10-Q 1 d576663d10q.htm 10-Q 10-Q
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

 

FORM 10-Q

 

 

 

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

FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2013

or

 

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

FOR THE TRANSITION PERIOD FROM              TO             

Commission File Number: 001-35546

 

 

DENDREON CORPORATION

(Exact name of registrant as specified in its charter)

 

 

 

DELAWARE   22-3203193

(State or other jurisdiction of

incorporation or organization)

 

(IRS Employer

Identification No.)

1301 2ND AVENUE

SEATTLE, WASHINGTON

  98101
(Address of registrant’s principal executive offices)   (Zip Code)

(206) 256-4545

(Registrant’s telephone number, including area code)

 

 

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

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  x    No  ¨

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   x    Accelerated filer   ¨
Non-accelerated filer   ¨  (Do not check if a smaller reporting company)    Smaller reporting company   ¨

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

The number of shares of the registrant’s common stock, $0.001 par value, outstanding as of August 5, 2013 was 157,704,228.

 

 

 


Table of Contents

DENDREON CORPORATION

INDEX

 

     PAGE NO.  

PART I. FINANCIAL INFORMATION

     1   

Item 1. Financial Statements

     1   

Consolidated Balance Sheets at June 30, 2013 (unaudited) and December 31, 2012

     1   

Consolidated Statements of Operations for the Three and Six Months Ended June  30, 2013 and 2012 (unaudited)

     2   

Consolidated Statements of Comprehensive Income (Loss) for the Three and Six Months Ended June  30, 2013 and 2012 (unaudited)

     3   

Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2013 and 2012 (unaudited)

     4   

Notes to Consolidated Financial Statements (unaudited)

     5   

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

     20   

Item 3. Quantitative and Qualitative Disclosures About Market Risk

     32   

Item 4. Controls and Procedures

     32   

PART II. OTHER INFORMATION

     32   

Item 1. Legal Proceedings

     32   

Item 1A. Risk Factors

     34   

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

     56   

Item 3. Defaults Upon Senior Securities

     56   

Item 4. Mine Safety Disclosures

     56   

Item 5. Other Information

     56   

Item 6. Exhibits

     56   

SIGNATURES

     58   


Table of Contents

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

DENDREON CORPORATION

CONSOLIDATED BALANCE SHEETS

(In thousands, except share amounts)

 

     June 30,     December 31,  
     2013     2012  
     (Unaudited)        

ASSETS

  

Current assets:

    

Cash and cash equivalents

   $ 92,012      $ 188,408   

Short-term investments

     115,406        165,396   

Trade accounts receivable

     36,552        38,884   

Inventory

     91,395        76,300   

Prepaid expenses and other current assets

     22,361        18,302   
  

 

 

   

 

 

 

Total current assets

     357,726        487,290   

Property and equipment, net

     139,935        150,604   

Long-term investments

     73,156        76,045   

Other assets

     6,070        7,180   
  

 

 

   

 

 

 

Total assets

   $ 576,887      $ 721,119   
  

 

 

   

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)

    

Current liabilities:

    

Accounts payable

   $ 7,621      $ 12,845   

Accrued liabilities

     47,770        44,821   

Accrued compensation

     19,044        27,050   

Restructuring and contract termination liabilities

     5,608        14,214   

Current portion of convertible debt

     27,685        —     

Current portion of capital lease obligations

     2,544        4,418   

Current portion of facility lease obligations

     625        594   
  

 

 

   

 

 

 

Total current liabilities

     110,897        103,942   

Long-term accrued liabilities

     5,405        5,081   

Capital lease obligations, less current portion

     4,914        6,219   

Facility lease obligations, less current portion

     10,469        10,835   

Convertible senior subordinated notes due 2014

     —          27,685   

Convertible senior notes due 2016, net of discount

     545,666        532,744   

Commitments and contingencies (Note 13)

    

Stockholders’ equity (deficit):

    

Preferred stock, $0.001 par value; 10,000,000 shares authorized, no shares issued or outstanding

     —          —     

Common stock, $0.001 par value; 250,000,000 shares authorized, 157,831,020 and 154,414,811 shares issued and outstanding at June 30, 2013 and December 31, 2012, respectively

     152        150   

Additional paid-in capital

     1,994,596        1,988,666   

Accumulated other comprehensive income (loss)

     (15     147   

Accumulated deficit

     (2,095,197     (1,954,350
  

 

 

   

 

 

 

Total stockholders’ equity (deficit)

     (100,464     34,613   
  

 

 

   

 

 

 

Total liabilities and stockholders’ equity (deficit)

   $ 576,887      $ 721,119   
  

 

 

   

 

 

 

See accompanying notes

 

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Table of Contents

DENDREON CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share amounts)

(Unaudited)

 

     Three Months Ended     Six Months Ended  
     June 30,     June 30,  
     2013     2012     2013     2012  

Product revenue, net

   $ 73,286      $ 79,964      $ 140,866      $ 161,936   

Royalty and other revenue

     29        28        43        130   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total revenue

     73,315        79,992        140,909        162,066   

Operating expenses:

        

Cost of product revenue

     43,798        61,731        87,173        121,772   

Research and development

     18,163        19,697        36,611        37,040   

Selling, general and administrative

     66,831        80,219        129,277        175,534   

Restructuring and contract termination

     (304     1,099        1,656        975   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     128,488        162,746        254,717        335,321   
  

 

 

   

 

 

   

 

 

   

 

 

 

Loss from operations

     (55,173     (82,754     (113,808     (173,255

Other income (expense):

        

Interest income

     177        375        395        758   

Interest expense

     (13,886     (13,768     (27,515     (27,580

Other income

     40        10        81        26   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

   $ (68,842   $ (96,137   $ (140,847   $ (200,051
  

 

 

   

 

 

   

 

 

   

 

 

 

Basic and diluted net loss per share

   $ (0.45   $ (0.65   $ (0.93   $ (1.35
  

 

 

   

 

 

   

 

 

   

 

 

 

Shares used in computation of basic and diluted net loss per share

     151,812        148,161        151,647        147,880   
  

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes

 

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DENDREON CORPORATION

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(In thousands)

(Unaudited)

 

     Three Months Ended     Six Months Ended  
     June 30,     June 30,  
     2013     2012     2013     2012  

Net loss

   $ (68,842   $ (96,137   $ (140,847   $ (200,051

Other comprehensive income (loss):

        

Net unrealized gain (loss) on securities

     (106     (72     (162     124   
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive loss

   $ (68,948   $ (96,209   $ (141,009   $ (199,927
  

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes

 

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DENDREON CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

 

     Six Months Ended
June  30,
 
     2013     2012  

Operating Activities:

    

Net loss

   $ (140,847   $ (200,051

Adjustments to reconcile net loss to net cash used in operating activities:

    

Depreciation expense

     15,721       21,654  

Non-cash stock-based compensation expense

     5,494       47,380  

Amortization of securities discount and premium

     1,435       1,395  

Amortization of convertible notes discount and debt issuance costs

     13,987       12,936  

Other

     268       136  

Changes in operating assets and liabilities:

    

Trade accounts receivable

     2,332       198  

Inventory

     (13,700     4,537  

Prepaid expenses and other assets

     (5,354     254  

Accounts payable

     (5,224     2,178  

Accrued liabilities and compensation

     (4,815     12,995  

Restructuring and contract termination liabilities

     (8,606     463  
  

 

 

   

 

 

 

Net cash used in operating activities

     (139,309     (95,925

Investing Activities:

    

Maturities and sales of investments

     110,110       126,631  

Purchases of investments

     (58,886     (201,044

Purchases of property and equipment

     (5,121     (10,010
  

 

 

   

 

 

 

Net cash provided by (used in) investing activities

     46,103       (84,423

Financing Activities:

    

Payments on facility lease obligations

     (335     (494

Payments on capital lease obligations

     (3,179     (1,588

Proceeds from deposits

     87       1,866  

Payments of security deposits

            (200

Issuance of common stock under the Employee Stock Purchase Plan

     1,006       2,795  

Net proceeds from the exercise of stock options

     41       181  

Other

     (810     (1,819
  

 

 

   

 

 

 

Net cash (used in) provided by financing activities

     (3,190     741  
  

 

 

   

 

 

 

Net decrease in cash and cash equivalents

     (96,396     (179,607

Cash and cash equivalents at beginning of period

     188,408       427,100  
  

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $  92,012     $ 247,493  
  

 

 

   

 

 

 

Supplemental Disclosure of Cash Flow Information:

    

Cash paid during the period for interest

   $ 13,745     $ 6,503  
  

 

 

   

 

 

 

See accompanying notes

 

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DENDREON CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. BUSINESS, PRINCIPLES OF CONSOLIDATION AND BASIS OF PRESENTATION

Business

Dendreon Corporation (referred to as “Dendreon,” the “Company,” “we,” “us,” or “our”), a Delaware corporation, is a biotechnology company focused on the discovery, development and commercialization of novel therapeutics that may significantly improve cancer treatment options for patients. Our product portfolio includes active cellular immunotherapies and a small molecule product candidate that could be applicable to treating multiple types of cancers.

PROVENGE® (sipuleucel-T), is our first commercialized product approved by the United States Food and Drug Administration (“FDA”), and is a first-in-class autologous cellular immunotherapy for the treatment of asymptomatic or minimally symptomatic, metastatic, castrate-resistant (hormone-refractory) prostate cancer. Commercial sale of PROVENGE began in May 2010. Prostate cancer is the most common non-skin cancer among men in the United States, with over one million men currently diagnosed with the disease, and the second leading cause of cancer deaths in men in the United States. We own worldwide rights for PROVENGE.

Principles of Consolidation

The consolidated financial statements include the accounts of Dendreon and its direct and indirect wholly-owned subsidiaries. All material intercompany transactions and balances have been eliminated in consolidation.

Basis of Presentation

The accompanying unaudited financial statements reflect, in the opinion of management, all adjustments, consisting of only normal recurring adjustments, necessary for a fair presentation of financial position, results of operations and cash flows for each period presented in accordance with United States generally accepted accounting principles (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, certain information and disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted from the accompanying statements. These interim financial statements should be read in conjunction with the audited financial statements and related notes thereto, included in our Annual Report on Form 10-K for the year ended December 31, 2012 (the “2012 Form 10-K”). The accompanying financial information as of December 31, 2012 has been derived from the Company’s audited 2012 consolidated financial statements included in the 2012 Form 10-K. Operating results for the three- and six-month periods ended June 30, 2013 are not necessarily indicative of future results that may be expected for the year ending December 31, 2013, or any other future period.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Revenue Recognition

We recognize revenue primarily from the sale of PROVENGE. Revenue from the sale of PROVENGE is recorded net of product returns and estimated price discounts, including rebates and chargebacks offered pursuant to mandatory federal and state government programs and to members of Group Purchasing Organizations (“GPOs”) with which we have contracts. Revenue from sales of PROVENGE is recognized upon confirmed product delivery to and issuance of a product release form to the physician. Product returns are limited to those instances in which the physician receives the product but does not infuse the product prior to expiry, either due to timing or the failure of the product to meet specifications and pass site inspection. Due to the limited usable life of PROVENGE of approximately 18 hours from the completion of the manufacturing process to patient infusion, actual return information is known and credited against sales in the month incurred.

PROVENGE sales are direct to physician; however, we have entered into distribution agreements with several credit-worthy third-party wholesalers (the “Wholesalers”) whereby we manufacture and ship the product direct to the physician and transfer the sale of PROVENGE to the Wholesalers. Under the distribution agreements, the Wholesalers assume all bad debt risk from the physician or institution; therefore no allowance for bad debt is recorded. Under the terms of the distribution agreements, our return policy allows for the return of product that has expired or has a defect prior to delivery, product that is damaged during delivery and product that cannot be infused because it does not otherwise meet specified requirements.

 

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Our product is subject to certain required pricing discounts via rebates and/or chargebacks pursuant to mandatory federal and state government programs and, accordingly, revenue recognition requires estimates of rebates and chargebacks.

We have agreements with the Centers for Medicare and Medicaid Services (“CMS”) providing for a rebate on sales to eligible Medicaid patients. For sales of our product to eligible Medicaid patients, the physician purchases our product at full price, and then receives reimbursement from the applicable state. The state, in turn, invoices us for the amount of the Medicaid rebate. Estimated rebates payable under Medicaid are recognized in the same period that the related revenue is recognized, resulting in a reduction in gross product revenue, and are classified as other accrued liabilities until paid. Our estimate of rebates payable is based on historical claim information. Medicaid rebates were not material for each period presented.

We also have agreements with the Public Health Service (“PHS”), providing for a chargeback on sales to PHS-eligible providers, and Federal Supply Schedule (“FSS”) customers, including the Department of Veteran Affairs and the Department of Defense, providing for a chargeback on sales to eligible patients. Chargebacks occur when a contracted physician purchases our product at fixed contract prices that are lower than the price we charge the Wholesalers. Each Wholesaler, in turn, charges us back for the difference between the price initially paid by the Wholesaler and the contract price paid to the Wholesaler by the physician. These chargebacks are estimated and recorded in the period that the related revenue is recognized, resulting in a reduction in gross product revenue and trade accounts receivable.

The following is a roll forward of our chargebacks reserve associated with the PHS and FSS programs:

 

                                           
     Six Months Ended June 30,  
     2013     2012  
     (in thousands)  

Beginning balance, January 1

   $ 3,107      $ 7,065   

Current provision related to sales made in current period

     6,588        9,086   

Current provision related to sales made in prior periods

     —          50   

Adjustments

     (1,575     —     

Payments/credits

     (5,425     (9,372
  

 

 

   

 

 

 

Balance at June 30

   $ 2,695      $ 6,829   
  

 

 

   

 

 

 

We have entered into agreements with certain GPOs that contract for the purchase of PROVENGE on behalf of their members and provide contract administration services. Beginning in July of 2012, eligible members of the GPOs purchase PROVENGE at contracted prices through a chargeback. These chargebacks are estimated and recorded in the period that the related revenue is recognized, resulting in a reduction in gross product revenue and trade accounts receivable. We recorded chargebacks of $1.4 million and $2.8 million for the three- and six-month periods ended June 30, 2013, respectively, related to the GPOs.

Eligible members of the GPOs may also be entitled to receive a rebate on eligible purchases of PROVENGE at the end of each quarter. Estimated rebates and administrative fees payable to GPOs are recognized in the same period that the related revenue is recognized, resulting in a reduction in gross product revenue, and are classified as other accrued liabilities until paid. Our estimate of rebates payable is based upon information we gather related to sales of our product to eligible GPO members. The following is a roll forward of our accrued GPO rebates and administrative fees balance:

 

                                           
     Six Months Ended June 30,  
     2013     2012  
     (in thousands)  

Beginning balance, January 1

   $ 1,950      $ 885   

Current provision related to sales made in current period

     3,098        4,045   

Current provision related to sales made in prior periods

     —          50   

Payments/credits

     (3,435     (2,548
  

 

 

   

 

 

 

Balance at June 30

   $ 1,613      $ 2,432   
  

 

 

   

 

 

 

 

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Inventory

Inventories are determined at the lower of cost or market value with cost determined under the specific identification method. We began capitalizing raw material inventory in mid-April 2009, in anticipation of the potential approval for marketing of PROVENGE in the first half of 2010. At this time, our expectation of future benefits became sufficiently high to justify capitalization of these costs, as regulatory approval was considered probable and the related costs were expected to be recoverable through the commercialization of the product. Costs incurred prior to mid-April 2009 were recorded as research and development expense in the statements of operations, which resulted in zero-cost inventory.

For the three- and six-month periods ended June 30, 2012, we used $0.6 million and $4.7 million, respectively, of zero-cost inventory, and no zero-cost inventory remained on hand as of June 30, 2012. As a result, cost of product revenue reflects a lower average per unit cost of raw material in the first half of 2012.

Restructuring and Contract Termination Expenses

We record a liability for costs associated with an exit or disposal activity at fair value in the period in which the liability is incurred. Employee termination benefits are accrued when the obligation is probable and estimable. Employee termination benefits are expensed at the date the employee is notified unless the employee must provide future service in excess of 60 days, in which case such benefits are expensed ratably over the future service period. For contract termination costs, we record a liability upon the later of the contract termination date or the date we cease using the rights conveyed by the contract.

Impairment of Long-Lived Assets

Losses from impairment of long-lived assets used in operations are recognized when indicators of impairment are present and the undiscounted cash flows estimated to be generated by those assets are less than the assets’ carrying amount. We periodically evaluate the carrying value of long-lived assets to be held and used when events and circumstances indicate that the carrying amount of an asset may not be recovered. The determination of fair value of the assets evaluated for impairment requires the use of judgmental assumptions surrounding the amount and timing of future cash flows and the highest and best use of the assets.

Accounting for Stock-Based Compensation

Stock-based compensation cost is estimated at the grant date based on the award’s fair value and is recognized on the accelerated method as expense over the requisite service period. The fair value of stock options is calculated using the Black-Scholes-Merton (“BSM”) option pricing model. The BSM model requires various judgmental assumptions regarding volatility and expected option life. If any of the assumptions used in the BSM model change significantly, stock-based compensation expense for new awards may differ materially from that recorded for existing awards. We determine the fair value of awards under our Employee Stock Purchase Plan using the BSM model.

