Nature of Business and Summary of Significant Accounting Policies (Policies)

12 Months Ended

Dec. 31, 2013

Nature of Business

Nature of Business

ARIAD is a global oncology company whose vision is to transform the lives of cancer patients with breakthrough medicines. The Company’s mission is to discover, develop and commercialize small-molecule drugs to treat cancer in patients with the greatest unmet medical need – aggressive cancers where current therapies are inadequate.

In addition to commercializing Iclusig^® (ponatinib), the Company is developing Iclusig for approval in additional countries and cancer indications and has two other product candidates in development, AP26113 and ridaforolimus. AP26113 is being studied in patients with advanced solid tumors, including non-small cell lung cancer. Ridaforolimus is being developed for cardiovascular indications by Medinol, Ltd. and ICON Medical Corp. In addition to its clinical development programs, the Company has a focused drug discovery program centered on small-molecule therapies that are molecularly targeted to cell-signaling pathways implicated in cancer.

In December 2012, the Company obtained accelerated approval from the U.S. Food and Drug Administration (“FDA”) to sell its first new cancer medicine, Iclusig, and commenced sales and marketing of Iclusig in the United States in January 2013. Iclusig is approved for the treatment of adult patients with chronic myeloid leukemia (“CML”) and Philadelphia chromosome-positive acute lymphoblastic leukemia (“Ph+ ALL”). On July 2, 2013, the Company announced that the European Commission granted marketing authorization for Iclusig in the European Union. The Company commenced sales efforts in certain European countries in the second half of 2013. Accordingly, the Company’s financial statements for 2013 include product revenue and other transactions related to commercialization that did not exist in prior years.

On October 9, 2013, the Company announced results of its review of updated clinical data from the pivotal PACE (Ponatinib Ph+ ALL and CML Evaluation) trial of Iclusig and actions that it was taking following consultations with the FDA. Based upon its review and the FDA consultations, the Company paused patient enrollment in all clinical trials of Iclusig and the FDA placed a partial clinical hold on all additional patient enrollment in clinical trials of Iclusig. In response to a request by the FDA, on October 31, 2013, the Company announced that it temporarily suspended the marketing and commercial distribution of Iclusig in the United States. On December 20, 2013, the Company announced that the FDA approved revised U.S. prescribing information, or USPI, and a Risk Evaluation and Mitigation Strategy, or REMS, that allowed for the immediate resumption of marketing and commercial distribution of Iclusig. Sales of Iclusig in the United States resumed in January 2014.

The Company’s current operating plan includes the impact of the re-launch of Iclusig in the United States. Based on this operating plan, the Company believes that its cash and cash equivalents at December 31, 2013, together with anticipated sales of Iclusig, will be sufficient to fund operations into 2015. The operating plan does not assume any capital-raising activities or other financing transactions. Until such time that revenue is sufficient to fund operations, the Company plans to continue to fund operations, as necessary, through capital raising or other financing transactions.

Principles of Consolidation

Principles of Consolidation

The consolidated financial statements include the accounts of ARIAD Pharmaceuticals, Inc. and its wholly-owned subsidiaries. Intercompany accounts and transactions have been eliminated in consolidation.

Foreign Currency

Foreign Currency

A subsidiary’s functional currency is the currency of the primary economic environment in which the subsidiary operates; normally, that is the currency of the environment in which a subsidiary primarily generates and expends cash. In making the determination of the appropriate functional currency for a subsidiary, the Company considers cash flow indictors, local market indicators, financing indicators and the subsidiary’s relationship with both the parent company and other subsidiaries. For subsidiaries that are primarily a direct and integral component or extension of the parent entity’s operations, the U.S. dollar is the functional currency.

For foreign subsidiaries that transact in functional currency other than the U.S. dollar, assets and liabilities are translated at current rates of exchange at the balance sheet date. Income and expense items are translated at the average foreign exchange rate for the period. Adjustments resulting from the translation of the financial statements of the Company’s foreign subsidiaries into U.S. dollars are excluded from the determination of net loss and are recorded in accumulated other comprehensive income (loss), a separate component of stockholders’ equity. For foreign subsidiaries where the functional currency is the U.S. dollar, monetary assets and liabilities are re-measured into U.S. dollars at the current exchange rate on the balance sheet date. Nonmonetary assets and liabilities are re-measured into U.S. dollars at historical exchange rates. Revenue and expense items are translated at average rates of exchange prevailing during each period.

