacy, any unacceptable adverse side effects or toxicities, when administered alone or in the presence of other pharmaceutical products or investigational agents, which can arise at any stage of development, may outweigh their potential benefit. For instance, in September 2010, two of our drug candidates, IDX184 and IDX320, were placed on clinical hold by the FDA due to three serious adverse events of elevated liver function tests that were detected during post drug exposure safety visits following a 14-day drug-drug interaction study of a combination of IDX184 and IDX320 in healthy volunteers. In future preclinical studies and clinical trials our product candidates may demonstrate unacceptable safety profiles or unacceptable drug-drug interactions, which could result in the delay or termination of their development, prevent regulatory approval or limit their market acceptance if they are ultimately approved.
We have a limited operating history and have incurred a cumulative loss since inception. If we do not generate significant revenues, we will not be profitable.
We have incurred significant losses each year since our inception in May 1998. Telbivudine (Tyzeka®/Sebivo®), our only product to reach commercialization, is marketed by Novartis, and we receive royalty payments associated with sales of this product. We have generated limited revenue from the sales of Tyzeka®/Sebivo® to date. Due to our limited Tyzeka®/Sebivo® sales history, there is risk in determining the potential future revenue associated with potential sales of this product or any other product that reaches commercialization. We will not be able to generate additional revenues from other product sales until we successfully complete clinical development and receive regulatory approval for one of our other drug candidates, and we or a collaboration partner successfully introduce such product commercially. We expect to incur annual operating losses over the next several years as we continue to expand our drug discovery and development efforts. We also expect that the net loss we will incur will fluctuate from quarter to quarter and such fluctuations may be substantial. To generate product revenue, regulatory approval for products we successfully develop must be obtained and we and/or one of our existing or future collaboration partners must effectively manufacture, market and sell such products. Even if we successfully commercialize drug candidates that receive regulatory approval, we may not be able to realize revenues at a level that would allow us to achieve or sustain profitability. Accordingly, we may never generate significant revenue and, even if we do generate significant revenue, we may never achieve profitability.
We will need additional capital to fund our operations, including the development, manufacture and potential commercialization of our drug candidates. If we do not have or cannot raise additional capital when needed, we will be unable to develop and ultimately commercialize our drug candidates successfully.
Our cash and cash equivalents balance was $64.7 million at September 30, 2011. We believe that in addition to this balance the anticipated royalty payments associated with product sales of Tyzeka®/Sebivo® will be sufficient to sustain operations into at least the second quarter of 2012. Our drug development programs and the potential commercialization of our drug candidates will require substantial cash to fund expenses that we will incur in connection with preclinical studies and clinical trials, regulatory review and future manufacturing and sales and marketing efforts.

 

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Our need for additional funding will depend in part on whether:
    with respect to ‘761, ViiV is able to continue clinical development of this drug candidate, following the clinical hold imposed by the FDA in February 2011, such that we receive certain future clinical development milestone payments;
 
    with respect to our other drug candidates, Novartis exercises its option to license any such drug candidates, and we receive related license fees, milestone payments and development expense reimbursement payments from Novartis; with respect to any of our drug candidates not licensed by Novartis, we receive related license fees, milestone payments and development expense reimbursement payments from third-parties;
 
    with respect to Tyzeka®/Sebivo®, whether the level of royalty payments received from Novartis is significant; and
 
    the terms of a development and commercialization agreement, if any, that we enter into with respect to our drug candidate, IDX184, for the treatment of HCV.
In addition, although Novartis has agreed to pay for certain development expenses incurred under development plans it approves for products and drug candidates that it has licensed from us, Novartis has the right to terminate its license and the related funding obligations with respect to any such product or drug candidate by providing us with six months written notice. Furthermore, ViiV has the right to terminate the ViiV license agreement by providing us with 90 days written notice.
Our future capital needs will also depend generally on many other factors, including:
    the amount of revenue that we may be able to realize from commercialization and sale of drug candidates, if any, which are approved by regulatory authorities;
 
    the scope and results of our preclinical studies and clinical trials;
 
    the progress of our current preclinical and clinical development programs for HCV;
 
    the cost of obtaining, maintaining and defending patents on our drug candidates and our processes;
 
    the cost, timing and outcome of regulatory reviews;
 
    any costs associated with changes in rules and regulations promulgated by the FDA related to the drug development process and/or clinical trials, including but not limited to increased costs associated with the evolving standard of care treatment regimens;
 
    the commercial potential of our drug candidates;
 
    the rate of technological advances in our markets;
 
    the cost of acquiring or in-licensing new discovery compounds, technologies, drug candidates or other business assets;
 
    the magnitude of our general and administrative expenses;
 
    any costs related to litigation in which we may be involved or related to any claims made against us;
 
    any costs we may incur under current and future licensing arrangements; and
 
    the costs of commercializing and launching other products, if any, which are successfully developed and approved for commercial sale by regulatory authorities.
We expect that we will incur significant costs to complete the clinical trials and other studies required to enable us to submit regulatory applications with the FDA and/or the European Medicines Agency, or EMEA, for our drug candidates as we continue development of each of our drug candidates. The time and cost to complete clinical development of our drug candidates may vary as a result of a number of factors.

 

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We may seek additional capital through a combination of public and private equity offerings, debt financings and collaborative, strategic alliance and licensing arrangements. Such additional financing may not be available when we need it or may not be available on terms that are favorable to us. In October 2011, we filed a shelf registration statement with the SEC for an indeterminate amount of shares of common stock, up to the aggregate of $150.0 million, for future issuance. Any financing requiring the issuance of additional shares of capital stock must first be approved by Novartis so long as Novartis continues to own at least 19.4% of our voting stock. As of October 24, 2011, Novartis owned approximately 35% of our outstanding common stock.
If we raise additional capital through the sale of our common stock, existing stockholders, other than Novartis, which has the right to maintain a certain level of ownership, will experience dilution of their current level of ownership of our common stock and the terms of the financing may adversely affect the holdings or rights of our stockholders. If we are unable to obtain adequate financing on a timely basis, we could be required to delay, reduce or eliminate one or more of our drug development programs or to enter into new collaborative, strategic alliances or licensing arrangements that may not be favorable to us. More generally, if we are unable to obtain adequate funding, we may be required to scale back, suspend or terminate our business operations.
Our research and development efforts may not result in additional drug candidates being discovered on anticipated timelines, which could limit our ability to generate revenues.
Some of our research and development programs are at preclinical stages. Additional drug candidates that we may develop or acquire will require significant research, development, preclinical studies and clinical trials, regulatory approval and commitment of resources before any commercialization may occur. We cannot predict whether our research will lead to the discovery of any additional drug candidates that could generate revenues for us.
Our failure to successfully acquire or develop and market additional drug candidates or approved drugs would impair our ability to grow.
As part of our strategy, we intend to establish a franchise in the HCV market by developing multiple drug candidates for this therapeutic indication. The success of this strategy depends upon the development and commercialization of additional drug candidates that we successfully discover, license or otherwise acquire. In September 2010, the FDA placed two of our HCV drug candidates, IDX184 and IDX320, on clinical hold. The hold was imposed due to three serious adverse events of elevated liver function tests that were detected during post drug exposure safety visits following a 14-day drug-drug interaction study of a combination of IDX184 and IDX320 in healthy volunteers. We believe the hepatotoxicity observed in this drug-drug interaction study was caused by IDX320 and therefore discontinued the clinical development of this drug candidate. In February 2011, the full clinical hold on IDX184 was removed by the FDA and the program was placed on partial clinical hold.
Drug candidates we discover, license or acquire will require additional and likely substantial development, including extensive clinical testing and approval by the FDA and applicable foreign regulatory authorities. All drug candidates are prone to the risks of failure which are inherent in pharmaceutical drug development, including the possibility that the drug candidate will not be shown to be sufficiently safe and effective for approval by regulatory authorities.
Proposing, negotiating and implementing the acquisition or in-license of drug candidates may be a lengthy and complex process. Other companies, including those with substantially greater financial, marketing and sales resources, may compete with us for the acquisition of drug candidates. We may not be able to acquire the rights to additional drug candidates on terms that we find acceptable.
Our investments are subject to general credit, liquidity, market and interest rate risks.
As of September 30, 2011, all of our cash and cash equivalents were invested in government agency and treasury money market instruments. Our investment policy seeks to manage these assets to achieve our goals of preserving principal and maintaining adequate liquidity. Should our investments cease paying or reduce the amount of interest paid to us, our interest income would suffer. In addition, general credit, liquidity, market and interest risks associated with our investment portfolio may have an adverse effect on our financial condition.
The commercial markets which we intend to enter are subject to intense competition. If we are unable to compete effectively, our drug candidates may be rendered noncompetitive or obsolete.
We are engaged in segments of the pharmaceutical industry that are highly competitive and rapidly changing. Many large pharmaceutical and biotechnology companies, academic institutions, governmental agencies and other public and private research organizations are commercializing or pursuing the development of products that target viral diseases, including the same diseases we are targeting.