Restricted stock awards generally vest and are expensed over two- to four-year periods. We have granted restricted stock awards and options with certain performance conditions to certain executive officers and key employees. At each reporting date, we evaluate whether achievement of the performance conditions is probable. Compensation expense is recorded over the appropriate service period based upon our assessment of accomplishing each performance provision or the occurrence of other events which may have caused the awards or options to accelerate and vest.

In the second quarter of 2013, we granted cash-settled stock appreciation rights with a two-year vest period to certain employees. These awards are classified as liabilities and are measured at fair value at each reporting date, with fair value being determined using the BSM model.

Stock-based compensation expense also requires the estimate of forfeiture rates. In the first and second quarters of 2013, we adjusted our estimated forfeiture rates based on historical forfeiture data, resulting in cumulative catch-up adjustments to decrease stock-based compensation expense and net loss by $3.1 million and $5.8 million for the three- and six- month periods ended June 30, 2013, respectively. These adjustments decreased basic and diluted net loss per share by $0.02 and $0.04 for the three- and six-month periods ended June 30, 2013, respectively.

 

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Net Loss Per Share

Basic net loss per share is calculated by dividing net loss by the weighted average number of common shares outstanding. For the calculation of diluted net loss per share, we have excluded all outstanding stock options, unvested restricted stock and shares issuable upon potential conversion of the 2.875% Convertible Senior Notes due 2016 (the “2016 Notes”) and the 4.75% Convertible Senior Subordinated Notes due 2014 (the “2014 Notes”) from the calculation because all such securities are anti-dilutive, and accordingly, our diluted net loss per shares is the same as basic net loss per share. For the three- and six-month periods ended June 30, 2013 and 2012, the computation of diluted net loss per share excluded 23.3 million shares and 23.5 million shares, respectively.

Comprehensive Income (Loss)

Comprehensive income (loss) includes charges and credits to stockholders’ equity that are not the result of transactions with stockholders. Our comprehensive loss consisted of net loss plus changes in unrealized gain or loss on investments for the three- and six-month periods ended June 30, 2013 and 2012.

Loss Contingencies

A loss contingency is recorded if it is probable that an asset has been impaired or a liability has been incurred and the amount of the loss can be reasonably estimated. We evaluate, among other factors, the probability of an unfavorable outcome and our ability to make a reasonable estimate of the amount of the ultimate loss. Loss contingencies that we determine to be reasonably possible, but not probable, are disclosed but not recorded. Changes in these estimates could materially affect our financial position and results of operations.

Recent Accounting Pronouncements

In February 2013, the Financial Accounting Standards Board (the “FASB”) issued an Accounting Standards Update which requires companies to provide information about the amounts reclassified from accumulated other comprehensive income to net income by component. In addition, companies are required to present, either on the face of the statements of operations or in the notes to the financial statements, significant amounts reclassified from accumulated other comprehensive income by statement of operations line item. There were no reclassifications from accumulated other comprehensive income to net income for the three- and six-month periods ended June 30, 2013.

In June 2013, the FASB ratified Emerging Issues Task Force (“EITF”) Issue 13-C, “Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists,” which concludes that an unrecognized tax benefit should be presented as a reduction of a deferred tax asset when settlement in this manner is available under the tax law. We will adopt this amendment as of January 2014, and do not believe it will have any impact on our financial position, results of operations or cash flows.

For a more detailed listing of our significant accounting policies, see Note 2 of the consolidated financial statements included in the 2012 Form 10-K.

3. INVESTMENTS

Securities available-for-sale at cost or amortized cost and fair market value by contractual maturity were as follows:

 

     Cost or Amortized Cost      Fair Market Value  
     (In thousands)  

June 30, 2013

     

Due in one year or less

   $                 115,371       $                 115,406   

Due after one year through two years

     73,206         73,156   
  

 

 

    

 

 

 
   $ 188,577       $ 188,562   
  

 

 

    

 

 

 

December 31, 2012

     

Due in one year or less

   $ 165,295       $ 165,396   

Due after one year through two years

     75,999         76,045   
  

 

 

    

 

 

 
   $ 241,294       $ 241,441   
  

 

 

    

 

 

 

 

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Our gross realized gains and losses on sales of available-for-sale securities were not material for the three- and six-month periods ended June 30, 2013 and 2012.

Securities available-for-sale, short-term and long-term, consisted of the following:

 

     Cost or Amortized
Cost
     Gross Unrealized
Gains
     Gross Unrealized
Losses
    Fair Market
Value
 
     (In thousands)  

June 30, 2013

          

Demand deposit

   $ 5,641       $ —         $ —        $ 5,641   

Corporate debt securities

     102,210         21         (79     102,152   

Government-sponsored enterprises

     13,230         9         —          13,239   

U.S. Treasury notes

     67,496         34         —          67,530   
  

 

 

    

 

 

    

 

 

   

 

 

 
   $ 188,577       $ 64       $ (79   $ 188,562   
  

 

 

    

 

 

    

 

 

   

 

 

 

December 31, 2012

          

Demand deposit

   $ 5,641       $ —         $ —        $ 5,641   

Corporate debt securities

     104,652         91         (17     104,726   

Government-sponsored enterprises

     33,438         18         —          33,456   

U.S. Treasury notes

     97,563         57         (2     97,618   
  

 

 

    

 

 

    

 

 

   

 

 

 
   $ 241,294       $ 166       $ (19   $ 241,441   
  

 

 

    

 

 

    

 

 

   

 

 

 

None of the securities have been in a continuous unrealized loss position for more than 12 months as of June 30, 2013.

Market values were determined for each individual security in the investment portfolio. We utilize third-party pricing services for all security valuations. We review the pricing methodology, including the collection of market information, used by the third-party pricing services. On a periodic basis, we also review and validate the pricing information received from the third-party providers.

The declines in value of these investments are primarily related to changes in interest rates and are considered to be temporary in nature. We evaluate, among other things, the duration and extent to which the fair value of a security is less than its cost, the financial condition of the issuer, and our intent to sell, or whether it is more likely than not that we will be required to sell the security before recovery of the amortized cost basis. We have the ability and intent to hold these securities to maturity; therefore we do not consider these investments to be other-than-temporarily impaired as of June 30, 2013. Refer to Note 4 – Fair Value Measurements for further discussion.

Investments securing letters of credit in the aggregate amount of $5.6 million as of June 30, 2013 and December 31, 2012 are classified as long-term investments.

4. FAIR VALUE MEASUREMENTS

We measure and report at fair value cash equivalents and investment securities (financial assets). Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability, an exit price, in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value maximize the use of observable inputs and minimize the use of unobservable inputs. The hierarchy of fair value measurements is described below:

 

Level 1

           Observable inputs for identical assets or liabilities such as quoted prices in active markets;

Level 2

           Inputs other than quoted prices in active markets that are either directly or indirectly observable, such as quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability (i.e., interest rates, yield curves, etc.), and inputs that are derived principally from or corroborated by observable market data by correlation or other means (market corroborated inputs); and

 

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Level 3

           Unobservable inputs in which little or no market data exists, therefore determined using estimates and assumptions developed by us, which reflect those that a market participant would use.

The following summarizes financial assets measured at fair value on a recurring basis:

 

Description

           Balance              Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
     Significant Other
Observable Inputs
(Level 2)
 
     (In thousands)  

Assets:

        

June 30, 2013

        

Money market

   $ 95,528       $ 95,528       $ —     

Corporate debt securities

     102,152         —           102,152   

Government-sponsored enterprises

     13,239         —           13,239   

U.S. Treasury notes

     67,530         —           67,530   
  

 

 

    

 

 

    

 

 

 

Total financial assets

     278,449       $ 95,528       $ 182,921   
     

 

 

    

 

 

 

Add: Cash

     2,125         
  

 

 

       

Total cash, cash equivalents and investments

   $ 280,574         
  

 

 

       

December 31, 2012

        

Money market

   $ 184,167       $ 184,167       $ —     

Corporate debt securities

     104,726         —           104,726   

Government-sponsored enterprises

     33,456         —           33,456   

U.S. Treasury notes

     97,618         —           97,618   
  

 

 

    

 

 

    

 

 

 

Total financial assets

     419,967       $ 184,167       $ 235,800   
     

 

 

    

 

 

 

Add: Cash

     9,882         
  

 

 

       

Total cash, cash equivalents and investments

   $ 429,849         
  

 

 

       

Fixed income investment securities are valued using the market approach. We had no Level 3 financial assets for either period presented.

The fair value of the 2016 Notes as of June 30, 2013 and December 31, 2012 was approximately $446.4 million and $471.2 million, respectively, based on the last trading prices as of the respective period end. The fair value of the 2014 Notes as of June 30, 2013 was approximately $26.3 million based on average trading prices near period end. The fair value of the 2014 Notes as of December 31, 2012 was approximately $25.3 million based on the last trading price as of the period end. Estimates of fair value for the 2016 Notes and the 2014 Notes are based on Level 2 inputs.

The carrying amounts reflected in the consolidated balance sheets for cash, prepaid expenses, other current assets, accounts payable, accrued expenses and other liabilities approximate fair value due to their short-term nature. In addition, our capital lease obligations approximate fair value based on current interest rates, which contain an element of default risk.

5. INVENTORY

Inventories, stated at the lower of cost or market, consisted of raw materials of $90.7 million and finished goods of $0.7 million as of June 30, 2013. Inventories consisted of raw materials of $76.3 million as of December 31, 2012.

6. PREPAID EXPENSES AND OTHER CURRENT ASSETS

We utilize a third-party supplier, Fujifilm Diosynth Biotechnologies (“Fujifilm”), to manufacture the recombinant antigen used in the manufacture of PROVENGE. As of June 30, 2013 and December 31, 2012, there was $0.9 million and $0.6 million, respectively, included in “Prepaid expenses and other current assets” on the consolidated balance sheets related to costs associated with the purchase of the antigen.

 

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As of June 30, 2013 and December 31, 2012, there was $7.2 million and $8.5 million, respectively, included in “Prepaid expenses and other current assets” on the consolidated balance sheets related to costs associated with agreements to develop second source suppliers for materials used in the manufacture of PROVENGE, and to qualify a contract manufacturer for production.

7. PROPERTY AND EQUIPMENT

Property and equipment consisted of the following:

 

     June 30,     December 31,  
             2013                     2012          
     (In thousands)  

Furniture and office equipment

   $ 2,111      $ 2,111   

Laboratory and manufacturing equipment

     29,802        29,590   

Computer equipment and software

     69,379        66,117   

Leasehold improvements

     116,498        115,735   

Buildings

     17,872        17,872   

Construction in progress

     3,115        2,313   
  

 

 

   

 

 

 
   $ 238,777      $ 233,738   

Less accumulated depreciation

     (98,842     (83,134
  

 

 

   

 

 

 
   $ 139,935      $ 150,604   
  

 

 

   

 

 

 

The buildings under our manufacturing facility leases must be restored to original condition upon lease termination. Accordingly, we have accrued the estimated costs of dismantlement and restoration associated with these obligations. The asset retirement obligations related to manufacturing facilities in Atlanta, Georgia (the “Atlanta Facility”) and in Orange County, California (the “Orange County Facility”) are included in “Long-term accrued liabilities” on the consolidated balance sheets. Upon sale of our manufacturing facility in Morris Plains, New Jersey (the “New Jersey Facility”) to Novartis Pharmaceuticals Corporation (“Novartis”) in December 2012, we were released from the related asset retirement obligation.

For further description of the facility leases refer to Note 9 – Financing Obligations and Note 13 – Commitments and Contingencies.

Depreciation expense, including depreciation of assets acquired through capital leases, for the three- and six-month periods ended June 30, 2013 was $7.9 million and $15.7 million, respectively, and for the three- and six-month periods ended June 30, 2012 was $10.8 million and $21.7 million, respectively.

8. ACCRUED LIABILITIES

Accrued liabilities consisted of the following:

 

     June 30,      December 31,  
             2013                      2012          
     (In thousands)  

Deferred rent

   $ 7,353       $ 7,875   

Accrued property and equipment

     929         792   

Inventory receipts

     6,732         6,636   

Accrued consulting and other services

     11,883         12,016   

Accrued clinical trials expense

     2,472         2,299   

Accrued interest

     8,225         8,234   

Accrued service fees and rebates

     2,787         3,533   

Other accrued liabilities

     7,389         3,436   
  

 

 

    

 

 

 
   $ 47,770       $ 44,821   
  

 

 

    

 

 

 

 

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9. FINANCING OBLIGATIONS

We lease the Orange County Facility and the Atlanta Facility, but were deemed owner of each of these manufacturing facilities during their construction periods under build-to-suit lease accounting. Upon completion of the facilities, we continued to be deemed owner, and were required to capitalize building costs related to each facility. We therefore capitalized building costs of approximately $6.7 million related to the Orange County Facility in August 2009 and building costs of approximately $6.4 million related to the Atlanta Facility in March 2010, and recorded corresponding financial obligations. We allocated the lease payments between the building and the land of each facility based upon estimated relative fair values. The portion of the lease payments associated with the building reduces the facility lease obligation, while the portion associated with the land is treated as payment of an operating lease obligation.

The Orange County Facility lease obligation has an extended term of 15.5 years with an effective interest rate of 1.46%. The estimated lease term is based on the initial 10.5-year term and a 5-year renewal. The Orange County Facility lease may be renewed for up to an additional 20 years beyond the estimated 15.5-year term. The remaining facility lease obligation related to this facility, based upon the estimated 15.5-year term, was approximately $5.5 million as of June 30, 2013.

The Atlanta Facility lease obligation has an extended term of 15.5 years with an effective interest rate of 3.37%. The estimated lease term is based on the initial 10.5-year term of the Atlanta Facility lease and a 5-year renewal. The Atlanta Facility lease may be renewed for up to an additional 20 years beyond the estimated 15.5-year term. The remaining facility lease obligation related to this facility, based upon the estimated 15.5-year term, was approximately $5.6 million as of June 30, 2013.

10. CONVERTIBLE NOTES

2016 Notes

On January 14, 2011, we entered into an underwriting agreement with J.P. Morgan Securities LLC (the “Underwriter”) relating to the offer and sale of $540 million aggregate principal amount of 2016 Notes. Under the terms of the underwriting agreement, we granted the Underwriter an option, exercisable within 30 days of the date of the agreement, to purchase up to an additional $80 million aggregate principal amount of 2016 Notes to cover overallotments. We issued $540 million in aggregate principal amount of 2016 Notes upon the closing of the offering on January 20, 2011. Net proceeds, after payment of underwriting fees and expenses, were approximately $528.8 million. On January 31, 2011, the Underwriter exercised the overallotment option in full, and we closed on the sale of the additional $80 million in principal amount of 2016 Notes on February 3, 2011. Net proceeds from the exercise of the overallotment option, after payment of underwriting fees and expenses, were approximately $78.3 million.

On January 20, 2011, we entered into the First Supplemental Indenture (the “Supplemental Indenture”) with The Bank of New York Mellon Trust Company, N.A., as trustee (the “Trustee”), to our existing Base Indenture (the “Base Indenture” and, together with the Supplemental Indenture, the “2016 Indenture”), dated as of March 16, 2007. The 2016 Indenture sets forth the rights and provisions governing the 2016 Notes. Interest at 2.875% per annum is payable on the 2016 Notes semi-annually in arrears on January 15 and July 15 of each year. Record dates for payment of interest on the 2016 Notes are each January 1 and July 1. The maturity date of the 2016 Notes is January 15, 2016, unless earlier converted.

The 2016 Notes are convertible at the option of the holder, and we may choose to satisfy conversions, if any, in cash, shares of our common stock, or a combination of cash and shares of our common stock, based on a conversion rate initially equal to 19.5160 shares of common stock per $1,000 principal amount of 2016 Notes, which is equivalent to an initial conversion price of approximately $51.24 per share. The conversion rate will be increased under certain circumstances described in the 2016 Indenture; however, the number of shares of common stock issued upon conversion of a 2016 Note will not exceed 27.3224 per $1,000 principal amount of 2016 Notes, subject to adjustment in accordance with the 2016 Indenture. Should a holder exercise the conversion option during the next twelve-month period, it is our intention to satisfy the conversion with shares of common stock. Consequently, the 2016 Notes are classified as a long-term liability as of June 30, 2013 and December 31, 2012.

The conversion rate will be adjusted upon the occurrence of certain events, including stock dividends or share splits, the issuance of rights, options or warrants, spin-offs or other distribution of property, cash dividends or distributions, or tender offers or exchange offers. We will not make an adjustment to the conversion rate for any transaction described above (other than share splits or share combinations) if each holder of 2016 Notes has the right to participate in such transaction at the same time and upon the same terms as holders of common stock, and solely as a result of holding 2016 Notes, without having to convert 2016 Notes, as if a number of shares of common stock were held equal to the applicable conversion rate multiplied by the principal amount of 2016 Notes held.