The net total of realized and unrealized transaction gains and losses was a loss of $194,000 in 2013.

Accounting Estimates

Accounting Estimates

The preparation of the consolidated financial statements in conformity with U.S. generally accepted accounting principles (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts and disclosure of assets and liabilities at the date of the consolidated financial statements and the reported amounts and disclosure of revenue and expenses during the reporting period. Significant estimates included in the Company’s financial statements include estimates associated with revenue recognition and the related adjustments, research and development accruals, inventory, leased buildings under construction and stock-based compensation. Actual results could differ from those estimates.

Reclassifications

Reclassifications

In the consolidated balance sheet as of December 31, 2012, inventory has been separately presented and amounts due under license agreement has been aggregated with other current assets in order to conform with current year presentation. In addition, amounts due under license and collaboration agreements and other current assets in the consolidated statement of cash flows for 2012 and 2011 have been aggregated. None of the reclassifications were significant.

Cash Equivalents

Cash Equivalents

Cash equivalents include short-term, highly liquid investments, with remaining maturities at the date of purchase of 90 days or less, and money market accounts.

Restricted Cash

Restricted Cash

Restricted cash consists of cash balances held as collateral for outstanding letters of credit related to the lease of the Company’s laboratory and office facilities, for a letter of credit related to the lease agreement entered into in January 2013, and amended in September 2013, for lab and office space in a new facility under construction in Cambridge, Massachusetts and for other purposes.

Marketable Securities

Marketable Securities

Marketable securities consist of United States government and agency-backed debt securities. The Company classifies these marketable debt securities as available-for-sale at fair value. The Company records the amortization of premium and accretion of discounts on marketable debt securities in the results of operations. The Company uses the specific identification method as a basis for determining cost and calculating realized gains and losses with respect to marketable debt securities.

Inventory

Inventory

The Company outsources the manufacturing of Iclusig and uses contract manufacturers that produce the raw and intermediate materials used in the production of Iclusig as well as the finished product. The Company currently has one supplier qualified for each step in the manufacturing process and is in the process of qualifying additional suppliers for certain steps of the production process of Iclusig. Accordingly, the Company has concentration risk associated with its manufacturing process and relies on its currently approved contract manufacturers for supply of its product.

In connection with production of inventory, the Company may be required to provide payments to vendors in advance of production. These amounts are included in other current assets on the accompanying consolidated balance sheets.

Inventory is composed of raw materials, intermediate materials, which are classified as work-in-process, and finished goods, which are goods that are available for sale. The Company records inventory at the lower of cost or market. The Company determines the cost of its inventory on a specific identification basis. If the Company identifies excess, obsolete or unsalable items, it writes down its inventory to its net realizable value in the period it is identified. These adjustments are recorded based upon various factors, including the level of product manufactured by the Company, the level of product in the distribution channel, current and projected demand for the foreseeable future and the expected shelf-life of the inventory components. Inventory that is not expected to be used within one year is included in other assets, net, on the accompanying consolidated balance sheets.

Prior to receiving approval from the FDA on December 14, 2012 to sell Iclusig, the Company expensed all costs incurred related to the manufacture of Iclusig as research and development expense because of the inherent risks associated with the development of a drug candidate, the uncertainty about the regulatory approval process and the lack of history for the Company of regulatory approval of drug candidates.

Shipping and handling costs for product shipments are recorded as incurred in cost of product revenue along with costs associated with manufacturing the product sold and any inventory reserves or write-downs.

Property and Equipment

Property and Equipment

Property and equipment are recorded at cost. Depreciation is recorded using the straight-line method over the estimated useful lives of the assets (3 to 10 years). Leasehold improvements and assets under capital leases are amortized over the shorter of their useful lives or lease term using the straight-line method.

In connection with a lease for a facility being constructed in Cambridge, Massachusetts, the landlord is providing the Company with a tenant improvement allowance for the costs associated with the design, engineering, and construction of tenant improvements for the leased facility. The tenant improvements will be constructed in accordance with the Company’s plans and include fit-out of the buildings to construct appropriate laboratory and office space, subject to approval by the landlord. To the extent the stipulated tenant allowance provided by the landlord is exceeded, the Company is obligated to fund all costs incurred in excess of the tenant allowance. The scope of the planned tenant improvements do not qualify as “normal tenant improvements” under the lease accounting guidance. Accordingly, for accounting purposes, the Company is the deemed owner of the buildings during the construction period.