 

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We face intense competition from existing products and we expect to face increasing competition as new products enter the market and advanced technologies become available. For the treatment of HBV, we are aware of six other drug products, specifically, lamivudine, entecavir, adefovir dipivoxil, tenofovir, pegylated interferon and interferon alpha, which are approved by the FDA and commercially available in the United States or in foreign jurisdictions. Five of these products have preceded Tyzeka®/Sebivo® into the marketplace and have gained acceptance with physicians and patients. For the treatment of HIV, there are approximately 25 antiviral therapies currently approved for commercial sale in the United States. For the treatment of HCV, pegylated interferon in combination with ribavirin are approved by the FDA for commercial sale. Two drug products, Incivek (telaprevir) and Victrelis (boceprevir), were recently approved by the FDA for the treatment of HCV in combination with Peg-IFN/RBV. Increased costs associated with the evolving standard of care treatment regimens and the cure rates of patients using either one of these approved drugs and future approved combinations of DAAs may be such that our development and discovery efforts in the area of HCV may be rendered noncompetitive.
We believe that a significant number of drug candidates that are currently under development may become available in the future for the treatment of HBV, HCV and HIV. Our competitors’ products may be more effective, have fewer side effects, have lower costs or be better marketed and sold than any of our products. Additionally, products that our competitors successfully develop for the treatment of HCV and HIV may be marketed prior to any HCV or HIV product we or our collaboration partners successfully develop. Many of our competitors have:
    significantly greater financial, technical and human resources than we have and may be better equipped to discover, develop, manufacture and commercialize products;
 
    more extensive experience in conducting preclinical studies and clinical trials, obtaining regulatory approvals and manufacturing and marketing pharmaceutical products;
 
    products that have been approved or drug candidates that are in late-stage development; and
 
    collaborative arrangements in our target markets with leading companies and research institutions.
Novartis and ViiV have the right to market and sell products that compete with the drug candidates and products that we license to them and any competition by Novartis or ViiV could have a material adverse effect on our business.
Competitive products may render our products obsolete or noncompetitive before we can recover the expenses of developing and commercializing our drug candidates. Furthermore, the development of new treatment methods and/or the widespread adoption or increased utilization of vaccines for the diseases we are targeting could render our drug candidates noncompetitive, obsolete or uneconomical.
With respect to Tyzeka®/Sebivo® and other products, if any, we may successfully develop and obtain approval to commercialize, we will face competition based on the safety and effectiveness of our products, the timing and scope of regulatory approvals, the availability and cost of supply, marketing and sales capabilities, reimbursement coverage, price, patent position and other factors. Our competitors may develop or commercialize more effective or more affordable products or obtain more effective patent protection than we do. Accordingly, our competitors may commercialize products more rapidly or effectively than we do, which could adversely affect our competitive position and business.
Biotechnology and related pharmaceutical technologies have undergone and continue to be subject to rapid and significant change. Our future will depend in large part on our ability to maintain a competitive position with respect to these technologies.
If we are not able to attract and retain key management and scientific personnel and advisors, we may not successfully develop our drug candidates or achieve our other business objectives.
The growth of our business and our success depends in large part on our ability to attract and retain key management and research and development personnel. Our key personnel include our senior officers, many of whom have very specialized scientific, medical or operational knowledge. The loss of the service of any of the key members of our senior management team may significantly delay or prevent our discovery of additional drug candidates, the development of our drug candidates and achievement of our other business objectives. Our ability to attract and retain qualified personnel, consultants and advisors is critical to our success.
We face intense competition for qualified individuals from numerous pharmaceutical and biotechnology companies, academic institutions, governmental entities and other research institutions. We may be unable to attract and retain these individuals and our failure to do so would have an adverse effect on our business.
Our business has a substantial risk of product liability claims. If we are unable to obtain or maintain appropriate levels of insurance, a product liability claim against us could adversely affect our business.
Our business exposes us to significant potential product liability risks that are inherent in the development, manufacturing and marketing of human therapeutic products. Product liability claims could result in a recall of products or a change in the therapeutic indications for which such products may be used. In addition, product liability claims may distract our management and key personnel from our core business, require us to spend significant time and money in litigation or to pay significant damages, which could prevent or interfere with commercialization efforts and could adversely affect our business. Claims of this nature would also adversely affect our reputation, which could damage our position in the marketplace.

 

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For Tyzeka®/Sebivo®, product liability claims could be made against us based on the use of our product prior to October 1, 2007, at which time we transferred to Novartis our worldwide development, commercialization and manufacturing rights and obligations related to Tyzeka®/Sebivo® in exchange for royalty payments equal to a percentage of net sales. For Tyzeka®/Sebivo® and our drug candidates, product liability claims could be made against us based on the use of our drug candidates in clinical trials. We have obtained product liability insurance for Tyzeka®/Sebivo® and maintain clinical trial insurance for our drug candidates in development. Such insurance may not provide adequate coverage against potential liabilities. In addition, clinical trial and product liability insurance is becoming increasingly expensive. As a result, we may be unable to maintain or increase current amounts of product liability and clinical trial insurance coverage, obtain product liability insurance for other products, if any, that we seek to commercialize, obtain additional clinical trial insurance or obtain sufficient insurance at a reasonable cost. If we are unable to obtain or maintain sufficient insurance coverage on reasonable terms or to otherwise protect against potential product liability claims, we may be unable to commercialize our products or conduct the clinical trials necessary to develop our drug candidates. A successful product liability claim brought against us in excess of our insurance coverage may require us to pay substantial amounts in damages. This could adversely affect our cash position and results of operations.
Our insurance policies are expensive and protect us only from some business risks, which will leave us exposed to significant, uninsured liabilities.
We do not carry insurance for all categories of risk that our business may encounter. We currently maintain general liability, property, workers’ compensation, products liability, directors’ and officers’ and employment practices insurance policies. We do not know, however, if we will be able to maintain existing insurance with adequate levels of coverage. Any significant uninsured liability may require us to pay substantial amounts, which would adversely affect our cash position and results of operations.
If the estimates we make, and the assumptions on which we rely, in preparing our financial statements prove inaccurate, our actual results may vary from those reflected in our projections and accruals.
Our financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of our assets, liabilities, revenues and expenses, the amounts of charges accrued by us and related disclosures of contingent assets and liabilities. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. There can be no assurance, however, that our estimates, or the assumptions underlying them, will not change.
One of these estimates is our estimate of the development period over which we amortize non-refundable payments from Novartis, which we review on a quarterly basis. We estimate this period to be through May 2021 based on current judgments related to the product development timeline of our licensed drug candidates. When the estimated development period changes, we adjust periodic revenue that is being recognized and record the remaining unrecognized non-refundable payments over the remaining development period during which our performance obligations are completed. Significant judgments and estimates are involved in determining the estimated development period and different assumptions could yield materially different financial results. This, in turn, could adversely affect our stock price.
If we fail to design and maintain an effective system of internal controls, we may not be able to accurately report our financial results or prevent fraud. As a result, current and potential stockholders could lose confidence in our financial reporting, which could harm our business and the trading price of our common stock.
As directed by Section 404 of the Sarbanes-Oxley Act of 2002, the SEC adopted rules requiring public companies to include a report in Annual Reports on Form 10-K that contains an assessment by management of the effectiveness of the company’s internal controls over financial reporting. In addition, the company’s registered independent public accounting firm must attest to the effectiveness of our internal controls over financial reporting.
We have completed an assessment and will continue to review in the future our internal controls over financial reporting in an effort to ensure compliance with the Section 404 requirements. The manner by which companies implement, maintain and enhance these requirements including internal control reforms, if any, to comply with Section 404, and how registered independent public accounting firms apply these requirements and test companies’ internal controls, is subject to change and will evolve over time. As a result, notwithstanding our efforts, it is possible that either our management or our registered independent public accounting firm may in the future determine that our internal controls over financial reporting are not effective.
A determination that our internal controls over financial reporting are ineffective could result in an adverse reaction in the financial marketplace due to a loss of investor confidence in the reliability of our financial statements, which ultimately could negatively impact the market price of our stock, increase the volatility of our stock price and adversely affect our ability to raise additional funding.

 

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Our business is subject to international economic, political and other risks that could negatively affect our results of operations or financial position.
Our business is subject to risks associated with doing business internationally, including:
    changes in a specific country’s or region’s political or economic conditions, including Western Europe, in particular;
 
    potential negative consequences from changes in tax laws affecting our ability to repatriate profits;
 
    difficulty in staffing and managing operations overseas;
 
    unfavorable labor regulations applicable to our European or other international operations;
 
    changes in foreign currency exchange rates; and
 
    the need to ensure compliance with the numerous regulatory and legal requirements applicable to our business in each of these jurisdictions and to maintain an effective compliance program to ensure compliance.
Our operating results are impacted by the health of the North American, European and Asian economies. Our business and financial performance may be adversely affected by current and future economic conditions that cause a decline in business and consumer spending, including a reduction in the availability of credit, rising interest rates, financial market volatility and recession.
We may be required to relocate one of our principal research facilities, which could interrupt our business activities and result in significant expense.
We have been involved in a dispute with the City of Cambridge, Massachusetts and its License Commission pertaining to the level of noise emitted from certain rooftop equipment at our research facility located at 60 Hampshire Street in Cambridge. The License Commission has claimed that we are in violation of the local noise ordinance pertaining to sound emissions, based on a complaint from neighbors living adjacent to the property. We have contested this alleged violation before the License Commission, as well as the Middlesex County, Massachusetts, Superior Court. In July 2010, the License Commission granted us a special variance from the requirements of the local noise ordinance for a period of one-year, effective as of July 1, 2010. In August 2011, the License Commission granted an extension of the July 2010 variance until August 2012. We may, however, be required to cease certain activities at the building if: a) the noise emitted from certain rooftop equipment at our research facility exceeds the levels permitted by the special variance; b) the parties are unable to resolve this matter through negotiations and remedial action after August 2012; or c) any future legal challenge to the position of the City of Cambridge and the License Commission is unsuccessful. In any such event, we could be required to relocate to another facility which could interrupt some of our business activities and could be time consuming and costly.
Factors Related to Development, Clinical Testing and Regulatory Approval of Our Drug Candidates
All of our drug candidates are in development. Our drug candidates remain subject to clinical testing and regulatory approval. If we are unable to develop our drug candidates, we will not be successful.
To date, we have limited experience marketing, distributing and selling any products. The success of our business depends primarily upon Novartis’ ability to commercialize Tyzeka®/Sebivo®, ViiV’s ability to successfully develop and commercialize our NNRTI compounds, including ‘761, and our ability, or that of any future collaboration partner, to successfully commercialize other products we may successfully develop. We received approval from the FDA in the fourth quarter of 2006 to market and sell Tyzeka® for the treatment of HBV in the United States. In April 2007, Sebivo® was approved in the European Union for the treatment of patients with HBV. Effective October 1, 2007, we transferred to Novartis our worldwide development, commercialization and manufacturing rights and obligations related to telbivudine (Tyzeka®/Sebivo®) in exchange for royalty payments equal to a percentage of net sales. The royalty percentage varies based on the specified territory and the aggregate dollar amount of net sales. In February 2009, we entered into the ViiV license agreement whereby ViiV is solely responsible for the worldwide development, manufacture and commercialization of our NNRTI compounds, including ‘761, for the treatment of human diseases, including HIV/AIDS. In February 2011, ViiV informed us that the FDA placed ‘761 on clinical hold. ViiV has full responsibility for the development of ‘761, including any regulatory interactions. If ViiV is unable to successfully develop ‘761 or any other compound licensed to it, we will not receive additional milestone or royalty payments from ViiV.