 

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If a “fundamental change,” as defined in the 2016 Indenture, occurs, holders of 2016 Notes may require us to repurchase all or a portion of their 2016 Notes for cash at a repurchase price equal to 100% of the principal amount of 2016 Notes to be repurchased, plus any accrued and unpaid interest and other amounts due thereon. However, if a fundamental change occurs and a holder elects to convert 2016 Notes, we will, under certain circumstances, increase the applicable conversion rate for 2016 Notes surrendered for conversion by a number of additional shares of common stock, based on the date on which the fundamental change occurs or becomes effective and the price paid per share of common stock in the fundamental change as specified in the 2016 Indenture. At our option, we will satisfy our conversion obligation with cash, shares of common stock or a combination of cash and shares, unless the consideration for common stock in any fundamental change is comprised entirely of cash, in which case the conversion obligation will be paid in cash. The number of additional shares of common stock was determined such that the fair value of the additional shares would be expected to approximate the fair value of the convertible option at the date of the fundamental change.

In addition, we may from time to time increase the conversion rate, to the extent permitted by law, by any amount for any period of time if the period is at least 20 business days and we provide 15 business days prior written notice of such increase. We may increase the conversion rate if the Board of Directors determines that such increase would avoid or diminish United States federal income tax to holders of common stock in connection with a dividend or distribution. The 2016 Indenture contains customary covenants.

The 2016 Notes are accounted for in accordance with FASB Accounting Standards Codification 470-20 (“ASC 470-20”), Debt with Conversion and Other Options, under which issuers of certain convertible debt instruments that may be settled entirely or partially in cash upon conversion are required to separately account for the liability (debt) and equity (conversion option) components of the instrument. The liability component of the 2016 Notes, as of the issuance date, was calculated by estimating the fair value of a similar liability issued at an 8.1% effective interest rate, which was determined by considering the rate of return investors would require in the Company’s debt structure. The amount of the equity component was calculated by deducting the fair value of the liability component from the principal amount of the 2016 Notes and resulted in a corresponding debt discount. The debt discount is being amortized as interest expense through the earlier of the maturity date of the 2016 Notes or the date of conversions, if any.

The application of ASC 470-20 resulted in the initial recognition of $132.9 million as the debt discount recorded in additional paid-in capital for the 2016 Notes. The net carrying amount of the liability component, which is recorded as a long-term liability in the consolidated balance sheets, and the remaining unamortized debt discount were as follows:

 

     June 30,     December 31,  
             2013                     2012          
     (In thousands)  

Aggregate principal amount of 2016 Notes

   $ 620,000      $ 620,000   

Unamortized discount of the liability component

     (74,334     (87,256
  

 

 

   

 

 

 

Carrying amount of the liability component

   $ 545,666      $ 532,744   
  

 

 

   

 

 

 

We incurred debt issuance costs of approximately $12.9 million related to the 2016 Notes. In accordance with ASC 470-20, we allocated approximately $10.1 million of debt issuance costs to the liability component of the 2016 Notes, and are amortizing these costs to interest expense through the earlier of the maturity date of the 2016 Notes or the date of conversions, if any. The remaining debt issuance costs, approximately $2.8 million, was allocated to the equity component of the 2016 Notes and recorded as an offset to additional paid-in capital.

Amortization of the debt discount and debt issuance costs resulted in non-cash interest expense of $7.0 million and $13.9 million for the three- and six-month periods ended June 30, 2013, respectively, and $6.5 million and $12.9 million for the three- and six-month periods ended June 30, 2012, respectively. In addition, interest expense recognized on the 2.875% stated coupon rate was $4.5 million for each of the three-month periods ended June 30, 2013 and 2012, and $8.9 million for each of the six-month periods ended June 30, 2013 and 2012.

We have identified other embedded derivatives associated with the 2016 Notes and are accounting for these embedded derivatives accordingly. These embedded derivatives meet certain criteria and are therefore not required to be accounted for separately from the 2016 Notes.

 

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2014 Notes

In 2007, an aggregate of $85.3 million of 2014 Notes was sold in a private placement to qualified institutional buyers. Proceeds from the offering, after deducting placement fees and expenses of approximately $3.0 million, were approximately $82.3 million. The 2014 Notes were issued at face principal amount and pay interest of 4.75% per annum on a semi-annual basis in arrears on June 15 and December 15 of each year. Record dates for payment of interest on the 2014 Notes are each June 1 and December 1. The maturity date of the 2014 Notes is June 15, 2014, unless earlier converted.

In certain circumstances, additional amounts may become due as additional interest. We can elect that the sole remedy for an event of default for our failure to comply with the “reporting obligations” provisions of the indenture under which the 2014 Notes were issued (the “2014 Indenture”) for the first 180 days after the occurrence of such event of default would be for the holders of the 2014 Notes to receive additional interest on the 2014 Notes at an annual rate equal to 1% of the outstanding principal amount of the 2014 Notes.

The 2014 Notes are convertible into our common stock at the option of the holder, initially at a conversion price of $10.28 per share, equal to a conversion rate of approximately 97.2644 shares per $1,000 principal amount of 2014 Notes, subject to adjustment. There may be an increase in the conversion rate of the 2014 Notes under certain circumstances described in the 2014 Indenture; however, the number of shares of common stock issued will not exceed 114.2857 per $1,000 principal amount of 2014 Notes.

If a “fundamental change,” as defined in the 2014 Indenture, occurs, holders of 2014 Notes may require us to repurchase all or a portion of their 2014 Notes for cash at a repurchase price equal to 100% of the principal amount of 2014 Notes to be repurchased, plus any accrued and unpaid interest and other amounts due thereon. However, a holder that converts 2014 Notes in connection with a fundamental change may, in some circumstances, be entitled to an increased conversion rate (i.e., a lower per share conversion price) as a make whole premium. The increased conversion rates were determined such that the fair value of the additional shares would be expected to approximate the fair value of the convertible option at the date of the fundamental change.

In addition, the conversion rate will be adjusted upon the occurrence of certain events, including stock dividends or share splits, the issuance of rights or warrants, other distribution of property, cash dividends or distributions, or tender offers or exchange offers. We will not make an adjustment to the conversion rate for any transaction described above (other than share splits or share combinations) if each holder of 2014 Notes has the right to participate in such transaction at the same time and upon the same terms as holders of common stock, and solely as a result of holding 2014 Notes, without having to convert 2014 Notes and as if a number of shares of common stock were held equal to the applicable conversion rate multiplied by the principal amount of 2014 Notes held.

In addition, we may from time to time increase the conversion rate, to the extent permitted by law, by any amount for any period of time if the period is at least 20 business days and we provide 15 business days prior written notice of such increase. We may increase the conversion rate if the Board of Directors determines that such increase would avoid or diminish United States federal income tax to holders of common stock in connection with a dividend or distribution. The 2014 Indenture contains customary covenants.

As of June 30, 2013 and December 31, 2012, the aggregate principal amount of the 2014 Notes outstanding was $27.7 million. As the 2014 Notes have a contractual maturity date of June 15, 2014, the balance is classified as a current liability as of June 30, 2013. We recorded interest expense, including the amortization of debt issuance costs, related to the 2014 Notes of $0.4 million during each of the three-month periods ended June 30, 2013 and 2012, and $0.7 million during each of the six-month periods ended June 30, 2013 and 2012.

We have identified embedded derivatives associated with the 2014 Notes and are accounting for these embedded derivatives accordingly. These embedded derivatives meet certain criteria and are therefore not required to be accounted for separately from the 2014 Notes.

11. STOCK-BASED COMPENSATION

Our equity-based employee incentive plans are described more fully in Note 12 in the 2012 Form 10-K, and in the Definitive Proxy Statement for the 2013 Annual Meeting of Stockholders. Our stock-based awards include stock options, restricted stock awards, and cash-settled stock appreciation rights.

 

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We recorded stock-based compensation expense in the consolidated statements of operations as follows:

 

                                                                                       
     Three Months Ended
June 30,
     Six Months Ended
June 30,
 
     2013      2012      2013      2012  
     (In thousands)  

Cost of revenue

   $ 106       $ 2,153       $ 187       $ 4,949   

Research and development

     1,363         1,820         2,262         3,849   

Selling, general and administrative

     2,094         12,254         3,196         38,582   

Restructuring

     1         —           9         —     
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 3,564       $ 16,227       $ 5,654       $ 47,380   
  

 

 

    

 

 

    

 

 

    

 

 

 

We have granted restricted stock awards and stock options with certain performance conditions to certain executive officers and key employees. At each reporting date, we evaluate whether achievement of the performance conditions is probable. Compensation expense is recorded over the appropriate service period based upon our assessment of accomplishing each performance provision or the occurrence of other events which may cause the awards or options to accelerate and vest. For the three- and six-month periods ended June 30, 2013, we recognized $0.3 million and $0.5 million, respectively, of compensation expense related to awards and options with performance conditions. For the three- and six month periods ended June 30, 2012, we recognized $0.1 million and $0.3 million, respectively, of compensation expense related to awards and options with performance conditions.

In the second quarter of 2013, we granted cash-settled stock appreciation rights with a two-year vest period to certain employees. These awards are classified as liabilities and are measured at fair value at each reporting date, with fair value being determined using the BSM model. For the three- and six-month periods ended June 30, 2013, we recognized $0.2 million of compensation expense related to cash-settled stock appreciation rights. As of June 30, 2013 we had approximately $2.5 million of unrecognized compensation expense related to our unvested cash-settled stock appreciation rights. We expect to recognize this compensation expense over a period of approximately 1.9 years.

As further described in Note 2 – Summary of Significant Accounting Policies, in the first and second quarters of 2013, we adjusted our estimated forfeiture rates based on historical forfeiture data, resulting in cumulative catch-up adjustments to decrease stock-based compensation expense by $3.1 million and $5.8 million for the three- and six- month periods ended June 30, 2013, respectively.

The fair value of stock options was estimated at the date of grant using the BSM model with the following weighted average assumptions:

 

     Three Months Ended June 30,      Six Months Ended June 30,  
             2013                      2012                      2013                      2012          

Weighted average estimated fair value per share

   $ 2.75       $ 5.48       $ 3.17       $ 5.81   

Weighted Average Assumptions

           

Dividend yield (a)

     0.0%         0.0%         0.0%         0.0%   

Expected volatility (b)

     85%         85%         85%         66%   

Risk-free interest rate (c)

     0.84%         0.72%         0.86%         0.82%   

Expected term (d)

     5.0 years         5.5 years         5.0 years         4.7 years   

 

(a) We have not paid dividends in the past and do not plan to pay dividends in the near future.
(b) The expected stock price volatility is based on the weighted average historical volatility of our stock.
(c) The risk-free interest rate is based on the implied yield available on United States Treasury zero-coupon issues with a term equal to the expected life of the award on the date of grant.
(d) The expected term of options granted represents the estimated period of time until exercise and is based on the historical weighted average term of similar awards, giving consideration to the contractual terms, vesting schedules, expectations of future employee behavior and the terms of certain peer companies.

 

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The following summarizes stock option activity:

 

     Number of
Shares
    Weighted-
Average
Exercise Price per
Share
     Weighted-
Average
Remaining
Contractual
Life (in years)
     Aggregate Intrinsic
Value
 

Outstanding at January 1, 2013

     3,757,704      $ 18.71         

Granted

     307,722        6.74         

Exercised

     (8,256     4.98         

Forfeited and expired

     (684,633     26.53         
  

 

 

         

Outstanding at June 30, 2013

     3,372,537        16.23         7.41       $ 24,700   
  

 

 

         

Options exercisable at June 30, 2013

     1,586,075        21.64         5.78       $ —     
  

 

 

         

As of June 30, 2013 we had approximately $4.0 million of unrecognized compensation expense related to our unvested stock options. We expect to recognize this compensation expense over a weighted-average period of approximately 1.3 years.

The following summarizes restricted stock award activity:

 

     Number of Shares     Weighted-Average Grant
Date Fair Value
 

Outstanding at January 1, 2013

     4,217,355      $ 13.87   

Granted

     3,470,986        5.79   

Vested

     (1,845,379     12.59   

Forfeited and expired

     (708,482     14.12   
  

 

 

   

Outstanding at June 30, 2013

     5,134,480        7.76   
  

 

 

   

As of June 30, 2013, we had approximately $19.7 million in total unrecognized compensation expense related to restricted stock awards, which will be recognized over a weighted-average period of approximately 1.4 years.

12. RESTRUCTURING AND CONTRACT TERMINATION

Restructuring – 2012

On July 30 2012, we announced that our Board of Directors had approved a strategic restructuring plan that included re-configuring our manufacturing model with the closure of the New Jersey Facility, restructuring administrative functions and strengthening commercial functions, which we anticipate will lower our overall cost structure. The restructuring initiatives included a reduction in workforce of approximately 600 full-time and contractor positions. The employees affected by the workforce reduction were notified the week of September 17, 2012.

On December 20, 2012, we announced the sale of the New Jersey Facility to Novartis for $43.0 million. As part of the agreement with Novartis, approximately 100 employees at the facility who were previously included in the workforce reduction were offered jobs with Novartis.

As a result of this workforce reduction, we recorded a charge of $20.1 million during 2012 related to severance, other termination benefits, outplacement services and non-cash stock-based compensation due to the accelerated vesting of options and restricted stock awards of certain employees with employment agreements. In addition, we recorded restructuring charges of $7.8 million during 2012 related to fees associated with planning and developing the restructuring plan, relocation benefits offered to employees, expenses associated with the closure of the New Jersey Facility and other related expenses.

During the three- and six-month periods ended June 30, 2013, we recorded charges of $0.2 million and $1.4 million, respectively, related to severance, other termination benefits and outplacement services. These charges were offset by adjustments to reduce the restructuring liability by approximately $0.9 million and $1.2 million for the three- and six-month periods ended June 30, 2013, respectively, related to outplacement services and COBRA benefits not used by employees and severance and other termination benefits that will not be paid. We do not expect to incur additional restructuring charges for employee severance benefits related to the 2012 workforce reduction. The implementation of these restructuring initiatives has been substantially completed.

 

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In addition, we recorded restructuring charges of $0.6 million and $1.6 million during the three- and six-month periods ended June 30, 2013, respectively, related to relocation benefits offered to employees, expenses associated with the closure of the New Jersey Facility, contract termination expenses and other related expenses.

Contract Termination – 2011

On September 1, 2011 we provided written notice to GlaxoSmithKline LLC (“GSK”) of termination of a Development and Supply Agreement (the “GSK Agreement”) effective on October 31, 2011. We entered into the GSK Agreement for the commercial production and supply of the antigen used in the manufacture of PROVENGE. We exercised our right to terminate the GSK Agreement when, after unforeseen delays, GSK failed to complete the process implementation phase on or before September 1, 2011 pursuant to the terms of the GSK Agreement.

As further described in Note 13 – Commitments and Contingencies, GSK filed a lawsuit against the Company in November 2011, purporting claims for monies due and owing and breach of the Company’s obligations under the GSK Agreement. On April 9, 2013, GSK amended its complaint to add a claim for breach of North Carolina’s unfair and deceptive trade practices act. Although the ultimate financial impact of the lawsuit is not yet determinable, we expect to pay approximately $4.0 million in fees in connection with the termination of the GSK Agreement. This amount is included in “Restructuring and contract termination liabilities” on the consolidated balance sheets as of June 30, 2013 and December 31, 2012.

The following is a rollforward of restructuring liabilities:

 

                                                                                                                            
     Restructuring
and Contract
Termination
Liabilities as of
December 31,
2012
     Charges, Net of
Adjustments
    Payments     Other Non-
Cash
Settlement
    Restructuring
and Contract
Termination
Liabilities as of
June 30, 2013
 
     (In thousands)  

2012 Restructuring:

           

Severance and other termination benefits

   $ 10,083       $ 184      $ (9,023   $ (9   $ 1,235   

Other associated costs

     108         1,578        (1,333     —          353   

Asset impairment

     —           (109     —          109        —     

2011 Restructuring:

           

Contract termination costs

     4,023         3        (6     —          4,020   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Total

   $ 14,214       $ 1,656      $ (10,362   $ 100      $ 5,608   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Total restructuring charges of $1.7 million are included in “Restructuring and contract termination” on our consolidated statement of operations for the six-month period ended June 30, 2013. We expect that the remaining liabilities associated with severance and other termination benefits related to the 2012 restructuring will be fully paid by the end of 2013.

13. COMMITMENTS AND CONTINGENCIES

We have a supply agreement with Fujifilm covering the commercial production of the recombinant antigen used in the manufacture of PROVENGE. The second amendment to the supply agreement extended the term of the agreement through December 31, 2018. Unless terminated, the agreement will renew automatically thereafter for additional 5-year terms. The agreement may be terminated upon written notice by us or Fujifilm at least 24 months before the end of a renewal term or by either party in the event of an uncured material breach or default by the other party.

We currently have a commitment with Fujifilm to purchase antigen of approximately $36.3 million. We expect that payments on this commitment will continue through 2014.

We have operating lease obligations related to two leases in Seattle, Washington which cover our principal corporate offices and research facility, a corporate office lease in Bridgewater, New Jersey, and the land portions of our two manufacturing facility leases in Orange County, California and Atlanta, Georgia.

 

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In February 2011, we entered into a lease for office space of 179,656 square feet in Seattle, Washington with an initial lease term of five and a half years and one renewal term of two and a half years. In July 2012, we amended the lease to reduce the premises to 158,081 square feet. The related rent reduction took effect in November 2012. In April 2013, we amended the lease to further reduce the premises to 112,915 square feet. Rent payments related to the space relinquished in April 2013 will cease effective October 2013 and August 2014. In addition, in April 2013, we subleased an additional 22,583 square feet at these premises, commencing in May 2013 through the remaining lease term.