As construction progresses, the Company records the project construction costs incurred as an asset, along with a corresponding facility lease obligation, on the consolidated balance sheet for the total amount of project costs incurred whether funded by the Company or the landlord. Upon completion of the buildings, the Company will determine if the asset and corresponding financing obligation should continue to be carried on its consolidated balance sheet under the accounting guidance. Based on the current terms of the lease, the Company expects to continue to be the deemed owner of the buildings upon completion of the construction period.

Intangible Assets

Intangible Assets

Intangible assets consist primarily of purchased technology and capitalized patent and license costs. The cost of purchased technology, patents and patent applications, costs incurred in filing patents and certain license fees are capitalized when recovery of the costs is probable. Capitalized costs related to purchased technology are amortized over the estimated useful life of the technology. Capitalized costs related to issued patents are amortized over a period not to exceed seventeen years or the remaining life of the patent, whichever is shorter, using the straight-line method. Capitalized license fees are amortized over the periods to which they relate. In addition, capitalized costs are expensed when it becomes determinable that the related patents, patent applications or technology will not be pursued.

Impairment of Long-Lived Assets

Impairment of Long-Lived Assets

The Company reviews its long-lived assets, including the above-mentioned intangible assets, for impairment when events or changes in circumstances indicate that the carrying amount of a long-lived asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets.

Accrued Rent

Accrued Rent

The Company recognizes rent expense for leases with increasing annual rents on a straight-line basis over the term of the lease. The amount of rent expense in excess of cash payments is classified as accrued rent. Any lease incentives received are deferred and amortized over the term of the lease. At December 31, 2013 and 2012, the amount of accrued rent is $5.1 million and $5.0 million, respectively. Of these amounts, at December 31, 2013 and 2012, $4.6 million and $4.7 million, respectively, are included in other long-term liabilities, with the remaining $0.5 million and $0.3 million as of December 31, 2013 and 2012, respectively, included in other current liabilities.

Revenue Recognition

Revenue Recognition

Revenue is recognized when there is persuasive evidence that an arrangement exists, delivery has occurred or services have been rendered, the price is fixed or determinable and collection is reasonably assured. Revenue arrangements with multiple elements are divided into separate units of accounting if certain criteria are met, including whether the delivered element has stand-alone value to the customer. When deliverables are separable, consideration received is allocated to the separate units of accounting based on the relative selling price of each deliverable and the appropriate revenue recognition principles are applied to each unit.

Product Revenue, Net

Commencing in January 2013, the Company sold Iclusig in the United States to a limited number of specialty pharmacies, which dispensed the product directly to patients, and specialty distributors, which in turn sold the product to hospital pharmacies and community practice pharmacies (collectively, healthcare providers) for the treatment of patients. In Europe, the Company sells Iclusig to retail pharmacies and hospital pharmacies which dispense product directly to patients. These specialty pharmacies, specialty distributors, retail pharmacies and hospital pharmacies are referred to as the Company’s customers.

During 2013, the Company provided the right of return to customers in the United States for unopened product for a limited time before and after its expiration date. European customers are provided the right to return product only in limited circumstances, such as instances of damaged product. Given the Company’s limited sales history for Iclusig and the inherent uncertainties in estimating product returns, the Company determined that the shipments of Iclusig to its United States customers in 2013 did not meet the criteria for revenue recognition at the time of shipment. Accordingly, the Company recognized revenue when the product was sold through by its United States customers, provided all other revenue recognition criteria were met. The Company invoiced its United States customers upon shipment of Iclusig to them and recorded accounts receivable, with a corresponding liability for deferred revenue, equal to the gross invoice price. The Company then recognized revenue when Iclusig was sold through, either when the specialty distributors shipped product to healthcare providers or when specialty pharmacies dispensed product directly to the patient. Healthcare providers to whom specialty distributors sold Iclusig held limited inventory that was designated for patients, thereby limiting the risk of return. For European customers, who are provided with a limited right of return, the criteria for revenue recognition is met at the time of shipment and revenue is recognized at that time, provided all other revenue recognition criteria are met.

In connection with the temporary suspension of Iclusig described above, the Company terminated its existing contracts with specialty pharmacies and specialty distributors in the United States. In addition, the Company accepted product returns for Iclusig in connection with the temporary suspension. These returns primarily related to Iclusig held by specialty pharmacies and specialty distributors for which revenue had not been recognized. Returns for which revenue had been previously recognized were not significant. At December 31, 2013, the Company owed approximately $4.2 million to former customers in the United States which had paid for product purchases and committed to return those purchases in connection with the temporary suspension of Iclusig. This amount is included within other current liabilities on the consolidated balance sheet as of December 31, 2013.