 

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Our other drug candidates are in various earlier stages of development. All of our drug candidates require regulatory review and approval prior to commercialization. Approval by regulatory authorities requires, among other things, that our drug candidates satisfy rigorous standards of safety, including efficacy and assessments of the toxicity and carcinogenicity of the drug candidates we are developing. To satisfy these standards, we must engage in expensive and lengthy testing. Notwithstanding the efforts to satisfy these regulatory standards, our drug candidates may not:
    offer therapeutic or other improvements over existing drugs;
 
    be proven safe and effective in clinical trials;
 
    meet applicable regulatory standards;
 
    be capable of being produced in commercial quantities at acceptable costs; or
 
    be successfully commercialized.
Commercial availability of our drug candidates is dependent upon successful clinical development and receipt of requisite regulatory approvals. Clinical data often are susceptible to varying interpretations. Many companies that have believed that their drug candidates performed satisfactorily in clinical trials in terms of both safety and efficacy have nonetheless failed to obtain regulatory approval for commercial sale. Furthermore, the FDA and other regulatory authorities may request additional information including data from additional clinical trials, which may significantly delay any approval and these regulatory agencies ultimately may not grant marketing approval for any of our drug candidates. For example, in September 2010, the FDA placed two of our HCV drug candidates, IDX184 and IDX320, on clinical hold. The hold was imposed due to three serious adverse events of elevated liver function tests that were detected during post drug exposure safety visits following a 14-day drug-drug interaction study of a combination of IDX184 and IDX320 in healthy volunteers. We believe the hepatotoxicity observed in this drug-drug interaction study was caused by IDX320 and therefore discontinued the clinical development of this drug candidate. In February 2011, the full clinical hold on IDX184 was removed. The program was placed on partial clinical hold, which allows us to initiate a phase IIb 12-week clinical trial of IDX184 in combination with Peg-IFN/RBV with safety evaluations of the patients that will be shared with the FDA at certain intervals in the trial.
If our clinical trials are not successful, we will not obtain regulatory approval for the commercial sale of our drug candidates.
To obtain regulatory approval for the commercial sale of our drug candidates, we will be required to demonstrate through preclinical studies and clinical trials that our drug candidates are safe and effective. Preclinical studies and clinical trials are lengthy and expensive and the historical rate of failure for drug candidates is high. The results from preclinical studies of a drug candidate may not predict the results that will be obtained in human clinical trials.
We, the FDA or other applicable regulatory authorities may prohibit the initiation or suspend clinical trials of a drug candidate at any time if we or they believe the persons participating in such clinical trials are being exposed to unacceptable health risks or for other reasons. The observation of adverse side effects in a clinical trial may result in the FDA or foreign regulatory authorities refusing to approve a particular drug candidate for any or all indications of use. Additionally, adverse or inconclusive clinical trial results concerning any of our drug candidates could require us to conduct additional clinical trials, result in increased costs, significantly delay the submission of applications seeking marketing approval for such drug candidates, result in a narrower indication than was originally sought or result in a decision to discontinue development of such drug candidates. Even if we successfully complete our clinical trials with respect to our drug candidates, we may not receive regulatory approval for such candidate.
Clinical trials require sufficient patient enrollment, which is a function of many factors, including the size of the patient population, the nature of the protocol, the proximity of patients to clinical sites, the availability of effective treatments for the relevant disease, the eligibility criteria for the clinical trial and other clinical trials evaluating other investigational agents for the same or similar uses, which may compete with us for patient enrollment. Delays in patient enrollment can result in increased costs and longer development times.
We cannot predict whether we will encounter additional problems with any of our completed, ongoing or planned clinical trials that will cause us or regulatory authorities to delay or suspend our clinical trials, delay or suspend patient enrollment into our clinical trials or delay the analysis of data from our completed or ongoing clinical trials. Delays in the development of our drug candidates would delay our ability to seek and potentially obtain regulatory approvals, increase expenses associated with clinical development and likely increase the volatility of the price of our common stock. Any of the following could suspend, terminate or delay the completion of our ongoing, or the initiation of our planned, clinical trials:
    discussions with the FDA or comparable foreign authorities regarding the scope or design of our clinical trials;
 
    delays in obtaining, or the inability to obtain, required approvals from, or suspensions or termination by, institutional review boards or other governing entities at clinical sites selected for participation in our clinical trials;
 
    delays in enrolling participants into clinical trials;
 
    lower than anticipated retention of participants in clinical trials;
 
    insufficient supply or deficient quality of drug candidate materials or other materials necessary to conduct our clinical trials;
 
    serious or unexpected drug-related side effects experienced by participants in our clinical trials; or
 
    negative results of clinical trials.

 

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If the results of our or our partner’s ongoing or planned clinical trials for our drug candidates are not available when we expect or if we encounter any delay in the analysis of data from our preclinical studies and clinical trials:
    we may be unable to commence human clinical trials of any drug candidates;
 
    ViiV may be unable to continue human clinical trials of ‘761, due to the clinical hold imposed by the FDA on ‘761 in February 2011, or commence human clinical trials of any other licensed compound;
 
    Novartis may choose not to license our drug candidates and we may not be able to enter into other collaborative arrangements for any of our other drug candidates; or
 
    we may not have the financial resources to continue the research and development of our drug candidates.
If our drug candidates fail to obtain United States and/or foreign regulatory approval, we and our partners will be unable to commercialize our drug candidates.
Each of our drug candidates is subject to extensive governmental regulations relating to development, clinical trials, manufacturing and commercialization. Rigorous preclinical studies and clinical trials and an extensive regulatory approval process are required in the United States and in many foreign jurisdictions prior to the commercial sale of any drug candidates. Before any drug candidate can be approved for sale, we, or ViiV, in the case of an NNRTI, including ‘761, or other collaboration partners, must demonstrate that it can be manufactured in accordance with the FDA’s current good manufacturing practices, or cGMP, requirements. In addition, facilities where the principal commercial supply of a product is to be manufactured must pass FDA inspection prior to approval. Satisfaction of these and other regulatory requirements is costly, time consuming, uncertain and subject to unanticipated delays. It is possible that none of the drug candidates we are currently developing, or have licensed to ViiV to develop, will obtain the appropriate regulatory approvals necessary to permit commercial distribution.
The time required for FDA review and other approvals is uncertain and typically takes a number of years, depending upon the complexity of the drug candidate. Analysis of data obtained from preclinical studies and clinical trials is subject to confirmation and interpretation by regulatory authorities, which could delay, limit or prevent regulatory approval. We or one of our partners may also encounter unanticipated delays or increased costs due to government regulation from future legislation or administrative action, changes in FDA policy during the period of product development, clinical trials and FDA regulatory review.
Any delay in obtaining or failure to obtain required approvals could materially adversely affect our ability or that of a partner to generate revenues from a particular drug candidate. For example, in September 2010, the FDA placed a clinical hold on IDX184 and IDX320, two of our drug candidates for the treatment of HCV. We discontinued the clinical development of IDX320 and in February 2011, the full clinical hold on IDX184 was removed by the FDA and the program was placed on partial clinical hold. In February 2011, ViiV informed us that the FDA placed ‘761 on clinical hold and we do not know whether or when the FDA will allow ViiV to continue development of ‘761. Furthermore, any regulatory approval to market a product may be subject to limitations on the indicated uses for which we or a partner may market the product. These restrictions may limit the size of the market for the product. Additionally, drug candidates we or our partners successfully develop could be subject to post market surveillance and testing.
We are also subject to numerous foreign regulatory requirements governing the conduct of clinical trials, and we, with our partners, are subject to numerous foreign regulatory requirements relating to manufacturing and marketing authorization, pricing and third-party reimbursement. The foreign regulatory approval processes include all of the risks associated with FDA approval described above as well as risks attributable to the satisfaction of local regulations in foreign jurisdictions. Approval by any one regulatory authority does not assure approval by regulatory authorities in other jurisdictions. Many foreign regulatory authorities, including those in the European Union and in China, have different approval procedures than those required by the FDA and may impose additional testing requirements for our drug candidates. Any failure or delay in obtaining such marketing authorizations for our drug candidates would have a material adverse effect on our business.