In February 2011, we entered into a sublease for laboratory and office space of 97,365 square feet in Seattle, Washington. The lease term is for eight years. In July 2012, we entered into a lease for office space of 39,937 square feet in Bridgewater, New Jersey. The initial lease term is for ten years, with one renewal term of five years.

In August 2009, we entered into an agreement to lease the Orange County Facility, comprising approximately 184,000 square feet, for use as a manufacturing facility following build-out. The initial lease term is ten and a half years, expiring in December 2019, with five renewal terms of five years each. In July 2009, we entered into an agreement to lease the Atlanta Facility, comprising approximately 156,000 square feet, for use as a manufacturing facility following build-out. The lease commenced when we took possession of the building upon substantial completion of construction of the building shell in March 2010. The initial lease term is ten and a half years, with five renewal terms of five years each.

We account for the Orange County Facility and the Atlanta Facility as assets with related facility lease obligations due to our significant investment in the build-out of the facilities. The lease payments are allocated to the building and land based on their estimated relative fair values. The portion of the lease related to land is treated as an operating lease. The portion of the lease related to the building is treated as a facility lease obligation as further discussed in Note 9 – Financing Obligations.

The Company and three current and former officers are named defendants in a consolidated putative securities class action proceeding filed in August 2011 with the United States District Court for the Western District of Washington (the “District Court”) under the caption In re Dendreon Corporation Class Action Litigation, Master Docket No. C 11-1291 JLR. Lead Plaintiff, San Mateo County Employees Retirement Association purports to state claims for violations of federal securities laws on behalf of a class of persons who purchased the Company’s common stock between April 29, 2010 and August 3, 2011. A consolidated amended complaint was filed on February 24, 2012. In general, the complaints allege that the defendants issued materially false or misleading statements concerning the Company, its finances, business operations and prospects with a focus on the market launch of PROVENGE and related forecasts concerning physician adoption, and revenue from sales of PROVENGE as reflected in the Company’s August 3, 2011 release of its financial results for the quarter ended June 30, 2011. On April 24, 2013, the parties entered into, and filed with the District Court, a Stipulation of Settlement (the “Stipulation”) setting forth terms of the settlement; in general, the litigation will be dismissed with prejudice and the defendants will receive full releases in exchange for a payment of $40 million, $38 million of which was funded by the Company’s directors’ and officers’ liability insurers. After notice to the settlement class, at a hearing held August 2, 2013, the District Court granted final approval to the settlement and entered judgment in accordance with terms of the Stipulation. The parties anticipate that the settlement will become final and effective as provided in the Stipulation.

On May 16, 2013, a group of individual shareholders who elected to opt out of the class action settlement commenced their own action alleging securities fraud. That action, captioned Christoph Bolling, et al. v. Dendreon Corporation, et al., Case No. 2:13-CV- 872 JLR, names the same defendant parties as the class action and bases its legal claims on substantially the same factual allegations relating to the same supposedly relevant period. In addition to claims under the federal securities laws, the plaintiff group also purports to assert certain claims under Washington state law. Based on information provided informally by plaintiffs’ counsel, the plaintiff group, which totals approximately 30 persons, purports to have purchased approximately 250,000 shares of Dendreon common stock during the relevant period, an amount that equates to under 0.5% of the estimated shares that comprised the plaintiff class in the class action. The Bolling plaintiffs filed an amended complaint July 16, 2013. Defendants’ response to the amended complaint is due August 9, and defendants plan to file a motion to dismiss; briefing is expected to extend through October 2013. Until the motion to dismiss is resolved, discovery in the Bolling action is stayed. We cannot predict the outcome of the motion. If the litigation proceeds, however, the Company intends to defend the claims vigorously.

Related to the securities lawsuits, the Company also is the subject of stockholder derivative complaints first filed in August 2011 generally arising out of the facts and circumstances that are alleged to underlie the securities action. Derivative suits filed in the District Court were consolidated into a proceeding captioned In re Dendreon Corp. Derivative Litigation, Master Docket No. C 11-1345 JLR; others were filed in the Superior Court of Washington for King County and were consolidated into a proceeding captioned In re Dendreon Corporation Shareholder Derivative Litigation, Lead Case No. 11-2-29626-1 SEA. On June 22, 2012, another derivative action was filed in the Court of Chancery of the State of Delaware, captioned Herbert Silverberg, derivatively on behalf of Dendreon Corporation v. Mitchell H. Gold, et al., Case No. 7646-VCP. The complaints filed in Washington all name as defendants the three individuals who are defendants in the securities action together with the other members of the Company’s Board of

 

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Directors. While the complaints filed in Washington assert various legal theories of liability, the lawsuits generally allege that the defendants breached fiduciary duties owed to the Company in connection with the launch of PROVENGE and by purportedly subjecting the Company to potential liability for securities fraud. The complaints also include claims against certain defendants for supposed misappropriation of Company information and insider trading; the Silverberg complaint, which names one additional former officer of the Company as a defendant, asserts only this claim. The Company filed a motion to dismiss the Silverberg action on standing grounds; the motion is fully briefed, and the Company anticipates that the Court of Chancery will schedule an argument on the motion. Proceedings in the Silverberg action are otherwise stayed. We cannot predict the outcome of the motion to dismiss. While the Company has certain indemnification obligations, including obligations to advance legal expense to the named defendants for defense of these lawsuits, the purported derivative lawsuits do not seek relief against the Company. Additionally, the Securities and Exchange Commission (“SEC”) is conducting a formal investigation, which the Company believes relates to some of the same issues raised in the securities and derivative actions. The Company is cooperating fully with the SEC investigation. The ultimate financial impact of these various proceedings, if any, is not yet determinable and therefore, no provision for loss, if any, has been recorded in the financial statements. With respect to all of the above-described proceedings, the Company has insurance that it believes affords coverage for much of the anticipated costs, subject to the policies’ terms and conditions.

The Company received notice in November 2011 of a lawsuit filed in the Durham County Superior Court of North Carolina against the Company by GSK. The lawsuit purports claims for monies due and owing and breach of the Company’s obligations under the GSK Agreement terminated as of October 31, 2011. On April 9, 2013, GSK amended its complaint to add a claim for breach of North Carolina’s unfair and deceptive trade practices act. The Company does not believe the lawsuit has merit, filed a Counterclaim and Answer on January 6, 2012, and intends to defend its position vigorously. The Company expects to pay approximately $4.0 million in fees in connection with the termination of the GSK Agreement. The ultimate financial impact of the lawsuit is not yet determinable. Therefore, no additional provision for loss has been recorded in the financial statements.

 

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This Quarterly Report on Form 10-Q contains forward-looking statements concerning matters that involve risks and uncertainties. The statements contained in this report that are not purely historical are forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and Section 27A of the Securities Act of 1933, as amended. These forward-looking statements concern matters that involve risks and uncertainties that could cause actual results to differ materially from those projected in the forward-looking statements. Words such as “believes,” “expects,” “likely,” “may” and “plans” are intended to identify forward-looking statements, although not all forward-looking statements contain these words.

Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. Moreover, neither we nor any other person assumes responsibility for the accuracy and completeness of the forward-looking statements. We are under no duty to update any of the forward-looking statements after the date hereof to conform such statements to actual results or to changes in our expectations.

The following discussion should be read in conjunction with the financial statements and the notes thereto included in Item 1 of this Quarterly Report on Form 10-Q. In addition, readers are urged to carefully review and consider the various disclosures made by us regarding important factors that affect our business, including without limitation the disclosures set forth under the heading “Risk Factors” in this report, as well as the disclosures in our Annual Report on Form 10-K for the year ended December 31, 2012 (the “2012 Form 10-K”), including the audited financial statements and the notes thereto and disclosures made under the captions “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

OVERVIEW

We are a biotechnology company focused on the discovery, development and commercialization of novel therapeutics that may significantly improve cancer treatment options for patients. Our product portfolio includes active cellular immunotherapies and a small molecule product candidate that could be applicable to treating multiple types of cancers.

PROVENGE® (sipuleucel-T) is our first commercialized product approved by the United States Food and Drug Administration (“FDA”), and is a first-in-class autologous cellular immunotherapy for the treatment of asymptomatic or minimally symptomatic, metastatic, castrate-resistant (hormone-refractory) prostate cancer. Prostate cancer is the most common non-skin cancer among men in the United States, with over one million men currently diagnosed with the disease, and the second leading cause of cancer deaths in men in the United States. We own worldwide rights for PROVENGE.

Commercial sale of PROVENGE began in May 2010. Approximately 877 parent accounts, some of which have multiple sites, had infused the product as of the end of June 2013. Commercial sale of PROVENGE is currently supported by manufacturing facilities in Orange County, California (the “Orange County Facility”) and Atlanta, Georgia (the “Atlanta Facility”). We also manufactured PROVENGE at a manufacturing facility in Morris Plains, New Jersey (the “New Jersey Facility”) into December 2012, at which time we sold the New Jersey Facility to Novartis Pharmaceuticals Corporation (“Novartis”) for $43.0 million. We believe that, after the sale of the New Jersey Facility, the combined capacity at the Orange County and Atlanta facilities will be sufficient to handle the manufacturing of PROVENGE in the volumes that we anticipate.

Prior to the sale of the New Jersey Facility, we announced on July 30, 2012 that we had initiated a strategic restructuring plan that included re-configuring our manufacturing model with the closure of the New Jersey Facility, restructuring administrative functions and strengthening commercial functions, which we anticipate will lower our overall cost structure. As a result of the restructuring, we expect to reduce costs by approximately $150 million annually, which includes a reduction in headcount of approximately 600 full-time and contractor positions. The implementation of these restructuring initiatives has been substantially completed.

We are currently seeking marketing authorization for the sale of PROVENGE in Europe. Following a number of pre-submission meetings with European Union National Agencies, we expect that data from our Phase 3 D9902B IMPACT (IMmunotherapy for Prostate AdenoCarcinoma Treatment) study, supported by data from our D9901 and D9902A studies, will be sufficient to seek regulatory approval for PROVENGE in the E.U. Using clinical data described in our United States Biologics License Application, we filed a Marketing Authorization Application (“MAA”) with the European Medicines Agency (“EMA”); the MAA was validated on January 25, 2012. On June 28, 2013, we announced that the EMA Committee for Medicinal Products for Human Use (“CHMP”) has adopted a positive opinion recommending that PROVENGE be granted marketing authorization in the E.U., for the treatment of asymptomatic or minimally symptomatic metastatic (non-visceral) castrate-resistant prostate cancer in male

 

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adults for whom chemotherapy is not yet clinically indicated. The CHMP’s recommendation follows a positive recommendation by the Committee for Advanced Therapy. The CHMP will make a final recommendation to the European Commission within the coming months on the marketing authorization application for PROVENGE in the E.U. We plan to manufacture product through a contract manufacturing organization. We anticipate a regulatory decision from the E.U. in the second half of 2013.

As of June 30, 2013, our manufacturing operations consisted of approximately 495 employees, a decrease from 840 employees as of June 30, 2012 due to the 2012 restructuring and workforce reduction, including the sale of the New Jersey Facility. Our commercial team included approximately 175 employees in sales, marketing, and market access support as of June 30, 2013, an increase of 20 employees from June 30, 2012, due in part to the realignment of employees from other departments.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

We make judgmental decisions and estimates with underlying assumptions when applying accounting principles to prepare our consolidated financial statements. Certain critical accounting policies requiring significant judgments, estimates, and assumptions are detailed below. We consider an accounting estimate to be critical if (1) it requires assumptions to be made that are uncertain at the time the estimate is made and (2) changes to the estimate or different estimates that could have reasonably been used would have materially changed our consolidated financial statements. The development and selection of these critical accounting policies have been reviewed with the Audit Committee of our Board of Directors.

We believe the current assumptions and other considerations used to estimate amounts reflected in our consolidated financial statements are appropriate. However, should our actual experience differ from these assumptions and other considerations used in estimating these amounts, the impact of these differences could have a material impact on our consolidated financial statements.

For a more detailed listing of our critical accounting estimates, refer to the 2012 Form 10-K.

Revenue Recognition

We recognize revenue primarily from the sale of PROVENGE. Revenue from the sale of PROVENGE is recorded net of product returns and estimated price discounts, including rebates and chargebacks offered pursuant to mandatory federal and state government programs and to members of Group Purchasing Organizations (“GPOs”) with which we have contracts. Revenue from sales of PROVENGE is recognized upon confirmed product delivery to and issuance of a product release form to the physician. Product returns are limited to those instances in which the physician receives the product but does not infuse the product prior to expiry, either due to timing or the failure of the product to meet specifications and pass site inspection. Due to the limited usable life of PROVENGE of approximately 18 hours from the completion of the manufacturing process to patient infusion, actual return information is known and credited against sales in the month incurred.

PROVENGE sales are direct to physician; however, we have entered into distribution agreements with several credit-worthy third-party wholesalers (the “Wholesalers”) whereby we manufacture and ship the product direct to the physician and transfer the sale of PROVENGE to the Wholesalers. Under the distribution agreements, the Wholesalers assume all bad debt risk from the physician or institution; therefore no allowance for bad debt is recorded. Under the terms of the distribution agreements, our return policy allows for the return of product that has expired or has a defect prior to delivery, product that is damaged during delivery and product that cannot be infused because it does not otherwise meet specified requirements.

Our product is subject to certain required pricing discounts via rebates and/or chargebacks pursuant to mandatory federal and state government programs and, accordingly, revenue recognition requires estimates of rebates and chargebacks. We have agreements with the Centers for Medicare and Medicaid Services (the “CMS”) providing for a rebate on sales to eligible Medicaid patients. For sales of our product to eligible Medicaid patients, the physician purchases our product at full price, and then receives reimbursement from the applicable state. The state, in turn, invoices us for the amount of the Medicaid rebate. Estimated rebates payable under Medicaid are recognized in the same period that the related revenue is recognized, resulting in a reduction in gross product revenue, and are classified as other accrued liabilities until paid. Our estimate of rebates payable is based on historical claim information. Since there is often a delay between product sale and the processing and payment of the Medicaid rebates, we evaluate our estimates regularly, and adjust our estimates as necessary.

We also have agreements with the Public Health Service (“PHS”), providing for a chargeback on sales to PHS-eligible providers, and Federal Supply Schedule (“FSS”) customers, including the Department of Veteran Affairs and the Department of Defense, providing for a chargeback on sales to eligible patients. Chargebacks occur when a contracted physician purchases our product at fixed contract prices that are lower than the price we charge the Wholesalers. Each Wholesaler, in turn, charges us back for the difference between the price initially paid by the Wholesaler and the contract price paid to the Wholesaler by the physician. These chargebacks are estimated and recorded in the period that the related revenue is recognized, resulting in a reduction in gross product revenue and trade accounts receivable. Our estimate of chargebacks is based on information we gather related to the physician site.

 

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We have entered into agreements with certain GPOs that contract for the purchase of PROVENGE on behalf of their members and provide contract administration services. Beginning in July of 2012, eligible members of the GPOs purchase PROVENGE at contracted prices through a chargeback. These chargebacks are estimated and recorded in the period that the related revenue is recognized, resulting in a reduction in gross product revenue and trade accounts receivable. Eligible members of the GPOs may also be entitled to receive a rebate on eligible purchases of PROVENGE at the end of each quarter. Estimated rebates and administrative fees payable to GPOs are recognized in the same period that the related revenue is recognized, resulting in a reduction in gross product revenue, and are classified as other accrued liabilities until paid. Our estimate of rebates payable is based upon information we gather related to sales of our product to eligible GPO members.

Inventory

Inventories are determined at the lower of cost or market value with cost determined under the specific identification method. We began capitalizing raw material inventory in mid-April 2009, in anticipation of the potential approval for marketing of PROVENGE in the first half of 2010. At this time, our expectation of future benefits became sufficiently high to justify capitalization of these costs, as regulatory approval was considered probable and the related costs were expected to be recoverable through the commercialization of the product. Costs incurred prior to mid-April 2009 were recorded as research and development expense in the statements of operations, which resulted in zero-cost inventory. Our zero-cost inventory was fully utilized as of June 30, 2012.

Restructuring and Contract Termination Expenses

We record a liability for costs associated with an exit or disposal activity at fair value in the period in which the liability is incurred. Employee termination benefits are accrued when the obligation is probable and estimable. Employee termination benefits are expensed at the date the employee is notified unless the employee must provide future service in excess of 60 days, in which case such benefits are expensed ratably over the future service period. For contract termination costs, we record a liability upon the later of the contract termination date or the date we cease using the rights conveyed by the contract. We have made estimates regarding the amount and timing of our restructuring expense and liability, including current period employee termination benefits.

Impairment of Long-Lived Assets

Losses from impairment of long-lived assets used in operations are recognized when indicators of impairment are present and the undiscounted cash flows estimated to be generated by those assets are less than the assets’ carrying amount. We periodically evaluate the carrying value of long-lived assets to be held and used when events and circumstances indicate that the carrying amount of an asset may not be recovered. The determination of fair value of the assets evaluated for impairment requires the use of judgmental assumptions surrounding the amount and timing of future cash flows and the highest and best use of the assets.