The Company has written contracts or standard terms of sale with each of its customers and delivery occurs when the customer receives Iclusig. The Company evaluates the creditworthiness of its customers to determine whether collection is reasonably assured. In order to conclude that the price is fixed or determinable, the Company must be able to (i) calculate its gross product revenues from the sales to its customers and (ii) reasonably estimate its net product revenues. The Company calculates gross product revenues based on the wholesale acquisition cost that the Company charges its customers for Iclusig. The Company estimates its net product revenues by deducting from its gross product revenues (i) trade allowances, such as invoice discounts for prompt payment and customer fees, (ii) estimated government and private payor rebates, chargebacks and discounts, such as Medicare and Medicaid reimbursements in the United States, and (iii) estimated costs of incentives offered to certain indirect customers including patients. These deductions from gross revenue to determine net revenue are also referred to as gross to net deductions.

Trade Allowances: The Company provides invoice discounts on Iclusig sales to certain of its customers for prompt payment and pays fees for certain distribution services, such as fees for certain data that its customers provide to the Company. The Company deducts the full amount of these discounts and fees from its gross product revenues at the time such discounts and fees are earned by such customers.

Rebates, Chargebacks and Discounts: In the United States, the Company contracts with Medicare, Medicaid, other government agencies and various private organizations (collectively, payors) to make Iclusig, when commercially available, eligible for purchase by, or for partial or full reimbursement from, such payors. The Company estimates the rebates, chargebacks and discounts it will provide to payors and deducts these estimated amounts from its gross product revenues at the time the revenues are recognized. The Company’s estimates of rebates, chargebacks and discounts are based on (1) the contractual terms of agreements in place with payors, (2) the government-mandated discounts applicable to government-funded programs, and (3) the estimated payor mix. Government rebates that are invoiced directly to the Company are recorded in other accrued expenses on the consolidated balance sheet. For qualified programs that can purchase the Company’s products at a lower contractual government or commercial price, the customers charge back to the Company the difference between their acquisition cost and the lower contractual government or commercial price, which the Company records as an allowance against accounts receivable on the consolidated balance sheet. In Europe, the Company is subject to mandatory rebates and discounts in markets where government-sponsored healthcare systems are the primary payers for healthcare. These rebates and discounts are recorded in other accrued expenses on the consolidated balance sheet.

Other Incentives: Other incentives that the Company offers to indirect customers include co-pay assistance rebates provided by the Company to commercially insured patients who have coverage for Iclusig and who reside in states that permit co-pay assistance programs. The Company’s co-pay assistance program is intended to reduce each participating patient’s portion of the financial responsibility for Iclusig’s purchase price to a specified dollar amount. In each period, the Company records the amount of co-pay assistance provided to eligible patients based on the terms of the program.

The following table summarizes activity in each of the above product revenue allowances and reserve categories for 2013:

In thousands	Trade Allowances			Rebates, Chargebacks and Discounts			Other Incentives/ Returns			Total
Balance, January 1, 2013	$	—		$	—		$	—		$	—
Provision		1,158			2,721			180			4,059
Payments or credits		(1,140	)		(2,206	)		(103	)		(3,449	)
Balance, December 31, 2013	$	18		$	515		$	77		$	610

The reserves above, included in the Company’s consolidated balance sheets are summarized as follows:

In thousands	December 31, 2013
Reductions of accounts receivable	$	64
Other accrued expenses		546
Total	$	610

Patients in Europe are also being treated with Iclusig in the framework of clinical trials and related studies and in named patient programs. In 2012, the French regulatory authority granted an Autorisation Temporaire d’Utilisation (ATU), or Temporary Authorization for Use, for Iclusig for the treatment of patients with CML and Ph+ ALL under a nominative program on a patient-by-patient basis. The Company began shipping Iclusig under this program during the year ended December 31, 2012. Until all revenue recognition criteria are met (including a fixed or determinable price), all amounts received under this program (approximately $8.8 million as of December 31, 2013) have not been recorded as revenue. This program concluded on September 30, 2013 and all outstanding amounts have been received. Upon completion of this program, the Company became eligible to ship Iclusig directly to customers in France as of October 1, 2013. These shipments have not met the criteria for revenue recognition as the price for these shipments is not yet fixed or determinable. These shipments totaled $4.1 million for the period from October 1, 2013 to December 31, 2013, of which $1.8 million was received as of December 31, 2013. The Company will record these shipments, as well as shipments under the ATU program, as revenue once the price is fixed or determinable.