 

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Our products will be subject to ongoing regulatory review even after approval to market such products is obtained. If we or our partners fail to comply with applicable United States and foreign regulations, we or our partners could lose approvals that we or our partners have been granted and our business would be seriously harmed.
Even after approval, any drug product that we or our collaboration partners successfully develop will remain subject to continuing regulatory review, including the review of clinical results, which are reported after our product becomes commercially available. The marketing claims we or our collaboration partners are permitted to make in labeling or advertising regarding our marketed drugs in the United States will be limited to those specified in any FDA approval, and in other markets such as the European Union, to the corresponding regulatory approvals. Any manufacturer we or our collaboration partners use to make approved products will be subject to periodic review and inspection by the FDA or other similar regulatory authorities in the European Union and other jurisdictions. We and our collaboration partners are required to report any serious and unexpected adverse experiences and certain quality problems with our products and make other periodic reports to the FDA or other similar regulatory authorities in the European Union and other jurisdictions. The subsequent discovery of previously unknown problems with the drug, manufacturer or facility may result in restrictions on the drug manufacturer or facility, including withdrawal of the drug from the market. We do not have, and currently do not intend to develop, the ability to manufacture material at commercial scale or for our clinical trials. Our reliance on third-party manufacturers entails risks to which we would not be subject if we manufactured products ourselves, including reliance on such manufacturers for regulatory compliance. Certain changes to an approved product, including the way it is manufactured or promoted, often require prior approval from regulatory authorities before the modified product may be marketed.
If we or our collaboration partners fail to comply with applicable continuing regulatory requirements, we or our collaboration partners may be subject to civil penalties, suspension or withdrawal of any regulatory approval obtained, product recalls and seizures, injunctions, operating restrictions and criminal prosecutions and penalties.
If we or our partners fail to comply with ongoing regulatory requirements after receipt of approval to commercialize a product, we or our partners may be subject to significant sanctions imposed by the FDA, EMEA or other United States and foreign regulatory authorities.
The research, testing, manufacturing and marketing of drug candidates and products are subject to extensive regulation by numerous regulatory authorities in the United States and other countries. Failure to comply with these requirements may subject a company to administrative or judicially imposed sanctions. These enforcement actions may include, without limitation:
    warning letters and other regulatory authority communications objecting to matters such as promotional materials and requiring corrective action such as revised communications to healthcare practitioners;
 
    civil penalties;
 
    criminal penalties;
 
    injunctions;
 
    product seizure or detention;
 
    product recalls;
 
    total or partial suspension of manufacturing; and
 
    FDA refusal to review or approve pending new drug applications or supplements to new drug applications for previously approved products and/or similar rejections of marketing applications or supplements by foreign regulatory authorities.
The imposition of one or more of these sanctions on us or one of our partners could have a material adverse effect on our business.
If we do not comply with laws regulating the protection of the environment and health and human safety, our business could be adversely affected.
Our research and development activities involve the controlled use of hazardous materials, chemicals and various radioactive compounds. Although we believe that our safety procedures for handling and disposing of these materials comply with the standards prescribed by state and federal laws and regulations, the risk of accidental contamination or injury from these materials cannot be eliminated. If an accident occurs, we could be held liable for resulting damages, which could be substantial. We are also subject to numerous environmental, health and workplace safety laws and regulations, including those governing laboratory procedures, exposure to blood-borne pathogens and the handling of biohazardous materials. Although we maintain workers’ compensation insurance to cover us for costs we may incur due to injuries to our employees resulting from the use of these materials and environmental liability insurance to cover us for costs associated with environmental or toxic tort claims that may be asserted against us, this insurance may not provide adequate coverage against all potential liabilities. Additional federal, state, foreign and local laws and regulations affecting our operations may be adopted in the future. We may incur substantial costs to comply with these laws or regulations. Additionally, we may incur substantial fines or penalties if we violate any of these laws or regulations.

 

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Growing availability of specialty pharmaceuticals may lead to increased focus of cost containment.
Specialty pharmaceuticals refer to medicines that treat rare or life-threatening conditions that have smaller patient populations, such as certain types of cancer, multiple sclerosis, HBV, HCV and HIV. The growing availability and use of innovative specialty pharmaceuticals, combined with their relative higher cost as compared to other types of pharmaceutical products, is beginning to generate significant payer interest in developing cost containment strategies targeted to this sector. While the impact on our payers’ efforts to control access and pricing of specialty pharmaceuticals has been limited to date, our portfolio of specialty products, combined with the increasing use of health technology assessment in markets around the world and the deteriorating finances of governments, may lead to a more significant adverse business impact in the future.
Factors Related to Our Relationship with Novartis
Novartis has substantial control over us and could delay or prevent a change in corporate control.
As of October 24, 2011, Novartis owned approximately 35% of our outstanding common stock. For so long as Novartis owns 19.4% of our voting stock, Novartis has the ability to delay or prevent a change in control of Idenix that may be favored by other stockholders and otherwise exercise substantial control over all corporate actions requiring stockholder approval including:
    the election of our directors;
 
    any amendment of our restated certificate of incorporation or amended and restated by-laws;
 
    the approval of mergers and other significant corporate transactions, including a sale of substantially all of our assets; or
 
    the defeat of any non-negotiated takeover attempt that might otherwise benefit our other stockholders.
Novartis has the right to exercise control over certain corporate actions, strategic direction, our research and development focus and other material decisions that may not otherwise require stockholder approval as long as it holds at least 19.4% of our voting stock.
As long as Novartis and its affiliates own at least 19.4% of our voting stock, which we define below, we cannot take certain actions without the consent of Novartis. These actions include:
    the authorization or issuance of additional shares of our capital stock or the capital stock of our subsidiaries, except for a limited number of specified issuances;
 
    any change or modification to the structure of our board of directors or a similar governing body of any of our subsidiaries;
 
    any amendment or modification to any of our organizational documents or those of our subsidiaries;
 
    the adoption of a three-year strategic plan;
 
    the adoption of an annual operating plan and budget, if there is no approved strategic plan;
 
    any decision that would result in a variance of total annual expenditures, capital or expense, in excess of 20% from the approved three-year strategic plan;
 
    any decision that would result in a variance in excess of the greater of $10.0 million or 20% of our profit or loss target in the strategic plan or annual operating plan;
 
    the acquisition of stock or assets of another entity that exceeds 10% of our consolidated net revenue, net income or net assets;
 
    the sale, lease, license or other disposition of any assets or business which exceeds 10% of our net revenue, net income or net assets;
 
    the incurrence of any indebtedness by us or our subsidiaries for borrowed money in excess of $2.0 million;
 
    any material change in the nature of our business or that of any of our subsidiaries;
 
    any change in control of Idenix or any subsidiary; and
 
    any dissolution or liquidation of Idenix or any subsidiary, or the commencement by us or any subsidiary of any action under applicable bankruptcy, insolvency, reorganization or liquidation laws.

 

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Pursuant to the amended and restated stockholders’ agreement, which we refer to as the stockholders’ agreement, among us, Novartis and certain of our stockholders, we are obligated to use our reasonable best efforts to nominate for election as directors at least two designees of Novartis for so long as Novartis and its affiliates own at least 30% of our voting stock and at least one designee of Novartis for so long as Novartis and its affiliates own at least 19.4% of our voting stock.
Under the stockholders’ agreement, voting stock means our outstanding securities entitled to vote in the election of directors, but does not include securities issued in connection with our acquisition of all of the capital stock, or all or substantially all of the assets of another entity, and shares of common stock issued upon exercise of stock options or stock awards pursuant to compensation and equity incentive plans. Notwithstanding the foregoing, voting stock includes up to approximately 1.4 million shares that were reserved as of May 8, 2003 for issuance under our 1998 equity incentive plan.
In April 2011, we amended the development and commercialization agreement to provide that Novartis retains the exclusive option to obtain rights to drug candidates developed by us, or in some cases licensed to us, so long as Novartis maintains ownership of at least 30% of our common stock, rather than ownership of at least 40%, as was the requirement prior to the execution of this amendment.
Additionally, in April 2011, we amended an agreement with Novartis providing that so long as Novartis and its affiliates own at least 30% of our common stock, Novartis’ consent is required for the selection and appointment of our chief financial officer. Prior to this amendment, the ownership requirement was 40%. If in Novartis’ reasonable judgment our chief financial officer is not satisfactorily performing his or her duties, we are required to terminate his or her employment.
Furthermore, under the terms of the stock purchase agreement, dated as of March 21, 2003, which we refer to as the stock purchase agreement, among us, Novartis and substantially all of our then existing stockholders, Novartis is required to make future contingent payments of up to $357.0 million to these stockholders if we achieve predetermined development milestones with respect to specific HCV drug candidates. As a result, in making determinations as to our annual operating plan and budget for the development of our drug candidates, the interests of Novartis may be different than the interests of our other stockholders and Novartis could exercise its approval rights in a manner that may not be in the best interests of all of our stockholders.
We currently depend on Novartis for a significant portion of our revenues, for the continuing commercialization of Tyzeka®/Sebivo®and for support in the development of drug candidates Novartis could license from us in the future. If our development and commercialization agreement with Novartis terminates, our business, in particular, the development of our drug candidates and the commercialization of any products that we successfully develop could be harmed.
In May 2003, we received a $75.0 million license fee from Novartis in connection with the license of our then HBV drug candidates, telbivudine and valtorcitabine. In April 2007, we received a $10.0 million milestone payment for regulatory approval of Sebivo® in China and in June 2007, we received an additional $10.0 million milestone payment for regulatory approval of Sebivo® in the European Union. Pursuant to the development and commercialization agreement, as amended, Novartis also acquired options to license valopicitabine and additional drug candidates from us. In March 2006, Novartis exercised its option and acquired a license to valopicitabine. As a result, we received a $25.0 million license fee and the right to receive up to an additional $45.0 million in license fee payments upon advancement of a specified HCV drug candidate into phase III clinical trials. Assuming we successfully develop and commercialize our drug candidates licensed by Novartis, under the terms of the development and commercialization agreement, we are entitled to receive reimbursement of expenses we incur in connection with the development of these drug candidates and additional milestone payments from Novartis. Additionally, if any of the drug candidates we have licensed to Novartis are approved for commercialization, we anticipate receiving proceeds in connection with the sales of such products. If Novartis exercises the option to license other drug candidates that we discover, or in some cases, acquire, we are entitled to receive license fees and milestone payments as well as reimbursement of expenses we incur in the development of such drug candidates in accordance with development plans mutually agreed with Novartis.
Under the existing terms of the development and commercialization agreement, we have the right to co-promote and co-market with Novartis in the United States, United Kingdom, Germany, Italy, France and Spain any products licensed by Novartis, excluding Tyzeka®/Sebivo®. For Tyzeka®/Sebivo®, we acted as the lead commercial party in the United States. Effective on October 1, 2007, we transferred to Novartis our worldwide development, commercialization and manufacturing rights and obligations related to telbivudine (Tyzeka®/Sebivo®). We receive royalty payments equal to a percentage of net sales of Tyzeka®/Sebivo®, with such percentage increasing according to specified tiers of net sales. The royalty percentage varies based on the specified territory and the aggregate dollar amount of net sales.