Convertible Senior Notes due 2016

The Company’s 2.875% Convertible Senior Notes due 2016 (the “2016 Notes”), issued in the first quarter of 2011, are convertible at the option of the holder, and we may choose to satisfy conversions, if any, in cash, shares of our common stock, or a combination of cash and shares of common stock, based on a conversion rate initially equal to 19.5160 shares of common stock per $1,000 principal amount of 2016 Notes, which is equivalent to an initial conversion price of approximately $51.24 per share. Should a holder exercise the conversion option during the next twelve-month period, it is our intention to satisfy the conversion with shares of common stock.

The 2016 Notes are accounted for in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification 470-20 (“ASC 470-20”), Debt with Conversion and Other Options, under which issuers of certain convertible debt instruments that may be settled entirely or partially in cash upon conversion are required to separately account for the liability (debt) and equity (conversion option) components of the instrument. The liability component of the 2016 Notes, as of the issuance date, was calculated by estimating the fair value of a similar liability issued at an 8.1% effective interest rate, which was determined by considering the rate of return investors would require in the Company’s debt structure. The amount of the equity component was calculated by deducting the fair value of the liability component from the principal amount of the 2016 Notes and resulted in a corresponding debt discount. The debt discount is being amortized as interest expense through the earlier of the maturity date of the 2016 Notes or the date of conversions, if any.

 

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Fair Value

We measure and report at fair value cash equivalents and investment securities (financial assets). Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability, an exit price, in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value maximize the use of observable inputs and minimize the use of unobservable inputs.

Market values were determined for each individual security in the investment portfolio. We utilize third-party pricing services for all security valuations. We review the pricing methodology, including the collection of market information, used by the third-party pricing services. On a periodic basis, we also review and validate the pricing information received from the third-party providers.

Assets and liabilities typically recorded at fair value on a non-recurring basis include long-lived assets measured at fair value due to an impairment assessment under ASC 360-10, Property, Plant and Equipment, and asset retirement obligations initially measured under ASC 410-20, Asset Retirement and Environmental Obligations.

Accounting for Stock-Based Compensation

Stock-based compensation cost is estimated at the grant date based on the award’s fair value and is recognized on the accelerated method as expense over the requisite service period. The fair value of stock options is calculated using the Black-Scholes-Merton (“BSM”) option pricing model. The BSM model requires various judgmental assumptions regarding volatility and expected option life. If any of the assumptions used in the BSM model change significantly, stock-based compensation expense for new awards may differ materially from that recorded for existing awards. We determine the fair value of awards under our Employee Stock Purchase Plan using the BSM model.

Restricted stock awards generally vest and are expensed over two- to four-year periods. We have granted restricted stock awards and options with certain performance conditions to certain executive officers and key employees. At each reporting date, we evaluate whether achievement of the performance conditions is probable. Compensation expense is recorded over the appropriate service period based upon our assessment of accomplishing each performance provision or the occurrence of other events which may have caused the awards or options to accelerate and vest.

In the second quarter of 2013, we granted cash-settled stock appreciation rights with a two-year vest period to certain employees. These awards are classified as liabilities and are measured at fair value at each reporting date, with fair value being determined using the BSM model.

Stock-based compensation expense also requires the estimate of forfeiture rates. In the first and second quarters of 2013, we adjusted our estimated forfeiture rates based on historical forfeiture data, resulting in cumulative catch-up adjustments to decrease stock-based compensation expense and net loss by $3.1 million and $5.8 million for the three- and six- month periods ended June 30, 2013, respectively. These adjustments decreased basic and diluted net loss per share by $0.02 and $0.04 for the three- and six-month periods ended June 30, 2013, respectively.

Loss Contingencies

A loss contingency is recorded if it is probable that an asset has been impaired or a liability has been incurred and the amount of the loss can be reasonably estimated. We evaluate, among other factors, the probability of an unfavorable outcome and our ability to make a reasonable estimate of the amount of the ultimate loss. Loss contingencies that we determine to be reasonably possible, but not probable, are disclosed but not recorded. Changes in these estimates could materially affect our financial position and results of operations.

Recent Accounting Pronouncements

In February 2013, the FASB issued an Accounting Standards Update which requires companies to provide information about the amounts reclassified from accumulated other comprehensive income to net income by component. In addition, companies are required to present, either on the face of the statements of operations or in the notes to the financial statements, significant amounts reclassified from accumulated other comprehensive income by statement of operations line item. There were no reclassifications from accumulated other comprehensive income to net income for the three- and six-month periods ended June 30, 2013.

 

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In June 2013, the FASB ratified Emerging Issues Task Force (“EITF”) Issue 13-C, “Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists,” which concludes that an unrecognized tax benefit should be presented as a reduction of a deferred tax asset when settlement in this manner is available under the tax law. We will adopt this amendment as of January 2014, and do not believe it will have any impact on our financial position, results of operations or cash flows.

RESULTS OF OPERATIONS FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2013 AND 2012

Revenue

 

     Three Months Ended June 30,      Six Months Ended June 30,  
     2013      2012      2013      2012  
     (In thousands)      (In thousands)  

Product revenue, net

   $ 73,286       $ 79,964       $ 140,866       $ 161,936   

Royalty and other revenue

     29         28         43         130   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total revenue

   $ 73,315       $ 79,992       $ 140,909       $ 162,066   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net product revenue from the commercial sale of PROVENGE was $73.3 million and $140.9 million for the three- and six-month periods ended June 30, 2013, respectively, and $80.0 million and $161.9 million for the three- and six-month periods ended June 30, 2012, respectively. The decrease in 2013 was primarily attributable to new competition entering into PROVENGE’s labeled indication, with the FDA approval of ZYTIGA® (abiraterone acetate) in December 2012 and the compendia listing for Xtandi (Enzalutamide). These competitive products have primarily impacted our small- and low-volume accounts. Approximately 877 parent accounts, some of which have multiple sites, had infused the product as of the end of June 2013.

Revenue from the sale of PROVENGE is recorded net of product returns and estimated pricing discounts via rebates and/or chargebacks offered pursuant to mandatory federal and state government programs and to members of GPOs. Revenue recognition requires estimates of rebates and chargebacks each period. We recorded estimated rebates, chargebacks and GPO administrative fees of approximately $5.8 million and $11.2 million for the three- and six-month periods ended June 30, 2013, respectively, and approximately $7.0 million and $13.7 million for the three- and six-month periods ended June 30, 2012, respectively.

The following is a roll forward of our chargebacks reserve associated with the PHS and FSS programs:

 

     Six Months Ended June 30,  
     2013     2012  
     (in thousands)  

Beginning balance, January 1

   $ 3,107      $ 7,065   

Current provision related to sales made in current period

     6,588        9,086   

Current provision related to sales made in prior periods

     —          50   

Adjustments

     (1,575     —     

Payments/credits

     (5,425     (9,372
  

 

 

   

 

 

 

Balance at June 30

   $ 2,695      $ 6,829   
  

 

 

   

 

 

 

The following is a roll forward of our accrued GPO rebates and administrative fees balance:

 

     Six Months Ended June 30,  
     2013     2012  
     (in thousands)  

Beginning balance, January 1

   $ 1,950      $ 885   

Current provision related to sales made in current period

     3,098        4,045   

Current provision related to sales made in prior periods

     —          50   

Payments/credits

     (3,435     (2,548
  

 

 

   

 

 

 

Balance at June 30

   $ 1,613      $ 2,432   
  

 

 

   

 

 

 

 

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Royalty revenue for the three- and six-month periods ended June 30, 2013 and 2012 resulted from the recognition of royalties pursuant to a license agreement. Other revenue for the three- and six-month periods ended June 30, 2013 and 2012 resulted from the recognition of deferred revenue related to a license agreement.

Cost of Product Revenue

 

     Three Months Ended June 30,      Six Months Ended June 30,  
     2013      2012      2013      2012  
     (In thousands)      (In thousands)  

Cost of product revenue

   $ 43,798       $ 61,731       $ 87,173       $ 121,772   

Gross profit (1)

     29,488         18,233         53,693         40,164   

 

(1) Gross profit is calculated by subtracting cost of product revenue from net product revenue.

Cost of product revenue includes the costs of manufacturing and distributing PROVENGE. Costs related to the manufacture of PROVENGE for clinical patients are classified as research and development expense. The decrease in cost of product revenue for the three- and six-month periods ended June 30, 2013 as compared to the same periods of 2012 was primarily due to the sale of the New Jersey Facility to Novartis in December 2012, other restructuring activities and decreased product sales.

We began capitalizing raw material inventory in mid-April 2009, in anticipation of the potential approval for marketing of PROVENGE in the first half of 2010. At this time, our expectation of future benefits became sufficiently high to justify capitalization of these costs, as regulatory approval was considered probable and the related costs were expected to be recoverable through the commercialization of the product. Costs incurred prior to mid-April 2009 were recorded as research and development expense in the statements of operations, which resulted in zero-cost inventory.

For the three- and six-month periods ended June 30, 2012, we used $0.6 million and $4.7 million, respectively, of zero-cost inventory, and no zero-cost inventory remained on hand as of June 30, 2012. As a result, cost of product revenue reflects a lower average per unit cost of raw material in the first quarter of 2012.

Gross margins on new product introductions generally increase over the life of the product as utilization of capacity increases and manufacturing efforts on product cost reduction are successful. As product sales increase and we gain efficiencies in our manufacturing processes, we anticipate cost of product revenue as a percentage of product revenue will decline.

Research and Development Expenses

Research and development expenses were $18.2 million and $36.6 million for the three- and six-month periods ended June 30, 2013, respectively, and $19.7 million and $37.0 million for the three- and six-month periods ended June 30, 2012, respectively. Expenses related to our research and development activities are categorized as costs associated with clinical programs, supplier development and research. Our research and development expenses were as follows:

 

     Three Months Ended June 30,      Six Months Ended June 30,  
     2013      2012      2013      2012  
     (In millions)      (In millions)  

Clinical programs

   $ 9.7       $ 13.6       $ 19.5       $ 24.6   

Supplier development expenses

     2.1         1.6         4.1         3.4   

Research programs

     6.4         4.5         13.0         9.0   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total research and development expense

   $ 18.2       $ 19.7       $ 36.6       $ 37.0   
  

 

 

    

 

 

    

 

 

    

 

 

 

Research and development costs associated with clinical programs include clinical trial site costs, clinical manufacturing costs, costs incurred for consultants and other outside services, such as data management and statistical analysis support, materials and supplies used in support of clinical programs and employee-related expenses of departments supporting clinical programs. Costs

 

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attributable to supplier development expenses include technology transfer and process development costs related to developing second source suppliers. Costs attributable to research programs represent efforts to develop and expand our product pipeline and other research efforts. The costs in each category may change in the future and new categories may be added.

Current product candidates and potential targets for the focus of new product candidates in research and development include:

 

   

DN24-02, our investigational active cellular immunotherapy which potentially may be used for the treatment of patients with bladder, breast, ovarian and other solid tumors expressing HER2/neu. In December 2010, we filed an Investigational New Drug (“IND”) application with the FDA for DN24-02 for the treatment of HER2+ urothelial carcinoma, including bladder cancer, following surgical resection. The trial will randomize patients to DN24-02 or standard of care, with a primary endpoint of overall survival. We enrolled our first patient in this trial in September 2011. Targeted enrollment is approximately 180 patients at clinical sites throughout the United States.

 

   

Active cellular immunotherapies directed at CA-9, an antigen highly expressed in renal cell carcinoma, and CEA, an antigen expressed in colorectal and other cancers, are in our portfolio.

 

   

TRPM8 (Transient Receptor Potential, sub-family M), a target for manipulation by small molecule drug therapy. We have developed an orally-available, small molecule targeting TRPM8 that could be applicable to treating multiple types of cancer. We completed our Phase 1 clinical trial in April 2012.

Research and development costs incurred related to these product candidates and potential targets were as follows:

 

     Three Months Ended June 30,      Six Months Ended June 30,  
     2013      2012      2013      2012  
     (In millions)      (In millions)  

DN24-02

   $ 1.7       $ 0.6       $ 2.4       $ 1.3   

Other pipeline development

     0.1         0.2         0.2         0.9   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 1.8       $ 0.8       $ 2.6       $ 2.2   
  

 

 

    

 

 

    

 

 

    

 

 

 

Research and development costs associated with CA-9, CEA and TRPM8 for each period presented were not material.

The significant majority of our historical research and development expense has been in connection with PROVENGE in the United States. In 2011, we commenced work in connection with our intention to seek approval of PROVENGE for marketing in the European Union. Research and development costs associated with PROVENGE in the United States and in the E.U. for each period presented were as follows:

 

     Three Months Ended June 30,      Six Months Ended June 30,  
     2013      2012      2013      2012  
     (In millions)      (In millions)  

PROVENGE- United States

   $ 12.7       $ 16.1       $ 27.1       $ 28.6   

PROVENGE- European Union

     3.7         2.8         6.9         6.2   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 16.4       $ 18.9       $ 34.0       $ 34.8   
  

 

 

    

 

 

    

 

 

    

 

 

 

The nature and efforts required to complete a prospective research and development project are typically indeterminable at very early stages when research is primarily conceptual and may have multiple applications. Once a focus towards developing a specific product candidate has been developed, we obtain more visibility into the efforts that may be required to reach conclusion of the development phase. However, there are inherent risks and uncertainties in developing novel biologics in a rapidly-changing industry environment. To obtain approval of a product candidate from the FDA, we must, among other requirements, submit data supporting safety and efficacy as well as detailed information on the manufacture and composition of the product candidate. In most cases, this entails extensive laboratory tests and preclinical and clinical trials. The collection of this data, as well as the preparation of applications for review by the FDA and other regulatory agencies outside the United States, is costly in time and effort, and may require significant capital investment.

 

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We may encounter significant difficulties or costs in our efforts to obtain FDA approvals or approvals to market products in foreign markets. For example, the FDA or the equivalent in jurisdictions outside the United States may determine that our data is not sufficiently compelling to warrant marketing approval and may require that we engage in additional clinical trials or provide further analysis which may be costly and time-consuming. In addition, the market access environment is continuously evolving and limitations on reimbursement or market access could limit a product’s potential. Further, individual countries or jurisdictions could require additional data, such as patient registries, to determine pricing and market access and the cost and time associated with these requirements could be extensive. Regardless of the nature of our efforts to complete development of our products, receive marketing approval, and receive appropriate market access, we may encounter delays that render our product candidates uncompetitive or otherwise preclude us from marketing products.

We may be required to obtain additional funding to complete development of product candidates or in order to commercialize approved products. However, such funding may not be available to us on terms we deem acceptable or at all. Our ability to access additional capital is dependent on the success of our business and the perception by the market of our future business prospects. In the event we were unable to obtain necessary funding, we might halt or temporarily delay ongoing development projects.

We anticipate our research and development expenses in 2013 will remain consistent with 2012.

Selling, General and Administrative Expenses

Selling, general and administrative expenses were $66.8 million and $129.3 million for the three- and six-month periods ended June 30, 2013, respectively, and $80.2 million and $175.5 million for the three- and six-month periods ended June 30, 2012, respectively. Selling, general and administrative expenses primarily consisted of salaries and wages, stock-based compensation, consulting fees, sales and marketing fees and administrative costs to support our operations.

The decrease in selling, general and administrative expenses for the three- and six-month periods ended June 30, 2013 compared to the respective periods in 2012 was primarily due to decreases in non-cash stock-based compensation and other compensation expenses due to fewer executive separations in 2013 and the strategic restructuring plan announced on July 30, 2012.

We anticipate our selling, general and administrative expenses for the remainder of 2013 will remain relatively consistent with the current quarter results.

Restructuring, Contract Termination and Asset Impairment Expenses

On July 30, 2012, we announced that our Board of Directors had approved a strategic restructuring plan that included re-configuring our manufacturing model with the closure of the New Jersey Facility, restructuring administrative functions and strengthening commercial functions, which we anticipate will lower our overall cost structure. The restructuring initiatives included a reduction in workforce of approximately 600 full-time and contractor positions. The employees affected by the workforce reduction were notified the week of September 17, 2012.

On December 20, 2012, we announced the sale of the New Jersey Facility to Novartis for $43.0 million. As part of the agreement with Novartis, approximately 100 employees at the facility who were previously included in the workforce reduction were offered jobs with Novartis.

During the three- and six-month periods ended June 30, 2013, we recorded charges of $0.2 million and $1.4 million, respectively, related to severance, other termination benefits and outplacement services. These charges were offset by adjustments to reduce the restructuring liability by approximately $0.9 million and $1.2 million for the three- and six-month periods ended June 30, 2013, respectively, related to outplacement services and COBRA benefits not used by employees and severance and other termination benefits that will not be paid. We do not expect to incur additional restructuring charges for employee severance benefits related to the 2012 workforce reduction. The implementation of these restructuring initiatives has been substantially completed.

In addition, we recorded restructuring charges of $0.6 million and $1.6 million during the three- and six-month periods ended June 30, 2013, respectively, related to relocation benefits offered to employees, expenses associated with the closure of the New Jersey Facility, contract termination expenses and other related expenses.