Concentration of Credit Risk

Concentration of Credit Risk

Financial instruments which potentially subject the Company to concentrations of credit risk consist of accounts receivable from customers and cash held at financial institutions. The Company believes that such customers and financial institutions are of high credit quality. As of December 31, 2013, a portion of the Company’s cash and cash equivalent accounts were concentrated at a single financial institution, which potentially exposes the Company to credit risks. The Company does not believe that there is significant risk of non-performance by the financial institution and the Company’s cash on deposit at this financial institution is fully liquid.

For the year-ended December 31, 2013, three individual customers accounted for 24 percent, 15 percent and 13 percent of net product revenue, respectively. As of December 31, 2013, two individual customers accounted for 15 percent and 13 percent of accounts receivable, respectively. No other customer accounted for more than 10 percent of net product revenue or accounts receivable.

Revenues in 2012 and 2011 primarily related to one license agreement discussed in Note 2.

Advertising Costs

Advertising Costs

In connection with the commercial launch of Iclusig during 2013, the Company began incurring advertising costs. Advertising costs are expensed as incurred. For the year ended December 31, 2013, advertising costs totaled $1.0 million.

Income Taxes

Income Taxes

The Company accounts for income taxes using an asset and liability approach to financial accounting and reporting for income taxes. Deferred income tax assets and liabilities are computed annually for differences between the financial statement basis and the income tax basis of assets and liabilities that will result in taxable or deductible amounts in the future. Such deferred income tax computations are based on enacted tax laws and rates applicable to the years in which the differences are expected to affect taxable income. A valuation allowance is established when it is necessary to reduce deferred income tax assets to the amount that is considered to be more-likely-than-not realizable.

The Company does not recognize a tax benefit unless it is more likely than not that the tax position will be sustained upon examination, including resolution of any related appeals or litigation processes, based on the technical merits of the position. The tax benefit that is recorded for these positions is measured at the largest amount of benefit that is greater than 50 percent likely of being realized upon ultimate settlement. Any interest and penalties on uncertain tax positions are included within the tax provision.

Stock-Based Compensation

Stock-Based Compensation

The Company awards stock options and other equity-based instruments to its employees, directors and consultants and provides employees the right to purchase common stock (collectively “share-based payments”), pursuant to stockholder approved plans. Compensation cost related to such awards is measured based on the fair value of the instrument on the grant date and is recognized on a straight-line basis over the requisite service period, which generally equals the vesting period.

Executive Compensation Plan

Executive Compensation Plan

The Company has an unfunded deferred executive compensation plan that defers the payment of annual bonus awards to officers to future periods as specified in each award. The value of the awards is indexed to the value of specified mutual funds. The Company accrues a liability based on the value of the awards ratably over the vesting period. The recorded balances of such awards are increased or decreased based on the actual total return and quoted market prices of the specified mutual funds.

Segment Reporting and Geographic Information

Segment Reporting and Geographic Information

The Company organizes itself into one operating segment reporting to the Chief Executive Officer.

In 2013, product revenue from customers outside the United States totaled 9%. All other product, license and collaboration and service revenues in 2013, 2012, and 2011 were generated within the United States. Long lived assets outside the United States were insignificant for all periods presented.

Subsequent Events

Subsequent Events

The Company considers events or transactions that occur after the balance sheet date but before the financial statements are issued to provide additional evidence relative to certain estimates or to identify matters that require additional disclosure.

On January 14, 2014, the Company jointly announced with Medinol Ltd., the initiation of two registration trials of Medinol’s stent system that incorporates ridaforolimus. The commencement of enrollment in the clinical trials, along with the submission of an investigational device exemption with the FDA, will trigger milestone payments to the Company of $3.8 million, expected in 2014.

Recent Accounting Pronouncements

Recent Accounting Pronouncements

In July 2013, the FASB issued ASU 2013-11, Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists. ASU 2013-11 requires, unless certain conditions exists, an unrecognized tax benefit or a portion of an unrecognized tax benefit to be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, similar to a tax loss or a tax credit carryforward. The Company will apply this standard beginning January 1, 2014. The adoption of the standard is not expected to have a material impact on the Company’s consolidated financial statements.