 

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Novartis may terminate the development and commercialization agreement in any country or with respect to any product or drug candidate licensed under the development and commercialization agreement for any reason with six months written notice. If the development and commercialization agreement is terminated in whole or in part and we are unable to enter similar arrangements with other collaborators or partners, our business would be materially adversely affected.
Novartis has the option to license from us drug candidates we discover or, in some cases, acquire. If Novartis does not exercise its option or disputes the adequacy of the notice provided by us pertaining to the drug candidate, or after we provide notice, delays its decision to exercise such option with respect to a drug candidate, our development, manufacture and/or commercialization of such drug candidate may be substantially delayed or limited.
Our drug development programs and potential commercialization of our drug candidates will require substantial additional funding. In addition to its license of Tyzeka®/Sebivo®, valtorcitabine and valopicitabine, Novartis has the option under the development and commercialization agreement to license our other drug candidates.
Furthermore, under the development and commercialization agreement, we must provide Novartis with notice and a data package as part of Novartis’ consideration to license a drug candidate from us. This notice includes information regarding the efficacy, safety and such other related material information from the final data set for the relevant clinical trial for the drug candidate, as well as a proposed development plan and proposed licensing terms. The development and commercialization agreement is not specific as to the exact content of the information required in such notice. If Novartis disputes the adequacy of the notice or data package, Novartis may argue that it is entitled to additional information or data, which would likely lead to a delay in its review of our drug candidate. Potential disputes over the adequacy of the notice and data package we provide Novartis may cause delays in our development programs in order to resolve any disputes with Novartis over the adequacy of such material. This could require substantial financial resources and could take a significant amount of time to complete.
If Novartis elects not to exercise such option, we may be required to seek other collaboration arrangements to provide funds necessary to enable us to develop such drug candidates. In October 2009, Novartis waived its option to license IDX184. As a result, we retain the worldwide rights to develop, manufacture, commercialize and license IDX184. We may seek a partner who will assist in the future development and commercialization of this drug candidate. We may not be successful in our efforts to enter into a collaboration arrangement with respect to a drug candidate not licensed by Novartis and we may not have sufficient funds to develop such drug candidate internally. As a result, our business would be adversely affected. In addition, the negotiation of a collaborative agreement is time consuming and could, even if successful, delay the development, manufacture and/or commercialization of a drug candidate and the terms of the collaboration agreements may not be favorable to us.
If we breach any of the numerous representations and warranties we made to Novartis under the development and commercialization agreement or the stock purchase agreement, Novartis has the right to seek indemnification from us for damages it suffers as a result of such breach. These amounts could be substantial.
We have agreed to indemnify Novartis and its affiliates against losses suffered as a result of our breach of representations and warranties in the development and commercialization agreement and the stock purchase agreement. Under the development and commercialization agreement and stock purchase agreement, we made numerous representations and warranties to Novartis regarding our HCV and HBV drug candidates, including representations regarding our ownership of and licensed rights to the inventions and discoveries relating to such drug candidates. If one or more of our representations or warranties were subsequently determined not to be true at the time we made them to Novartis, we would be in breach of these agreements. In the event of a breach by us, Novartis has the right to seek indemnification from us and, under certain circumstances, us and our stockholders who sold shares to Novartis, which include many of our directors and officers, for damages suffered by Novartis as a result of such breach. The amounts for which we could become liable to Novartis could be substantial.
In May 2004, we entered into a settlement agreement with UAB, relating to our ownership of our former chief executive officer’s inventorship interest in certain of our patents and patent applications, including patent applications covering our HCV drug candidates. Under the terms of the settlement agreement, we agreed to make payments to UAB, including an initial payment made in 2004 in the amount of $2.0 million, as well as regulatory milestone payments and payments relating to net sales of certain products. Novartis may seek to recover from us and, under certain circumstances, us and our stockholders who sold shares to Novartis, which include many of our officers and directors, the losses it suffers as a result of any breach of the representations and warranties we made relating to our HCV drug candidates and may assert that such losses include the settlement payments.
In July 2008, we, our former chief executive officer, in his individual capacity, the University of Montpellier and CNRS entered into a settlement agreement with UAB, UABRF, and Emory University. Pursuant to this settlement agreement, all contractual disputes relating to patents covering the use of certain synthetic nucleosides for the treatment of HBV and all litigation matters relating to patents and patent applications related to the use of ß-L-2’-deoxy-nucleosides for the treatment of HBV assigned to one or more of Idenix, CNRS, and the University of Montpellier and which cover the use of telbivudine (Tyzeka®/Sebivo®) for the treatment of HBV have been resolved. Under the terms of the settlement, we paid UABRF (on behalf of UAB and Emory University) a $4.0 million upfront payment and will make additional payments to UABRF equal to 20% of all royalty payments received by us from Novartis based on worldwide sales of telbivudine, subject to minimum payment obligations aggregating $11.0 million. Novartis may seek to recover from us and, under certain circumstances, us and those of our officers, directors and other stockholders who sold shares to Novartis, such losses and other losses it suffers as a result of any breach of the representations and warranties we made relating to our HBV drug candidates and may assert that such losses include the settlement payments.

 

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If we materially breach our obligations or covenants arising under the development and commercialization agreement with Novartis, we may lose our rights to develop or commercialize our drug candidates.
We have significant obligations to Novartis under the development and commercialization agreement. The obligations to which we are subject include the responsibility for developing and, in some countries, co-promoting or co-marketing the products licensed to Novartis in accordance with plans and budgets subject to Novartis’ approval. The covenants and agreements we made when entering into the development and commercialization agreement include covenants relating to payments of our required portion of development expenses under the development and commercialization agreement, compliance with certain third-party license agreements, the conduct of our clinical studies and activities relating to the commercialization of any products that we successfully develop. If we materially breach this agreement and are unable within an agreed time period to cure such breach, the agreement may be terminated and we may be required to grant Novartis an exclusive license to develop, manufacture and/or sell such products. Although such a license would be subject to payment of a royalty by Novartis to be negotiated in good faith, we and Novartis have stipulated that no such payments would permit the breaching party to receive more than 90% of the net benefit it was entitled to receive before the agreement was terminated. Accordingly, if we materially breach our obligations under the development and commercialization agreement, we may lose our rights to develop our drug candidates or commercialize our successfully developed products and may receive lower payments from Novartis than we had anticipated.
If we issue capital stock, in certain situations, Novartis will be able to purchase shares at par value to maintain its percentage ownership in Idenix and, if that occurs, this could cause dilution. In addition, Novartis has the right, under specified circumstances, to purchase a pro rata portion of other shares that we may issue.
Under the terms of the stockholders’ agreement, Novartis has the right to purchase, at par value of $0.001 per share, such number of shares of our capital stock that would be required to maintain its percentage ownership of our voting stock if we issue shares of capital stock in connection with the acquisition or in-licensing of technology through the issuance of up to 5% of our stock in any 24-month period. If Novartis elects to maintain its percentage ownership of our voting stock under the rights described above, Novartis will be buying such shares at a price that is substantially below market value, which would cause dilution. This right of Novartis will remain in effect until the earlier of:
    the date that Novartis and its affiliates own less than 19.4% of our voting stock; or
 
    the date that Novartis becomes obligated under the stock purchase agreement to make the additional future contingent payments of $357.0 million to our stockholders who sold shares to Novartis in May 2003.
In addition to the right to purchase shares of our common stock at par value as described above, Novartis has the right, subject to limited exceptions noted below, to purchase a pro rata portion of shares of capital stock that we issue. The price that Novartis pays for these securities would be the price that we offer such securities to third-parties, including the price paid by persons who acquire shares of our capital stock pursuant to awards granted under stock compensation or equity incentive plans. Novartis’ right to purchase a pro rata portion does not include:
    securities issuable in connection with any stock split, reverse stock split, stock dividend or recapitalization that we undertake that affects all holders of our common stock proportionately;
 
    shares that Novartis has the right to purchase at par value, as described above;
 
    shares of common stock issuable upon exercise of stock options and other awards pursuant to our 1998 equity incentive plan; and
 
    securities issuable in connection with our acquisition of all the capital stock or all or substantially all of the assets of another entity.
Novartis’ right to purchase shares includes a right to purchase securities that are convertible into, or exchangeable for, our common stock, provided that Novartis’ right to purchase stock in connection with options or other convertible securities issued to any of our directors, officers, employees or consultants pursuant to any stock compensation or equity incentive plan will not be triggered until the underlying equity security has been issued to the director, officer, employee or consultant. Novartis waived its right to purchase additional shares of our common stock as a result of the shares of common stock we issued to GSK in 2009. Additionally, Novartis did not purchase shares of our common stock pursuant to our underwritten offerings in August 2009 and in April 2010. On April 13, 2011, we issued approximately 21.1 million shares of our common stock pursuant to an underwritten agreement and approximately 1.8 million shares of our common stock to Novartis pursuant to a private placement agreement. The net proceeds of both transactions were $60.2 million. As of October 24, 2011, Novartis owned approximately 35% of our outstanding common stock.