Interest Income

Interest income was $0.2 million and $0.4 million for the three- and six-month periods ended June 30, 2013, respectively, and $0.4 million and $0.8 million for the three- and six-month periods ended June 30, 2012, respectively. We receive interest income primarily from holdings of cash and investments. The decrease in interest income in 2013, compared to 2012, was due both to lower prevailing interest rates and lower investment balances.

 

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Interest Expense

Interest expense was $13.9 million and $27.5 million for the three- and six-month periods ended June 30, 2013, respectively, and $13.8 million and $27.6 million for the three- and six-month periods ended June 30, 2012, respectively. Interest expense includes amortization of the debt discount and debt issuance costs for the 2016 Notes, which resulted in non-cash interest expense of $7.0 million and $13.9 million for the three- and six-month periods ended June 30, 2013, respectively, and $6.5 million and $12.9 million for the three- and six-month periods ended June 30, 2012, respectively. Interest expense recognized on the 2.875% stated coupon rate was $4.5 million for each of the three-month periods and $8.9 million for each of the six-month periods ended June 30, 2013 and 2012. Refer to Liquidity and Capital Resources: Financings from the Issuance of Convertible Notes for further discussion of the accounting for the 2016 Notes.

We also recorded interest expense, including the amortization of debt issuance costs, related to the 4.75% Convertible Senior Subordinated Notes due 2014 (the “2014 Notes”) of $0.4 million and $0.7 million during each of the three- and six-month periods, respectively, ended June 30, 2013 and 2012.

Financing fees paid to the Wholesalers in the three- and six-month periods ended June 30, 2013 decreased as compared to the same periods in 2012 due to lower revenue.

LIQUIDITY AND CAPITAL RESOURCES

Cash Uses and Proceeds

At June 30, 2013 and December 31, 2012, we had cash, cash equivalents and short-term and long-term investments of approximately $280.6 million and $429.8 million, respectively. The decrease in these balances in 2013 was primarily attributable to cash used in operating activities, including costs associated with the commercialization of PROVENGE, research and development expenses, including costs associated with clinical programs, supplier development and research, and selling, general and administrative expenses in support of our operations. To date, we have financed our operations primarily through proceeds from the sale of equity and convertible debt securities, commercial sale of PROVENGE, sale of a royalty for boceprevir for the treatment of chronic hepatitis C for $125 million in the fourth quarter of 2011, cash receipts from collaborative agreements and interest income.

Net cash used in operating activities for the six-month periods ended June 30, 2013 and 2012 was $139.3 million and $95.9 million, respectively. The increase in net cash used in operating activities during the six-month period ended June 30, 2013, compared to the same period in 2012, primarily resulted from increased inventory purchases, the timing of interest payment on our convertible debt, decreased sales of PROVENGE and payment of restructuring expenses in 2013.

Net cash provided by investing activities was $46.1 million for the six-month period ended June 30, 2013, compared with net cash used in investing activities of $84.4 million for the six-month period ended June 30, 2012. Since our inception, investing activities, other than purchases and maturities of short-term and long-term investments, have consisted primarily of purchases of property and equipment. Expenditures related to investing activities for the six-month period ended June 30, 2013 consisted primarily of purchases of investments of $58.9 million and purchases of property and equipment, primarily hardware and software expenditures, of $5.1 million, offset by maturities and sales of investments of $110.1 million. The increase in net cash provided by investing activities for the six-month period ended June 30, 2013, compared to the six-month period ended June 30, 2012, was primarily related to a decrease in investment purchases.

Net cash used in financing activities was $3.2 million for the six-month period ended June 30, 2013, compared with net cash provided by financing activities of $0.7 million for the six-month period ended June 30, 2012. Net cash used in financing activities in 2013 primarily related to payments on capital lease obligations, offset by the issuance of common stock under the Employee Stock Purchase Plan. Net cash provided by financing activities in 2012 primarily related to the issuance of common stock under the Employee Stock Purchase Plan and proceeds from the release of security deposits, offset by payments on capital lease obligations.

We have incurred significant losses and negative cash flows from operations since our inception. As of June 30, 2013, our accumulated deficit was $2.1 billion. We have incurred net losses as a result of research and development expenses, clinical trial expenses, contract manufacturing and facility expenses, costs associated with the commercial launch of PROVENGE and general and administrative expenses in support of our operations and research efforts.

 

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We believe that our cash, cash equivalents, and short-term and long-term investments as of June 30, 2013, together with revenue generated from our commercial sales of PROVENGE and either growth in revenue and/or implementation of cost saving measures will be sufficient to meet our obligations and anticipated expenditures for at least the next 12 months as we continue to invest in commercial operations, continue clinical trials, apply for regulatory approvals, potentially invest in commercial infrastructure outside the United States and invest in research and product development. The majority of our resources continue to be used in support of the commercialization of PROVENGE in the United States. Even if we are able to successfully realize our commercialization goals for PROVENGE, because of the numerous risks and uncertainties associated with commercialization of a biologic, we are unable to predict when we will become profitable, if at all. Even if we achieve profitability, we may not be able to maintain or increase profitability. We expect that continued revenue from PROVENGE product sales will be a significant source of cash. However, we may need to raise additional funds to meet potential liquidity needs including:

 

   

continued investment in marketing, manufacturing, information technology and other infrastructure and activities related to the commercialization of PROVENGE in the United States,

 

   

continuing and expanding internal research and development programs,

 

   

engaging in clinical trials outside of the United States, potential commercial infrastructure development and other investment in order to support the commercialization of PROVENGE in territories outside the United States,

 

   

working capital needs, and

 

   

satisfying debt obligations.

Leases and Other Commitments

Office Leases

In February 2011, we entered into a lease for office space of 179,656 square feet in Seattle, Washington with an initial lease term of five and a half years and one renewal term of two and a half years. In July 2012, we amended the lease to reduce the premises to 158,081 square feet. The related rent reduction took effect in November 2012. In April 2013, we amended the lease to further reduce the premises to 112,915 square feet. Rent payments related to the space relinquished in April 2013 will cease effective October 2013 and August 2014. In addition, in April 2013, we subleased an additional 22,583 square feet at these premises, commencing in May 2013 through the remaining lease term.

In February 2011, we entered into a sublease for laboratory and office space of 97,365 square feet in Seattle, Washington. The lease term is for eight years. In July 2012, we entered into a lease for office space of 39,937 square feet in Bridgewater, New Jersey. The initial lease term is for ten years, with one renewal term of five years.

Manufacturing Facilities Leases

In August 2009, we entered into an agreement to lease the Orange County Facility, consisting of approximately 184,000 square feet, for use as a manufacturing facility following build-out. The initial lease term is ten and a half years, expiring in December 2019, with five renewal terms of five years each. In July 2009, we entered into an agreement to lease the Atlanta Facility, consisting of approximately 156,000 square feet, for use as a manufacturing facility following build-out. The lease commenced when we took possession of the building upon substantial completion of construction of the building shell in March 2010. The initial lease term is ten and a half years, with five renewal terms of five years each.

The manufacturing facility leases have provisions requiring that we restore the buildings to original condition upon lease termination. Accordingly, we have accrued the estimated costs of dismantlement and restoration associated with these obligations.

Production and Supply Expenses

We have a supply agreement with Fujifilm Diosynth Biotechnologies (“Fujifilm”) covering the commercial production of the recombinant antigen used in the manufacture of PROVENGE. The second amendment to the supply agreement extended the term of the agreement through December 31, 2018. Unless terminated, the agreement will renew automatically thereafter for additional 5-year terms. The agreement may be terminated upon written notice by us or Fujifilm at least 24 months before the end of a renewal term or by either party in the event of an uncured material breach or default by the other party.

 

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We currently have a commitment with Fujifilm to purchase antigen of approximately $36.3 million. We expect that payments on this commitment will continue through 2014.

Software and Equipment Financing

We have entered into various agreements for the lease of software licenses and equipment. The leases have been treated as capital leases. The capital leases, with an aggregate remaining obligation at June 30, 2013 of $7.5 million, bear interest at rates ranging from 4.5% to 11.7% per year.

Financings from the Issuance of Convertible Notes

2016 Notes 

On January 14, 2011, we entered into an underwriting agreement with J.P. Morgan Securities LLC (the “Underwriter”) relating to the offer and sale of $540 million aggregate principal amount of 2016 Notes. Under the terms of the underwriting agreement, we granted the Underwriter an option, exercisable within 30 days of the date of the agreement, to purchase up to an additional $80 million aggregate principal amount of 2016 Notes to cover overallotments. We issued $540 million in aggregate principal amount of 2016 Notes upon the closing of the offering on January 20, 2011. Net proceeds, after payment of underwriting fees and expenses, were approximately $528.8 million. On January 31, 2011, the Underwriter exercised the overallotment option in full, and we closed on the sale of the additional $80 million in principal amount of 2016 Notes on February 3, 2011. Net proceeds from the exercise of the overallotment option, after payment of underwriting fees and expenses, were approximately $78.3 million.

On January 20, 2011, we entered into the First Supplemental Indenture (the “Supplemental Indenture”) with The Bank of New York Mellon Trust Company, N.A., as trustee (the “Trustee”), to our existing Base Indenture (the “Base Indenture” and, together with the Supplemental Indenture, the “2016 Indenture”), dated as of March 16, 2007. The 2016 Indenture sets forth the rights and provisions governing the 2016 Notes. Interest at 2.875% per annum is payable on the 2016 Notes semi-annually in arrears on January 15 and July 15 of each year. Record dates for payment of interest on the 2016 Notes are each January 1 and July 1. The maturity date of the 2016 Notes is January 15, 2016, unless earlier converted.

The 2016 Notes are convertible at the option of the holder, and we may choose to satisfy conversions, if any, in cash, shares of our common stock, or a combination of cash and shares of our common stock, based on a conversion rate initially equal to 19.5160 shares of common stock per $1,000 principal amount of 2016 Notes, which is equivalent to an initial conversion price of approximately $51.24 per share. The conversion rate will be increased under certain circumstances described in the 2016 Indenture; however, the number of shares of common stock issued upon conversion of a 2016 Note will not exceed 27.3224 per $1,000 principal amount of 2016 Notes, subject to adjustment in accordance with the 2016 Indenture. Should a holder exercise the conversion option during the next twelve-month period, it is our intention to satisfy the conversion with shares of common stock. Consequently, the 2016 Notes are classified as a long-term liability as of June 30, 2013 and December 31, 2012.

The conversion rate will be adjusted upon the occurrence of certain events, including stock dividends or share splits, the issuance of rights, options or warrants, spin-offs or other distribution of property, cash dividends or distributions, or tender offers or exchange offers. We will not make an adjustment to the conversion rate for any transaction described above (other than share splits or share combinations) if each holder of 2016 Notes has the right to participate in such transaction at the same time and upon the same terms as holders of common stock, and solely as a result of holding 2016 Notes, without having to convert 2016 Notes, as if a number of shares of common stock were held equal to the applicable conversion rate multiplied by the principal amount of 2016 Notes held.

If a “fundamental change,” as defined in the 2016 Indenture, occurs, holders of 2016 Notes may require us to repurchase all or a portion of their 2016 Notes for cash at a repurchase price equal to 100% of the principal amount of 2016 Notes to be repurchased, plus any accrued and unpaid interest and other amounts due thereon. However, if a fundamental change occurs and a holder elects to convert 2016 Notes, we will, under certain circumstances, increase the applicable conversion rate for 2016 Notes surrendered for conversion by a number of additional shares of common stock, based on the date on which the fundamental change occurs or becomes effective and the price paid per share of common stock in the fundamental change as specified in the 2016 Indenture. At our option, we will satisfy our conversion obligation with cash, shares of common stock or a combination of cash and shares, unless the consideration for common stock in any fundamental change is comprised entirely of cash, in which case the conversion obligation will be paid in cash. The number of additional shares of common stock was determined such that the fair value of the additional shares would be expected to approximate the fair value of the convertible option at the date of the fundamental change.

 

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In addition, we may from time to time increase the conversion rate, to the extent permitted by law, by any amount for any period of time if the period is at least 20 business days and we provide 15 business days prior written notice of such increase. We may increase the conversion rate if the Board of Directors determines that such increase would avoid or diminish United States federal income tax to holders of common stock in connection with a dividend or distribution. The 2016 Indenture contains customary covenants.

The 2016 Notes are accounted for in accordance with ASC 470-20 under which issuers of certain convertible debt instruments that may be settled entirely or partially in cash upon conversion are required to separately account for the liability (debt) and equity (conversion option) components of the instrument. The liability component of the 2016 Notes, as of the issuance date, was calculated by estimating the fair value of a similar liability issued at an 8.1% effective interest rate, which was determined by considering the rate of return investors would require in the Company’s debt structure. The amount of the equity component was calculated by deducting the fair value of the liability component from the principal amount of the 2016 Notes and resulted in a corresponding debt discount. The debt discount is being amortized as interest expense through the earlier of the maturity date of the 2016 Notes or the date of conversions, if any.

The application of ASC 470-20 resulted in the initial recognition of approximately $132.9 million as the debt discount recorded in additional paid-in capital for the 2016 Notes. As of June 30, 2013, the net carrying amount of the liability component, which is recorded as a long-term liability in the consolidated balance sheet, was $545.7 million, and the remaining unamortized debt discount was $74.3 million. Amortization of the debt discount and debt issuance costs resulted in non-cash interest expense of $7.0 million and $13.9 million for the three- and six-month periods ended June 30, 2013, respectively, and $6.5 million and $12.9 million for the three- and six-month periods ended June 30, 2012, respectively. In addition, interest expense recognized on the 2.875% stated coupon rate was $4.5 million for each of the three-month periods and $8.9 million for each of the six-month periods ended June 30, 2013 and 2012.

2014 Notes

In 2007, an aggregate of $85.3 million of 2014 Notes was sold in a private placement to qualified institutional buyers. Proceeds from the offering, after deducting placement fees and expenses of approximately $3.0 million, were approximately $82.3 million. The 2014 Notes were issued at face principal amount and pay interest at 4.75% per annum on a semi-annual basis in arrears on June 15 and December 15 of each year. Record dates for payment of interest on the 2014 Notes are each June 1 and December 1. The maturity date of the 2014 Notes is June 15, 2014, unless earlier converted.

In certain circumstances, additional amounts may become due as additional interest. We can elect that the sole remedy for an event of default for our failure to comply with the “reporting obligations” provisions of the indenture under which the 2014 Notes were issued (the “2014 Indenture”) for the first 180 days after the occurrence of such event of default would be for the holders of the 2014 Notes to receive additional interest on the 2014 Notes at an annual rate equal to 1% of the outstanding principal amount of the 2014 Notes.

The 2014 Notes are convertible into our common stock at the option of the holder, initially at the conversion price of $10.28 per share, equal to a conversion rate of approximately 97.2644 shares per $1,000 principal amount of 2014 Notes, subject to adjustment. There may be an increase in the conversion rate of the 2014 Notes under certain circumstances described in the 2014 Indenture; however, the number of shares of common stock issued will not exceed 114.2857 per $1,000 principal amount of 2014 Notes.

If a “fundamental change,” as defined in the 2014 Indenture, occurs, holders of 2014 Notes may require us to repurchase all or a portion of their 2014 Notes for cash at a repurchase price equal to 100% of the principal amount of 2014 Notes to be repurchased, plus any accrued and unpaid interest and other amounts due thereon. However, a holder that converts 2014 Notes in connection with a fundamental change may, in some circumstances, be entitled to an increased conversion rate (i.e., a lower per share conversion price) as a make whole premium. The increased conversion rates were determined such that the fair value of the additional shares would be expected to approximate the fair value of the convertible option at the date of the fundamental change.

In addition, the conversion rate will be adjusted upon the occurrence of certain events, including stock dividends or share splits, the issuance of rights or warrants, other distribution of property, cash dividends or distributions, or tender offers or exchange offers. We will not make an adjustment to the conversion rate for any transaction described above (other than share splits or share combinations) if each holder of 2014 Notes has the right to participate in such transaction at the same time and upon the same terms as holders of common stock, and solely as a result of holding 2014 Notes, without having to convert 2014 Notes and as if a number of shares of common stock were held equal to the applicable conversion rate multiplied by the principal amount of 2014 Notes held.

 

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In addition, we may from time to time increase the conversion rate, to the extent permitted by law, by any amount for any period of time if the period is at least 20 business days and we provide 15 business days prior written notice of such increase. We may increase the conversion rate if the Board of Directors determines that such increase would avoid or diminish United States federal income tax to holders of common stock in connection with a dividend or distribution. The 2014 Indenture contains customary covenants.

As of June 30, 2013 and December 31, 2012, the aggregate principal amount of the 2014 Notes outstanding was $27.7 million. As the 2014 Notes have a contractual maturity date of June 15, 2014, the balance is classified as a current liability as of June 30, 2013. We recorded interest expense, including the amortization of debt issuance costs, related to the 2014 Notes of $0.4 million during each of the three-month periods and $0.7 million during each of the six-month periods ended June 30, 2013 and 2012.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Our investment portfolio is maintained in accordance with our investment policy, which specifies credit quality standards, limits credit exposure to any single issuer or security issuance and defines allowable investments. Pursuant to our policy, auction rate or asset-backed securities without a guarantee by the United States government are not permitted to be purchased. The fair value of cash equivalents and marketable securities is subject to change as a result of changes in market interest rates and investment risk related to the issuers’ credit worthiness.