 

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If Novartis terminates or fails to perform its obligations under the development and commercialization agreement, we may not be able to successfully commercialize our drug candidates licensed to Novartis and the development and commercialization of our other drug candidates could be delayed, curtailed or terminated.
Under the amended development and commercialization agreement, Novartis is solely responsible for the worldwide development, commercialization and manufacturing rights to telbivudine. We expect to co-promote or co-market with Novartis other products, if any, that Novartis has licensed or will license from us which are successfully developed and approved for commercialization. As a result, we will depend upon the success of the efforts of Novartis to manufacture, market and sell Tyzeka®/Sebivo® and our other products, if any, that we successfully develop and license to Novartis. However, we have limited control over the resources that Novartis may devote to such manufacturing and commercialization efforts and, if Novartis does not devote sufficient time and resources to such efforts, we may not realize the commercial or financial benefits we anticipate, and our results of operations may be adversely affected.
In addition, Novartis has the right to terminate the development and commercialization agreement with respect to any product, drug candidate or country with six months written notice to us. If Novartis were to breach or terminate this agreement with us, the development or commercialization of the affected drug candidate or product could be delayed, curtailed or terminated because we may not have sufficient resources or capabilities, financial or otherwise, to continue development and commercialization of the drug candidate, and we may not be successful in entering into a collaboration with another third-party.
Novartis has the right to market and sell products that compete with the drug candidates and products that we license to it and any competition by Novartis could have a material adverse effect on our business.
Novartis may market, sell, promote or license competitive products. Novartis has significantly greater financial, technical and human resources than we have and is better equipped to discover, develop, manufacture and commercialize products. In addition, Novartis has more extensive experience in preclinical studies and clinical trials, obtaining regulatory approvals and manufacturing and marketing pharmaceutical products. In the event that Novartis competes with us, our business could be materially and adversely affected.
Factors Related to Our Dependence on Third-Parties Other Than Novartis
If we seek to enter into collaboration agreements for any drug candidates other than those licensed to Novartis and ViiV and we are not successful in establishing such collaborations, we may not be able to continue development of those drug candidates.
Our drug development programs and product commercialization efforts will require substantial additional cash to fund expenses to be incurred in connection with these activities. While we have entered into the development and commercialization agreement with Novartis in May 2003 and the ViiV license agreement in February 2009, we may seek to enter into additional collaboration agreements with other pharmaceutical companies to fund all or part of the costs of drug development and commercialization of drug candidates that Novartis does not license. We may seek a partner who will assist in the future development and commercialization of our drug candidate, IDX184, for the treatment of HCV. We may not be able to enter into collaboration agreements and the terms of any such collaboration agreements may not be favorable to us. If we are not successful in our efforts to enter into a collaboration arrangement with respect to a drug candidate, we may not have sufficient funds to develop such drug candidate or any other drug candidate internally.
If we do not have sufficient funds to develop our drug candidates, we will not be able to bring these drug candidates to market and generate revenue. As a result, our business will be adversely affected. In addition, the inability to enter into collaboration agreements could delay or preclude the development, manufacture and/or commercialization of a drug candidate and could have a material adverse effect on our financial condition and results of operations because:
    we may be required to expend our own funds to advance the drug candidate to commercialization;
 
    revenue from product sales could be delayed; or
 
    we may elect not to develop or commercialize the drug candidate.
Our license agreement with ViiV is important to our business. The milestone payments and royalties we could receive under our license agreement with ViiV could be delayed, reduced or terminated if ViiV terminates or fails to perform its obligations under its agreement with us or if ViiV is unsuccessful in its sales efforts.
In February 2009, we entered into the ViiV license agreement under which we granted ViiV an exclusive worldwide license to develop, manufacture and commercialize our NNRTI compounds, including ‘761, for the treatment of human diseases, including HIV/AIDS. In February 2011, ViiV informed us that the FDA placed ‘761 on clinical hold. Our potential revenues under this license agreement will consist primarily of development and sales milestones and royalty payments based on worldwide annual net sales, if any, of an NNRTI compound, including ‘761, by ViiV, its affiliates and sublicensees. Milestone payments and royalties under this agreement will depend solely on ViiV’s efforts, including development and sales efforts and enforcement of patents, which we cannot control. If ViiV does not devote sufficient time and resources to its license agreement with us, including the resolution of the clinical hold relating to ‘761, or focuses its efforts in countries where we do not hold patents, we may not receive any such milestone or royalty payment and our results of operations may be adversely affected.

 

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If ViiV were to breach or terminate its agreement with us or fail to perform its obligations to us in a timely manner, the milestone payments and royalties we could receive under the ViiV license agreement could decrease or cease. Any delay or termination of this type could have a material adverse effect on our financial condition and results of operations because we may lose technology rights and milestone or royalty payments from ViiV and/or revenues from product sales, if any, could be delayed, reduced or terminated.
Our collaborations with outside scientists may be subject to restriction and change.
We work with chemists and biologists at academic and other institutions that assist us in our research and development efforts. Many of our drug candidates were discovered with the research and development assistance of these chemists and biologists. Many of the scientists who have contributed to the discovery and development of our drug candidates are not our employees and may have other commitments that would limit their future availability to us. Although our scientific advisors and collaborators generally agree not to do competing work, if a conflict of interest between their work for us and their work for another entity arises, we may lose their services.
We have depended on third-party manufacturers to manufacture products for us. If in the future we manufacture any of our products, we will be required to incur significant costs and devote significant efforts to establish these capabilities.
We have relied upon third-parties to produce material for preclinical and clinical studies and may continue to do so in the future. Although we believe that we will not have any material supply issues, we cannot be certain that we will be able to obtain long-term supply arrangements of those materials on acceptable terms. We also expect to rely on third-parties to produce materials required for clinical trials and for the commercial production of certain of our products if we succeed in obtaining necessary regulatory approvals. If we are unable to arrange for third-party manufacturing, or to do so on commercially reasonable terms, we may not be able to complete development of our products or market them.
Reliance on third-party manufacturers entails risks to which we would not be subject if we manufactured products ourselves, including reliance on the third-party for regulatory compliance and quality assurance, the possibility of breach by the third-party of agreements related to supply because of factors beyond our control and the possibility of termination or nonrenewal of the agreement by the third-party, based on its own business priorities, at a time that is costly or damaging to us.
In addition, the FDA and other regulatory authorities require that our products be manufactured according to cGMP regulations. Any failure by us or our third-party manufacturers to comply with cGMPs and/or our failure to scale up our manufacturing processes could lead to a delay in, or failure to obtain, regulatory approval. In addition, such failure could be the basis for action by the FDA to withdraw approvals for drug candidates previously granted to us and for other regulatory action.
Factors Related to Patents and Licenses
If we are unable to adequately protect our patents and licenses related to our drug candidates, or if we infringe the rights of others, it may not be possible to successfully commercialize products that we develop.
Our success will depend in part on our ability to obtain and maintain patent protection both in the United States and in other countries for any products we successfully develop. The patents and patent applications in our patent portfolio are either owned by us, exclusively licensed to us, or co-owned by us and others and exclusively licensed to us. Our ability to protect any products we successfully develop from unauthorized or infringing use by third-parties depends substantially on our ability to obtain and maintain valid and enforceable patents. Due to evolving legal standards relating to the patentability, validity and enforceability of patents covering pharmaceutical inventions and the scope of claims made under these patents, our ability to obtain and enforce patents is uncertain and involves complex legal and factual questions. Accordingly, rights under any issued patents may not provide us with sufficient protection for any products we successfully develop or provide sufficient protection to afford us a commercial advantage against our competitors or their competitive products or processes. In addition, we cannot guarantee that any patents will be issued from any pending or future patent applications owned by or licensed to us. Even if patents have been issued or will be issued, we cannot guarantee that the claims of these patents are, or will be, valid or enforceable, or provide us with any significant protection against competitive products or otherwise be commercially valuable to us.

 

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We may not have identified all patents, published applications or published literature that may affect our business, either by blocking our ability to commercialize our drug candidates, by preventing the patentability of our drug candidates by us, our licensors or co-owners, or by covering the same or similar technologies that may invalidate our patents, limiting the scope of our future patent claims or adversely affecting our ability to market our drug candidates. For example, patent applications in the United States are maintained in confidence for up to 18 months after their filing. In some cases, however, patent applications remain confidential in the U.S. Patent and Trademark Office, which we refer to as the U.S. Patent Office, for the entire time prior to issuance of a U.S. patent. Patent applications filed in countries outside the United States are not typically published until at least 18 months from their first filing date. Similarly, publication of discoveries in the scientific or patent literature often lags behind actual discoveries. Therefore, we cannot be certain that we or our licensors or co-owners were the first to invent, or the first to file, patent applications on our product or drug candidates or for their uses. In the event that a third-party has also filed a U.S. patent application covering our product or drug candidates or a similar invention, we may have to participate in an adversarial proceeding, known as an interference, declared by the U.S. Patent Office to determine priority of invention in the United States.
The costs of these proceedings could be substantial and it is possible that our efforts could be unsuccessful, potentially resulting in a loss of our U.S. patent position. The laws of some foreign jurisdictions do not protect intellectual property rights to the same extent as in the United States and many companies have encountered significant difficulties in protecting and defending such rights in foreign jurisdictions. If we encounter such difficulties in protecting, or are otherwise precluded from effectively protecting, our intellectual property rights in foreign jurisdictions, our business prospects could be substantially harmed.
Since our HBV product, telbivudine, was a known compound before the filing of our patent applications covering the use of this drug candidate to treat HBV, we cannot obtain patent protection on telbivudine itself. As a result, we have obtained and maintain patents granted on the method of using telbivudine as a medical therapy for the treatment of HBV.
In July 2008, we entered into a settlement agreement with UAB, UABRF and Emory University relating to our telbivudine technology. Pursuant to this settlement agreement, all contractual disputes relating to patents covering the use of certain synthetic nucleosides for the treatment of HBV and all litigation matters relating to patents and patent applications related to the use of ß-L-2’-deoxy-nucleosides for the treatment of HBV assigned to one or more of Idenix, CNRS and the University of Montpellier and which cover the use of telbivudine (Tyzeka®/Sebivo®) for the treatment of HBV have been resolved. UAB also agreed to abandon certain continuation patent applications it filed in July 2005. Under the terms of the settlement, we paid UABRF (on behalf of UAB and Emory University) a $4.0 million upfront payment and will make additional payments to UABRF equal to 20% of all royalty payments received by us from Novartis based on worldwide sales of telbivudine, subject to minimum payment obligations in the aggregate of $11.0 million.
In accordance with our patent strategy, we are attempting to obtain patent protection for our HCV nucleoside/nucleotide polymerase inhibitor drug candidates, including IDX184. We have filed U.S. and foreign patent applications, and in some jurisdictions have obtained patent protection, related to IDX184 itself, as well as to methods of treating HCV with IDX184. Further, we are prosecuting U.S. and foreign patent applications, and have been granted U.S. and foreign patents, claiming methods of treating HCV with nucleoside/nucleotide polymerase inhibitors.
We are aware that a number of other companies have filed patent applications attempting to cover broad classes of compounds and their use to treat HCV or infection by any member of the Flaviviridae virus family to which HCV belongs. These classes of compounds might relate to nucleoside polymerase inhibitors associated with IDX184. The companies include Merck & Co., Inc., Isis Pharmaceuticals, Inc., Ribapharm, Inc. (a wholly-owned subsidiary of Valeant Pharmaceuticals International), Genelabs Technologies, Inc., Pharmasset, Inc. and Biota, Inc. (a subsidiary of Biota Holdings Ltd.). A foreign country may grant patent rights covering one or more of our drug candidates to one or more other companies. If that occurs, we may need to challenge the third-party patent rights, and if we do not challenge or are not successful with the challenge, we will need to obtain a license that might not be available on commercially reasonable terms or at all. The U.S. Patent Office may grant patent rights covering one or more of our drug candidates to one or more other companies. If that occurs, we may need to challenge the third-party patent rights, and if we do not challenge or are not successful with the challenge, we will need to obtain a license that might not be available at all or on commercially reasonable terms.
In accordance with our patent strategy, we are attempting to obtain, and in some jurisdictions have obtained, patent protection for our HIV drug candidate ‘761, which we licensed to ViiV in 2009. We have filed and are prosecuting U.S. and foreign patent applications directed to ‘761 itself, as well as methods of treating HIV with ‘761.
A number of companies have filed patent applications and have obtained patents covering certain compositions and methods for the treatment, diagnosis and/or screening of HBV, HCV and HIV that could materially affect the ability to develop and commercialize Tyzeka®/Sebivo® and other drug candidates we may develop in the future. For example, we are aware that Apath, LLC has obtained broad patents covering HCV proteins, nucleic acids, diagnostics and drug screens. If we need to use these patented materials or methods to develop any of our HCV drug candidates and the materials or methods fall outside certain safe harbors in the laws governing patent infringement, we will need to buy these products from a licensee of the company authorized to sell such products or we will require a license from one or more companies, which may not be available to us on commercially reasonable terms or at all. This could materially affect or preclude our ability to develop and sell our HCV drug candidates.
If we find that any drug candidates we are developing should be used in combination with a product covered by a patent held by another company or institution, and that a labeling instruction is required in product packaging recommending that combination, we could be accused of, or held liable for, infringement or inducement of infringement of certain third-party patents claims covering the product recommended for co-administration with our product. In that case, we may be required to obtain a license from the other company or institution to provide the required or desired package labeling, which may not be available on commercially reasonable terms or at all.

 

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Litigation and disputes related to intellectual property matters occur frequently in the biopharmaceutical industry. Litigation regarding patents, patent applications and other proprietary rights may be expensive and time consuming. If we are unsuccessful in litigation concerning patents or patent applications owned or co-owned by us or licensed to us, we may not be able to protect our products from competition or we may be precluded from selling our products. If we are involved in such litigation, it could cause delays in bringing drug candidates to market and harm our ability to operate. Such litigation could take place in the United States in a federal court or in the U.S. Patent Office. The litigation could also take place in a foreign country, in either the courts or the patent office of that country.
Our success will depend in part on our ability to uphold and enforce patents or patent applications owned or co-owned by us or licensed to us, which cover products we successfully develop. Proceedings involving our patents or patent applications could result in adverse decisions regarding:
    ownership of patents and patent applications;
 
    the patentability of our inventions relating to our products and drug candidates; and/or
 
    the enforceability, validity or scope of protection offered by our patents relating to our products and drug candidates.
Even if we are successful in these proceedings, we may incur substantial costs and divert management’s time and attention in pursuing these proceedings, which could have a material adverse effect on us.
In May 2004, we and our former chief executive officer entered into a settlement agreement with UAB resolving a dispute regarding ownership of inventions and discoveries made by our former chief executive officer during the period from November 1999 to November 2002, at which time our former chief executive officer was on sabbatical and then unpaid leave from his position at UAB. The patent applications we filed with respect to such inventions and discoveries include the patent applications covering valopicitabine and IDX184.
Under the terms of the settlement agreement, we agreed to make a $2.0 million initial payment to UAB, as well as other contingent payments based upon the commercial launch of other HCV products discovered or invented by our former chief executive officer during his sabbatical and unpaid leave. In addition, UAB and UABRF have each agreed that neither of them has any right, title or ownership interest in these inventions and discoveries. Under the development and commercialization agreement and stock purchase agreement, we made numerous representations and warranties to Novartis regarding our HCV program, including representations regarding our ownership of the inventions and discoveries. If one or more of our representations or warranties were subsequently determined not to be true at the time we made them to Novartis, we would be in breach of these agreements. In the event of a breach by us, Novartis has the right to seek indemnification from us and, under certain circumstances, us and our stockholders who sold shares to Novartis, which include many of our directors and officers, for damages suffered by Novartis as a result of such breach. The amounts for which we could be liable to Novartis could be substantial.
Our success will also depend in part on our ability to avoid infringement of the patent rights of others. If it is determined that we do infringe a patent right of another, we may be required to seek a license (which may not be available on commercially reasonable terms or at all), defend an infringement action or challenge the validity of the patents in court. Patent litigation is costly and time consuming. We may not have sufficient resources to bring these actions to a successful conclusion. In addition, if we are not successful in infringement litigation and we do not license or develop non-infringing technology, we may:
    incur substantial monetary damages;
 
    encounter significant delays in bringing our drug candidates to market; and/or
 
    be precluded from participating in the manufacture, use or sale of our drug candidates or methods of treatment requiring licenses.
Confidentiality agreements with employees and others may not adequately prevent disclosure of trade secrets and other proprietary information.
To protect our proprietary technology and processes, we also rely in part on confidentiality agreements with our corporate collaborators, employees, consultants, outside scientific collaborators and sponsored researchers and other advisors. These agreements may not effectively prevent disclosure of confidential information and may not provide an adequate remedy in the event of unauthorized disclosure of confidential information. In addition, others may independently discover our trade secrets and confidential information and in such cases we could not assert any trade secret rights against such parties. Costly and time consuming litigation could be necessary to enforce and determine the scope of our proprietary rights and failure to obtain or maintain trade secret protection could adversely affect our competitive business position.