As of June 30, 2013 and December 31, 2012, we had short-term investments of $115.4 million and $165.4 million, respectively, and long-term investments of $73.2 million and $76.0 million, respectively. Our short-term and long-term investments are subject to interest rate risk and will decline in value if market interest rates increase. The estimated fair value of short-term and long-term investments as of June 30, 2013, assuming a 100 basis point increase in market interest rates, would decrease by approximately $1.4 million, which would not materially impact results of operations, cash flows or financial position. While changes in interest rates may affect the fair value of our investment portfolio, gains or losses, if any, will not be recognized in our statement of operations until the investment is sold or if the reduction in fair value is determined to be an other-than-temporary impairment.

We actively monitor and manage our portfolio. If necessary, we believe that we are able to liquidate investments within the next year without significant loss. We currently believe that these securities are not significantly impaired; however, it could take until the final maturity of the underlying notes to realize our investments’ recorded values. Based on expected operating cash flows and other sources of cash, we do not anticipate the potential lack of liquidity on these investments to affect our ability to execute our current business plan.

ITEM 4. CONTROLS AND PROCEDURES

(a) Disclosure controls and procedures.

Our chief executive officer and our chief financial officer, based on their evaluation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act) as of June 30, 2013, have concluded that our disclosure controls and procedures are effective for ensuring that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms.

(b) Changes in internal control over financial reporting.

There were no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the fiscal quarter ended June 30, 2013 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

The Company and three current and former officers are named defendants in a consolidated putative securities class action proceeding filed in August 2011 with the United States District Court for the Western District of Washington (the “District Court”) under the caption In re Dendreon Corporation Class Action Litigation, Master Docket No. C 11-1291 JLR. Lead Plaintiff, San Mateo

 

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County Employees Retirement Association purports to state claims for violations of federal securities laws on behalf of a class of persons who purchased the Company’s common stock between April 29, 2010 and August 3, 2011. A consolidated amended complaint was filed on February 24, 2012. In general, the complaints allege that the defendants issued materially false or misleading statements concerning the Company, its finances, business operations and prospects with a focus on the market launch of PROVENGE and related forecasts concerning physician adoption, and revenue from sales of PROVENGE as reflected in the Company’s August 3, 2011 release of its financial results for the quarter ended June 30, 2011. On April 24, 2013, the parties entered into, and filed with the District Court, a Stipulation of Settlement (the “Stipulation”) setting forth terms of the settlement; in general, the litigation will be dismissed with prejudice and the defendants will receive full releases in exchange for a payment of $40 million, $38 million of which was funded by the Company’s directors’ and officers’ liability insurers. After notice to the settlement class, at a hearing held August 2, 2013, the District Court granted final approval to the settlement and entered judgment in accordance with terms of the Stipulation. The parties anticipate that the settlement will become final and effective as provided in the Stipulation.

On May 16, 2013, a group of individual shareholders who elected to opt out of the class action settlement commenced their own action alleging securities fraud. That action, captioned Christoph Bolling, et al. v. Dendreon Corporation, et al., Case No. 2:13-CV- 872 JLR, names the same defendant parties as the class action and bases its legal claims on substantially the same factual allegations relating to the same supposedly relevant period. In addition to claims under the federal securities laws, the plaintiff group also purports to assert certain claims under Washington state law. Based on information provided informally by plaintiffs’ counsel, the plaintiff group, which totals approximately 30 persons, purports to have purchased approximately 250,000 shares of Dendreon common stock during the relevant period, an amount that equates to under 0.5% of the estimated shares that comprised the plaintiff class in the class action. The Bolling plaintiffs filed an amended complaint July 16, 2013. Defendants’ response to the amended complaint is due August 9, and defendants plan to file a motion to dismiss; briefing is expected to extend through October 2013. Until the motion to dismiss is resolved, discovery in the Bolling action is stayed. We cannot predict the outcome of the motion. If the litigation proceeds, however, the Company intends to defend the claims vigorously.

Related to the securities lawsuits, the Company also is the subject of stockholder derivative complaints first filed in August 2011 generally arising out of the facts and circumstances that are alleged to underlie the securities action. Derivative suits filed in the District Court were consolidated into a proceeding captioned In re Dendreon Corp. Derivative Litigation, Master Docket No. C 11-1345 JLR; others were filed in the Superior Court of Washington for King County and were consolidated into a proceeding captioned In re Dendreon Corporation Shareholder Derivative Litigation, Lead Case No. 11-2-29626-1 SEA. On June 22, 2012, another derivative action was filed in the Court of Chancery of the State of Delaware, captioned Herbert Silverberg, derivatively on behalf of Dendreon Corporation v. Mitchell H. Gold, et al., Case No. 7646-VCP. The complaints filed in Washington all name as defendants the three individuals who are defendants in the securities action together with the other members of the Company’s Board of Directors. While the complaints filed in Washington assert various legal theories of liability, the lawsuits generally allege that the defendants breached fiduciary duties owed to the Company in connection with the launch of PROVENGE and by purportedly subjecting the Company to potential liability for securities fraud. The complaints also include claims against certain defendants for supposed misappropriation of Company information and insider trading; the Silverberg complaint, which names one additional former officer of the Company as a defendant, asserts only this claim. The Company filed a motion to dismiss the Silverberg action on standing grounds; the motion is fully briefed, and the Company anticipates that the Court of Chancery will schedule an argument on the motion. Proceedings in the Silverberg action are otherwise stayed. We cannot predict the outcome of the motion to dismiss. While the Company has certain indemnification obligations, including obligations to advance legal expense to the named defendants for defense of these lawsuits, the purported derivative lawsuits do not seek relief against the Company. Additionally, the Securities and Exchange Commission (“SEC”) is conducting a formal investigation, which the Company believes relates to some of the same issues raised in the securities and derivative actions. The Company is cooperating fully with the SEC investigation. The ultimate financial impact of these various proceedings, if any, is not yet determinable and therefore, no provision for loss, if any, has been recorded in the financial statements. With respect to all of the above-described proceedings, the Company has insurance that it believes affords coverage for much of the anticipated costs, subject to the policies’ terms and conditions.

The Company received notice in November 2011 of a lawsuit filed in the Durham County Superior Court of North Carolina against the Company by GlaxoSmithKline LLC (“GSK”). The lawsuit purports claims for monies due and owing and breach of the Company’s obligations under the Development and Supply Agreement terminated as of October 31, 2011. On April 9, 2013, GSK amended its complaint to add a claim for breach of North Carolina’s unfair and deceptive trade practices act. The Company does not believe the lawsuit has merit, filed a Counterclaim and Answer on January 6, 2012, and intends to defend its position vigorously. The Company expects to pay approximately $4.0 million in fees in connection with the termination of the Development and Supply Agreement. The ultimate financial impact of the lawsuit is not yet determinable. Therefore, no additional provision for loss has been recorded in the financial statements.

 

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ITEM 1A. RISK FACTORS

The risks described below may not be the only ones relating to our company. Additional risks that we currently believe are immaterial may also impair our business operations. Our business, financial condition, future prospects and the trading price of our common stock could be harmed as a result of any of these risks. These risks and uncertainties may be interrelated or co-related, and as a result, the occurrence of one risk might directly affect other risks described below, make them more likely to occur or magnify their impact. Investors should also refer to the other information contained or incorporated by reference in this Quarterly Report on Form 10-Q for the period ended June 30, 2013, including our consolidated financial statements and related notes, and information contained in our Annual Report on Form 10-K (“Annual Report”), and in our other filings from time to time with the Securities and Exchange Commission (“SEC”). The risks set forth below with an asterisk (*) next to the title are new risk factors or risk factors containing changes from the risk factors previously disclosed in our Quarterly Report on Form 10-Q for the three months ended March 31, 2013.

Risks Relating to our Product Commercialization Pursuits

* If we fail to achieve and sustain commercial success for PROVENGE, our business will suffer, our future prospects may be harmed and our stock price would likely decline.

Prior to the launch of PROVENGE in May 2010, we had never sold or marketed a pharmaceutical product. Unless we can successfully commercialize another product candidate or acquire the right to market other approved products, we will continue to rely on PROVENGE to generate substantially all of our revenue and fund our operations from product sales. Our ability to maintain or increase our revenues for PROVENGE will depend on, and may be limited by, a number of factors, including the following:

 

   

acceptance of and ongoing satisfaction with PROVENGE as the first in a new class of therapy by the medical community, patients receiving therapy and third-party payers in the United States, and eventually in foreign markets if we receive marketing approvals abroad;

 

   

our ability to develop and expand market share, both in the United States and potentially in the rest of the world if we receive marketing approvals outside the United States, in the midst of numerous competing products for late-stage prostate cancer, many of which are commercially available or in late-stage clinical development;

 

   

whether data from clinical trials for PROVENGE, including clinical trials for additional indications or clinical trials to identify biomarkers or clinical trials in connection with competing products such as sequencing studies, are positive and whether such data, if positive, will be sufficient to achieve approval from the U.S. Food and Drug Administration (“FDA”) and its foreign counterparts to market and sell PROVENGE for such additional indications;

 

   

whether competing therapies are prescribed in place of PROVENGE for certain patients or are perceived as superior to PROVENGE by physicians or patients;

 

   

adequate coverage or reimbursement for PROVENGE by government healthcare programs and third-party payers, including private health coverage insurers and health maintenance organizations;

 

   

our ability to sell PROVENGE in the U.S. despite significant turnover in our sales force; and

 

   

the ability of patients to afford any required co-payments for PROVENGE.

If for any reason we become unable to continue selling or manufacturing PROVENGE, our business would be seriously harmed and could fail.

* If PROVENGE were to become the subject of problems related to its efficacy, safety, or otherwise, our revenues from PROVENGE could decrease.

PROVENGE, in addition to any other of our drug candidates that may be approved by the FDA, will be subject to continual review by the FDA, and we cannot assure you that newly discovered efficacy or safety issues will not arise. With the use of any newly marketed drug by a wider patient population, serious adverse events may occur from time to time that initially do not appear to relate to the drug itself. Any efficacy or safety issues could cause us to suspend or cease marketing of our approved products, cause us to modify how we market our approved products, subject us to substantial liabilities, and adversely affect our revenues and financial condition. In the event of a withdrawal of PROVENGE from the market, our revenues would decline significantly and our business would be seriously harmed and could fail.

 

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Adoption of PROVENGE for the treatment of patients with advanced prostate cancer may be slow or limited for a variety of reasons including competing therapies and perceived difficulties in the treatment process or delays in obtaining reimbursement. If PROVENGE is not successful in achieving broad acceptance as a treatment option for advanced prostate cancer, our business would be harmed.

The continued rate of adoption of PROVENGE for advanced prostate cancer and the ultimate market size will be dependent on several factors, including the education of treating physicians on the patient treatment process with PROVENGE and immunotherapies generally. As a first-in-class therapy, PROVENGE utilizes a unique treatment approach, which can have associated challenges in practice for treating physicians. A significant portion of the prospective patient base for treatment with PROVENGE may be under the care of urologists who may be less experienced with infusion treatments than oncologists. Acceptance by urologists of PROVENGE as a treatment option may be measurably slower than adoption by oncologists of PROVENGE as a therapy and may require more educational effort by us. In addition, the tight manufacturing and infusion timelines required for treatment with PROVENGE require educating physicians to adjust practice mechanics, which may result in delay in market adoption of PROVENGE as a preferred therapy.

We may not be able to successfully achieve the full global market potential of PROVENGE.

PROVENGE is presently approved for the treatment of metastatic asymptomatic or minimally symptomatic castrate-resistant prostate cancer in the United States. Earlier diagnosis of metastatic prostate cancer will be increasingly important, and screening, diagnostic and treatment practices can vary significantly by geographic region. To achieve global success for PROVENGE as a treatment, we will need to obtain approvals by foreign regulatory authorities. Data from our completed clinical trials of PROVENGE may not be sufficient to support approval for commercialization by regulatory agencies governing the sale of drugs outside the United States. This could require us to spend substantial sums to develop sufficient clinical data for licensure by foreign authorities. Submissions for approval by foreign regulatory authorities may not result in marketing approval by these authorities for the requested indication. In addition, certain countries require pricing to be established before reimbursement for the specific indication may be obtained. We may not receive or maintain marketing approvals at favorable pricing or reimbursement levels or at all, which could harm our ability to market PROVENGE globally. Prostate cancer is common in many regions where the healthcare support systems are limited and reimbursement for PROVENGE may be limited or unavailable, which will likely limit or slow adoption in these regions. If we are unable to successfully achieve the full global market potential of PROVENGE due to diagnosis practices or regulatory hurdles, our future prospects would be harmed and our stock price could decline.

Products we may potentially commercialize and market may be subject to promotional limitations.

The FDA has the authority to impose significant restrictions on an approved product through the product label and allowed advertising, promotional and distribution activities. The FDA also may require us to undertake post-marketing clinical trials. If the results of such post-marketing studies are not satisfactory, the FDA may withdraw marketing authorization or may condition continued marketing on commitments from us that may be expensive and/or time consuming to fulfill. Even if we receive FDA and other regulatory approvals, if we or others identify adverse side effects after any of our products are on the market, or if manufacturing problems occur, regulatory approval may be suspended or withdrawn and reformulation of our products, additional clinical trials, changes in labeling of our products and additional marketing applications may be required, any of which could harm our business and cause our stock price to decline.

Risks Relating to Manufacturing Activities

*We closed one of our manufacturing facilities and we may close more of our manufacturing facilities, which could limit our ability to supply the market and may limit our product sales.

On July 30, 2012, we announced the closure of our Morris Plains, New Jersey manufacturing facility in connection with our strategic restructuring plan. On December 20, 2012, we announced the sale of the New Jersey Facility to Novartis for $43.0 million. We may decide to close more of our manufacturing facilities in the future. Manufacturing PROVENGE is very complex and time-sensitive. With fewer manufacturing facilities, it may be difficult for us to meet the commercial demand for PROVENGE, especially in certain parts of the country. In addition, having fewer manufacturing facilities exposes us to greater risk that problems with any individual facility, or regional issues such as natural disasters or terrorist attacks, could have a greater effect on our overall ability to supply the market. If we cannot meet demand, we could lose product sales and our revenue and reputation with physicians would suffer. In addition, our business could be materially harmed and our results of operations would be adversely impacted.

We and our contract manufacturers are subject to significant regulation with respect to manufacturing of our products.

All of those involved in the preparation of a therapeutic drug for clinical trials or commercial sale, including our existing (and any future) supply contract manufacturers and clinical trial investigators, are subject to extensive regulation. Components of a finished therapeutic product approved for commercial sale or used in late-stage clinical trials must be manufactured in accordance with the FDA’s current Good Manufacturing Practices, or equivalent cGMP regulations developed by authorities in other countries. These regulations govern manufacturing processes and procedures and the implementation and operation of quality systems to control and assure the quality of investigational products and products approved for sale. Our facilities and quality systems and the facilities and

 

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quality systems of some or all of our third-party contractors must be inspected and audited routinely for compliance with applicable United States and other country regulations. If any such inspection or audit identifies a failure to comply with applicable regulations or if a violation of our product specifications or applicable regulation occurs independent of such an inspection or audit, we, the FDA, or governmental authorities in other countries may require remedial measures that may be costly and/or time consuming for us or a third party to implement and that may include the temporary or permanent suspension or change of a clinical trial or commercial sales, recalls, market withdrawals, seizures or the temporary or permanent closure of a facility. Any such remedial measures imposed upon us or third parties with whom we contract could materially harm our business.

Manufacturing difficulties, disruptions or delays could limit supply of our products and limit our product sales.

Manufacturing biologic human therapeutic products is difficult, complex and highly regulated. We currently manufacture PROVENGE in the United States and plan to manufacture any other product candidates ourselves. We have contracted with a third-party manufacturer in order to commence clinical trials in the European Union, and we are presently reliant on the ability of the third party to adequately support our initial clinical trials in the E.U. Our ability to adequately and in a timely manner manufacture and supply our products is dependent on the uninterrupted and efficient operation of our facilities and those of our third-party contract manufacturers, which may be impacted by:

 

   

availability or contamination of raw materials and components used in the manufacturing process, particularly those for which we have no other source or supplier;

 

   

the ongoing capacity of our facilities and those of our contract manufacturers;

 

   

the performance of our information technology systems;

 

   

compliance with regulatory requirements;

 

   

inclement weather and natural disasters;

 

   

changes in forecasts of future demand for product components;

 

   

patient access to leukapheresis, and other logistical support requirements;

 

   

potential facility contamination by microorganisms or viruses;

 

   

updating of manufacturing specifications; and

 

   

product quality success rates and yields.

If the efficient manufacture and supply of our products is interrupted, we may experience delayed shipments or supply constraints. If we are at any time unable to provide an uninterrupted supply of our products to patients, we may have to notify the FDA, we may lose patients, and physicians may elect to prescribe competing therapeutics, all of which could materially and adversely affect our product sales and results of operations.