 

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If any of our agreements that grant us the exclusive right to make, use and sell our drug candidates are terminated, we and/or our collaboration partners may be unable to develop or commercialize our drug candidates.
We, together with Novartis, entered into an amended and restated agreement with CNRS and the University of Montpellier, co-owners of the patents and patent applications covering Tyzeka®/Sebivo® and valtorcitabine. This agreement covers both the cooperative research program and the terms of our exclusive right to exploit the results of the cooperative research, including Tyzeka®/Sebivo® and valtorcitabine. The cooperative research program with CNRS and the University of Montpellier ended in December 2006 although many of the terms remain in effect for the duration of the patent life of the affected products. We, together with Novartis, and in 2009 with ViiV, have also entered into two agreements with the University of Cagliari, the co-owner of the patents and patent applications covering some of our HCV drug candidates and certain HIV drug candidates. One agreement with the University of Cagliari covers our cooperative research program and the other agreement is an exclusive license to develop and sell jointly created drug candidates. Under the amended and restated agreement with CNRS and the University of Montpellier and the license agreement, as amended, with the University of Cagliari, we obtained from our co-owners the exclusive right to exploit these drug candidates. Subject to certain rights afforded to Novartis and to ViiV as they relate to the license agreement with the University of Cagliari, these agreements can be terminated by either party in circumstances such as the occurrence of an uncured breach by the non-terminating party. The termination of our rights, including patent rights, under the agreement with CNRS and the University of Montpellier or the license agreement, as amended, with the University of Cagliari would have a material adverse effect on our business and could prevent us from developing a drug candidate or selling a product. In addition, these agreements provide that we pay certain costs of patent prosecution, maintenance and enforcement. These costs could be substantial. Our inability or failure to pay these costs could result in the termination of the agreements or certain rights under them.
Under our amended and restated agreement with CNRS and the University of Montpellier and our license agreement, as amended, with the University of Cagliari, we and Novartis have the right to exploit and license certain co-owned drug candidates. Under our license agreement, as amended, with the University of Cagliari, we and ViiV have the right to exploit and license certain co-owned drug candidates. However, our agreements with CNRS and the University of Montpellier and with the University of Cagliari are currently governed by, and will be interpreted and enforced under, French and Italian law, respectively, which are different in substantial respects from United States law and which may be unfavorable to us in material respects. Under French law, co-owners of intellectual property cannot exploit, assign or license their individual rights without the permission of the co-owners. Similarly, under Italian law, co-owners of intellectual property cannot exploit or license their individual rights without the permission of the co-owners. Accordingly, if our agreements with the University of Cagliari terminate based on a breach, we may not be able to exploit, license or otherwise convey to Novartis, ViiV or other third-parties our rights in certain products or drug candidates for a desired commercial purpose without the consent of the co-owner, which could materially affect our business and prevent us from developing certain drug candidates and selling our products.
Under United States law, a patent co-owner has the right to prevent another co-owner from suing infringers by refusing to join voluntarily in a suit to enforce a patent. Our amended and restated agreement with CNRS and the University of Montpellier and our license agreement, as amended, with the University of Cagliari provide that such parties will cooperate to enforce our jointly owned patents on our products or drug candidates. If these agreements terminate or the parties’ cooperation is not given or is withdrawn, or they refuse to join in litigation that requires their participation, we may not be able to enforce these patent rights or protect our markets.
Factors Related to Our Common Stock
Our common stock may have a volatile trading price and low trading volume.
The market price of our common stock could be subject to significant fluctuations. Some of the factors that may cause the market price of our common stock to fluctuate include:
    realization of license fees and achievement of milestones under our development and commercialization agreement with Novartis;
 
    realization of license fees, achievement of preclinical and clinical milestones and sales thresholds under the ViiV license agreement;
 
    reductions in proceeds associated with Novartis’ right to maintain its percentage ownership of our voting stock when we issue shares at a price below fair market value;
 
    adverse developments regarding the safety and efficacy of Tyzeka®/Sebivo® or our other drug candidates;
 
    the results of ongoing and planned clinical trials of our drug candidates;
 
    developments in the market with respect to competing products or more generally the treatment of HBV, HCV or HIV;

 

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    the results of preclinical studies and planned clinical trials of our other discovery-stage programs;
 
    future sales of, and the trading volume in, our common stock;
 
    the timing and success of the launch of products, if any, we successfully develop;
 
    future royalty payments received by us associated with sales of Tyzeka®/Sebivo®;
 
    the entry into key agreements, including those related to the acquisition or in-licensing of new programs, or the termination of key agreements;
 
    the results and timing of regulatory actions relating to the approval of our drug candidates, including any decision by the regulatory authorities to place a clinical hold on our drug candidates;
 
    the initiation of, material developments in or conclusion of litigation to enforce or defend any of our intellectual property rights;
 
    the initiation of, material developments in or conclusion of litigation to defend products liability claims;
 
    the failure of any of our drug candidates, if approved, to achieve commercial success;
 
    the results of clinical trials conducted by others on drugs that would compete with our drug candidates;
 
    issues in manufacturing our drug candidates or any approved products;
 
    the loss of key employees;
 
    adverse publicity related to our company, our products or our product candidates;
 
    changes in estimates or recommendations by securities analysts who cover our common stock;
 
    future financings through the issuance of equity or debt securities or otherwise;
 
    changes in the structure of health care payment systems;
 
    our cash position and period-to-period fluctuations in our financial results;
 
    general and industry-specific economic conditions; and
 
    the decision by Novartis to license a drug candidate that has completed a proof-of-concept clinical trial.
Moreover, the stock markets in general have experienced substantial volatility that has often been unrelated to the operating performance of individual companies. These broad market fluctuations may also adversely affect the trading price of our common stock.
We do not anticipate paying cash dividends, so you must rely on stock price appreciation for any return on your investment.
We anticipate retaining any future earnings for reinvestment in our research and development programs. Therefore, we do not anticipate paying cash dividends in the future. As a result, only appreciation of the price of our common stock will provide a return to stockholders. Investors seeking cash dividends should not invest in our common stock.
Sales of additional shares of our common stock could result in dilution to existing stockholders and cause the price of our common stock to decline.
Sales of substantial amounts of our common stock in the public market or the availability of such shares for sale, could adversely affect the price of our common stock. In addition, the issuance of common stock upon exercise of outstanding options could be dilutive and may cause the market price for a share of our common stock to decline. As of October 24, 2011, we had 96,153,387 shares of common stock issued and outstanding, together with outstanding options to purchase approximately 7,803,512 shares of common stock with a weighted average exercise price of $6.17 per share.
Novartis and other holders of shares of common stock have rights, subject to certain conditions, to require us to file registration statements covering their shares or to include their shares in registration statements that we may file for ourselves or other stockholders.

 

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An investment in our common stock may decline in value as a result of announcements of business developments by us or our competitors.
The market price of our common stock is subject to substantial volatility as a result of announcements by us or other companies in our industry. As a result, purchasers of our common stock may not be able to sell their shares of common stock at or above the price at which they purchased such stock. Announcements which may subject the price of our common stock to substantial volatility include:
    our collaboration with Novartis;
 
    our collaboration with ViiV and GSK;
 
    the results of our clinical trials pertaining to any of our drug candidates;
 
    the results of discovery, preclinical studies and clinical trials by us or our competitors;
 
    the acquisition of technologies, drug candidates or products by us or our competitors;
 
    the development of new technologies, drug candidates or products by us or our competitors;
 
    regulatory actions with respect to our drug candidates or products or those of our competitors, including those relating to clinical trials, such as clinical holds imposed by regulatory authorities, marketing authorizations, pricing and reimbursement;
 
    the timing and success of launches of any product we successfully develop;
 
    future royalty payments received by us associated with sales of Tyzeka®/Sebivo®;
 
    the market acceptance of any products we successfully develop;
 
    significant changes to our existing business model;
 
    the initiation of, material developments in or conclusion of litigation to enforce or defend any of our intellectual property rights; and
 
    significant acquisitions, strategic partnerships, joint ventures or capital commitments by us or our competitors.
In addition, if we fail to reach an important research, development or commercialization milestone or result by a publicly expected deadline, even if by only a small margin, there could be a significant impact on the market price of our common stock. Additionally, as we approach the announcement of important clinical data or other significant information and as we announce such results and information, we expect the price of our common stock to be particularly volatile and negative results would have a substantial negative impact on the price of our common stock.
We could be subject to class action litigation due to stock price volatility, which, if such litigation occurs, will distract our management and could result in substantial costs or large judgments against us.
The stock market frequently experiences extreme price and volume fluctuations. In September 2010, we experienced a significant decline in our stock price based on the FDA’s decision to place a clinical hold on IDX184 and IDX320, two of our drug candidates for the treatment of HCV. In addition, the market prices of securities of companies in the biotechnology and pharmaceutical industry have been extremely volatile and have experienced fluctuations that have often been unrelated or disproportionate to the operating performance of these companies. These fluctuations could adversely affect the market price of our common stock. In the past, securities class action litigation has often been brought against companies following periods of volatility in the market prices of their securities. Due to the volatility in our stock price, we may be the target of similar litigation in the future.
Securities litigation could result in substantial costs and divert our management’s attention and resources, which could cause serious harm to our business, operating results and financial condition.
Item 2.   Unregistered Sales of Equity Securities and Use of Proceeds
None.

 

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Item 3.   Defaults Upon Senior Securities
None.
Item 4.   [Removed and Reserved]
Item 5.   Other Information
None.
Item 6.   Exhibits
See Exhibit Index on the page immediately preceding the exhibits for a list of the exhibits filed as a part of this Quarterly Report, which Exhibit Index is incorporated herein by reference.

 

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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
         
Date: November 2, 2011  By:   /s/ RONALD C. RENAUD, JR.    
    Ronald C. Renaud, Jr.   
    President and Chief Executive Officer
(Principal Executive Officer)
 
 
 
Date: November 2, 2011  By:   /s/ DANIELLA BECKMAN    
    Daniella Beckman   
    Chief Financial Officer
(Principal Financial Officer)
 
 

 

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EXHIBIT INDEX
         
Exhibit      
No.     Description
       
 
  31.1    
Certification of Chief Executive Officer pursuant to Rule 13a-14(a)/Rule 15d-14(a) of the Securities Exchange Act of 1934, as amended.
       
 
  31.2    
Certification of Chief Financial Officer pursuant to Rule 13a-14(a)/Rule 15d-14(a) of the Securities Exchange Act of 1934, as amended.
       
 
  32.1    
Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
       
 
  32.2    
Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

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