Our manufacturing processes and those of our third-party contract manufacturers must undergo a potentially lengthy FDA or other country regulatory approval process and are subject to continued review by the FDA and other country regulatory authorities.

If regulatory authorities determine that we or our third-party contract manufacturers or certain of our third-party service providers have violated regulations or if they restrict, suspend or revoke our prior approvals, they could prohibit us from manufacturing our products or conducting clinical trials or selling our marketed products until we or the affected third-party contract manufacturers or third-party service providers comply, or indefinitely. Because our third-party contract manufacturers and certain of our third-party service providers are subject to FDA and foreign regulatory authorities, alternative qualified third-party contract manufacturers and third-party service providers may not be available on a timely basis or at all. If we or our third-party contract manufacturers or third-party service providers cease or interrupt production or if our third-party contract manufacturers and third-party service providers fail to supply materials, products or services to us, we may experience delayed shipments, and supply constraints for our products.

We rely on complex IT systems for various critical purposes, including timely delivery of product and maintaining patient confidentiality.

We have developed a comprehensive, integrated IT system for the intake of physician orders for PROVENGE, to track product delivery, and to store patient-related data we obtain for purposes of manufacturing PROVENGE. We rely on this system to maintain the chain of identity for each patient-specific dose of PROVENGE, and to ensure timely delivery of product prior to expiration. PROVENGE has a limited usable life of approximately 18 hours from the completion of the manufacturing process to patient infusion and accordingly maintaining accurate scheduling logistics is critical. In addition, this IT system stores and protects the privacy of the required patient information for the manufacture of PROVENGE. If our systems were to fail or be disrupted for an extended period of time we could lose product sales and our revenue and reputation would suffer. In the event our systems were to be breached by an unauthorized third party, they could potentially access confidential patient information we obtain in manufacturing PROVENGE, which could cause us to suffer reputational damage and loss of customer confidence. Any one of these events could cause our business to be materially harmed and our results of operations would be adversely impacted.

 

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We have rapidly expanded our operations to support commercial launch of PROVENGE, and we may encounter unexpected costs or difficulties.

Since 2010, we have increased investment in commercial infrastructure. We will need to effectively manage our expanded operations and facilities to successfully grow sales of PROVENGE and pursue development of our other product candidates. We must effectively manage our supply chain, third-party vendors and distribution network, all of which requires strict planning to meet production timelines for PROVENGE. If we fail to manage the growth in our systems and personnel appropriately and successfully to achieve our commercialization plans for PROVENGE our revenues could suffer and our business could be harmed.

Risks Relating to Our Financial Position and Operations

Our operating results may be harmed if our 2012 restructuring plan does not achieve the anticipated results or causes undesirable consequences.

On July 30, 2012, we announced a restructuring plan which will result in a reduction in headcount of approximately 600 full-time and contractor positions, and the closing of our Morris Plains, New Jersey facility. Restructuring plans may yield unintended consequences, such as attrition beyond our intended reduction in workforce and reduced employee morale, which may cause our employees who were not affected by the reduction in workforce to seek alternate employment. Additional attrition could impede our ability to meet our operational goals, which could have a material adverse effect on our financial performance. In addition, as a result of the reductions in our workforce, we may face an increased risk of employment litigation. Furthermore, employees whose positions will be eliminated in connection with these restructuring plans may seek future employment with our competitors. Although all our employees are required to sign a confidentiality agreement with us at the time of hire, we cannot assure you that the confidential nature of our proprietary information will be maintained in the course of such future employment. We cannot assure you that we will not undertake additional restructuring activities, that any of our restructuring efforts will be successful, or that we will be able to realize the cost savings and other anticipated benefits from our previous or any future restructuring plans. In addition, if we continue to reduce our workforce, it may adversely impact our ability to respond rapidly to any new growth or revenue opportunities.

Because of reductions in our workforce related to our prior restructuring activities, we have reallocated certain employment responsibilities and have increased our dependence on third parties to perform certain corporate functions.

We restructured our operations in 2011 and 2012, which included reductions in our workforce. The reductions resulted in the loss of numerous long-term employees, the loss of institutional knowledge and expertise and the reallocation of certain employment responsibilities, all of which could adversely affect operational efficiencies, employee performance and retention. In addition, because of these reductions, we are outsourcing certain corporate functions, which make us more dependent on third parties for the performance of these functions in connection with our business and product candidates. To the extent that we are unable to effectively reallocate employee responsibilities, retain key employees, establish and maintain agreements with competent third-party contractors on terms that are acceptable to us, or effectively manage the work performed by any retained third-party contractors, our ability to advance our business or product candidates may be significantly impaired and our stock price may be adversely affected.

*We have a history of operating losses. We expect to continue to incur losses for the foreseeable future, and we may never become profitable.

As of June 30, 2013, our accumulated deficit was $2.1 billion and our net loss for the six-month period ended June 30, 2013 was $140.8 million. We have incurred net losses as a result of research and development expenses, clinical trial expenses, contract manufacturing and facility expenses, costs associated with our commercial efforts on behalf of PROVENGE and general and administrative expenses in support of our operations and research efforts. There can be no assurance that available cash and cash generated through current operations will be sufficient to continue to conduct our operations and expand according to our business plans. The majority of our resources continue to be used in support of the commercialization of PROVENGE, including outside the United States. Even if we are able to successfully realize our commercialization goals for PROVENGE, because of the numerous risks and uncertainties associated with commercialization of a biologic, we may still require additional funding. And in any event, we are unable to predict when we will break-even on our U.S. operations or become profitable, if at all. Even if we do produce revenues and achieve profitability, we may not be able to maintain or increase profitability.

Forecasting sales of PROVENGE may continue to be difficult. If our revenue projections are inaccurate and our business forecasting and planning decisions are not reflected in our actual results, our business may be harmed and our stock price may be adversely affected.

Our forecasting model for PROVENGE revenue may be inaccurate because of any number of factors. These factors may include slower than anticipated physician adoption of PROVENGE because of cautionary prescribing behavior due to lack of reimbursement history for the product, difficulty in identifying appropriate patients for treatment with PROVENGE, the cost of the product, which is purchased by the physician on a buy and bill basis, and incurred over a short time period, and other aspects of physician education due to the novelty of the treatment process. The extent to which any of these or other factors individually or in the aggregate may impact

 

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future sales of PROVENGE is uncertain and difficult to predict. Our management must make forecasting decisions regarding future revenue in the course of business planning despite this uncertainty, and actual results of operations may deviate materially from projected results. This may lead to inefficiencies and increased difficulties in operational planning. Our general and administrative expenses are relatively fixed in the short term. If our revenues from PROVENGE sales are lower than we anticipate, we will incur costs in the short term that will result in losses that are unavoidable. A shortfall in our revenue has a direct impact on our cash flow and on our business generally. In addition, as reflected in our recent stock price, fluctuations in our quarterly results can adversely and significantly affect the market price of our common stock.

We may require additional funding, and our future access to capital is uncertain.

It is expensive to develop and commercialize cancer immunotherapy and small molecule product candidates. We plan to continue to simultaneously conduct clinical trials and preclinical research for a number of product candidates while pursuing commercial acceptance and our marketing goals for PROVENGE. Our product development efforts may not lead to commercial products, either because our product candidates fail to be found safe or effective in clinical trials or because we lack the necessary financial or other resources or relationships to pursue our programs through commercialization. Even if commercialized, a product may not achieve revenues that exceed the costs of producing and selling it. Our capital and future cash flow may not be sufficient to support the expenses of our operations and we may need to raise additional capital depending on a number of factors, including but not limited to the following:

 

   

sales of PROVENGE in the United States;

 

   

the rate of progress and cost of our research and development and clinical trial activities;

 

   

the need to establish additional manufacturing and distribution capability for the potential foreign marketing of PROVENGE; and

 

   

the need to remain competitive because of the introduction into the marketplace of other products approved in our indication and other adverse market developments.

We may not be able to obtain additional financing if and when needed. If we are unable to raise additional funds on terms we find acceptable, we may have to delay, reduce or eliminate some of our clinical trials and our development programs. If we raise additional funds by issuing equity or equity-linked securities, further dilution to our existing stockholders will result. In addition, the possibility of future dilution as a result of our offering of securities convertible into equity securities may cause our stock price to decline.

Our existing indebtedness could adversely affect our financial condition.

Our existing indebtedness includes an aggregate of $27.7 million in outstanding Convertible Senior Subordinated Notes due 2014 (the “2014 Notes”) which bear interest at 4.75%, and an aggregate of $620 million in outstanding Convertible Senior Notes due 2016 (the “2016 Notes”) which bear interest at 2.875%. Our indebtedness and annual debt service requirements may adversely impact our business, operations and financial condition in the future. For example, it could:

 

   

increase our vulnerability to general adverse economic and industry conditions;

 

   

limit our ability to raise additional funds by borrowing or engaging in equity sales in order to fund future working capital, capital expenditures, research and development and other general corporate requirements;

 

   

require us to dedicate a substantial portion of our cash to service payments on our debt; or

 

   

limit our flexibility to react to changes in our business and the industry in which we operate or to pursue certain strategic opportunities that may present themselves.

The accounting method for convertible debt securities that may be settled in cash, such as the 2016 Notes, could have a material effect on our net loss, net working capital or other financial results.

Under the Financial Accounting Standards Board (the “FASB”) Accounting Standards Codification Section 470-20, Debt with Conversion and other Options (“ASC 470-20”), an entity must separately account for the liability and equity components of the convertible debt instruments (such as the 2016 Notes) that may be settled entirely or partially in cash upon conversion in a manner that reflects the issuer’s economic interest cost. The effect of ASC 470-20 on the accounting for our 2016 Notes is that the equity component is required to be included in the additional paid-in capital section of stockholders’ equity on the consolidated balance sheets and the value of the equity component is treated as original issue discount for purposes of accounting for the debt component of the notes. As a result, we are required to record non-cash interest expense as a result of the amortization of the discounted carrying value of the 2016 Notes to their face amount over the term of the 2016 Notes. We report higher interest expense in our financial results because ASC 470-20 requires interest to include both the current period’s amortization of the debt discount and the instrument’s coupon interest, which could adversely affect our reported or future financial results, the trading price of our common stock and the trading price of the 2016 Notes.

 

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Our stockholders may be diluted by the conversion of our outstanding convertible notes.

The holders of the 2014 Notes may choose at any time to convert their notes into common stock prior to maturity in June 2014. The holders of the 2016 Notes may choose at any time to convert their notes prior to maturing in January 2016, and upon conversion we may issue cash, stock, or a combination thereof at our option. Should a holder of the 2016 Notes exercise their conversion option during the next twelve month period, it is our intention to satisfy the conversion with shares of our common stock.

The 2014 Notes are convertible into our common stock, initially at the conversion rate of approximately 97.2644 shares per $1,000 principal amount, or approximately $10.28 per share. The 2016 Notes are convertible into our common stock initially at the conversion rate of 19.5160 shares per $1,000 principal amount, or approximately $51.24 per share, subject to adjustment. The number of shares of common stock issuable upon conversion of the 2014 Notes and 2016 Notes, and therefore the dilution of existing common stockholders, could increase under certain circumstances described in the indentures under which the 2014 Notes and 2016 Notes were issued. The conversion of the 2014 Notes and potentially the 2016 Notes will result in the issuance of additional shares of common stock, diluting existing common stockholders.

We may elect to issue additional shares of our common stock or other securities that may be convertible into our common stock, which could result in further dilution to our existing stockholders.

Future sales of our common stock will depend primarily on the market price of our common stock, the terms we may receive upon the sale of debt or convertible securities, the interest in our company by institutional investors and our cash needs. In addition, we may register additional equity, debt or other convertible securities with the SEC for sale in the future. Each of our issuances of common stock or securities convertible into common stock to investors under a registration statement or otherwise will proportionately decrease our existing stockholders’ percentage ownership of our total outstanding equity interests and may reduce our stock price.

Our business, financial condition and future prospects could suffer as a result of carrying out strategic alternatives in the future.

We may decide it is in our best interests to engage in a strategic transaction that could dilute our existing stockholders or cause us to incur contingent liabilities, commitments, or significant expense. In the course of pursuing strategic alternatives, we may evaluate potential acquisitions or investments in related businesses, products or technologies. Future acquisitions or investments could subject us to a number of risks, including, but not limited to:

 

   

the assumption of additional indebtedness or contingent liabilities;

 

   

risks and uncertainties associated with the other party to such a transaction, including but not limited to the prospects of that party and their existing products or product candidates and regulatory approvals;

 

   

the loss of key personnel and business relationships;

 

   

difficulties associated with assimilating and integrating new personnel, intellectual property and operations of an acquired company;

 

   

our inability to generate revenue from acquired technology and/or products sufficient to meet our objectives in undertaking the acquisition or even to offset the associated acquisition and maintenance costs; and

 

   

the distraction of our management from our existing product programs and initiatives in pursuing such a strategic merger or acquisition.

In connection with an acquisition, we must estimate the value of the transaction by making certain assumptions that may prove to be incorrect, which could cause us to fail to realize the anticipated benefits of a transaction. We may incur as part of a transaction substantial charges for closure costs associated with the elimination of duplicate operations and facilities and acquired in-process research and development charges. In either case, the incurrence of these charges could adversely affect our results of operations for particular quarterly or annual periods. Any strategic transaction we may pursue may not result in the benefits we initially anticipate, and/or result in costs that end up outweighing the benefits, and may adversely impact our financial condition and business prospects.

Risks Related to Future Ability to Utilize Net Operating Loss Carryforwards

Our ability to realize potential value from our net operating loss carryforwards is highly speculative and subject to numerous material uncertainties.

Our net operating loss carryforwards permit us to offset net operating losses from prior years to taxable income in future years in order to reduce our tax liability. As we have incurred losses since our inception and do not currently expect to turn a profit in the near future, we are currently unable to realize value from our net operating loss carryforwards unless we generate future taxable income, either through the acquisition of a profitable company or otherwise. There can be no assurance that we will have sufficient taxable income, if any, in future years to use the net operating loss carryforwards before they expire. The Internal Revenue Service could challenge the amount of our net operating loss carryforwards.

 

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In order to preserve our net operating loss carryforwards, we must ensure that there has not been a “change of control” of our company. A “change in control” includes a more than 50 percentage point increase in the ownership of our company by certain equity holders who are defined in Section 382 of the Internal Revenue Code as “5 percent shareholders.” Calculating whether an ownership change has occurred is subject to uncertainty, both because of the complexity of Section 382 of the Code and because of limitations on a publicly-traded company’s knowledge as to the ownership of, and transactions in, its securities. Therefore, the calculation of the amount of our net operating loss carryforwards may be changed as a result of a challenge by a governmental authority or our learning of new information about the ownership of, and transactions in, our securities. Our ability to fully utilize our net operating losses could be limited if there have been past ownership changes or if there are future ownership changes resulting in a change of control for Section 382. Additionally, future changes in tax legislation could negatively affect our ability to use the tax benefits associated with our net operating losses.

Risks from Competitive Factors

Delays to our expansion outside the United States may result in increased competitive challenges.

In September 2011, we announced that, in conjunction with a company restructuring to reduce operating costs in the near term due to a lack of forecasted sales growth in line with our original projections, we were revising our commercialization strategy for PROVENGE outside the United States. The announced changes included seeking a longer-term contract manufacturing partnership for production of PROVENGE in Europe, rather than building our own immunotherapy manufacturing facility, as well as revisiting our European clinical trial plan. Although we believe the revisions to our commercialization strategy outside the United States will have long-term benefits for the Company from our near-term cash conservation and extended business planning strategy for the EU, delays to the commercialization of PROVENGE in the European Union and throughout the rest of the world could result in increased competitive challenges in the future if competing products and therapies gain market acceptance in the interim. These competitive challenges could impede adoption of PROVENGE as a preferred therapy, which could adversely affect our future product sales and results of operations.

*Our competitors may develop and market products that are less expensive, more effective, or safer, or that reach the market sooner, which may diminish or eliminate the commercial success of PROVENGE or any other products we may commercialize.

We operate in a highly competitive environment. PROVENGE competes with other products or treatments for diseases in its indication. If PROVENGE is unable to compete or be combined successfully with existing approaches or if new therapies are developed for asymptomatic or minimally symptomatic, metastatic, castrate-resistant (hormone-refractory) prostate cancer, our business would be harmed.

Competition in the cancer therapeutics field is intense and is accentuated by the rapid pace of advancements in product development. In addition, we compete with other clinical-stage companies and institutions for clinical trial participants, which could reduce our ability to recruit participants for our clinical trials. Delay in recruiting clinical trial participants could adversely affect our ability to bring a product to market prior to our competitors. Further, research and discoveries by others may result in breakthroughs that render PROVENGE or our other product candidates obsolete.

Products such as chemotherapeutics, androgen metabolism or androgen receptor antagonists, endothelin A receptor antagonists, antisense compounds, angiogenesis inhibitors and gene therapies for cancer are also under development by a number of companies and could potentially compete with PROVENGE and our other product candidates. In addition, many universities and private and public research institutions have become active in cancer research, which may be in direct competition with us.

Furthermore, in 2011, ZYTIGA® (abiraterone acetate) was approved for use in men with prostate cancer with progression following treatment with a chemotherapeutic regime. In 2012, ZYTIGA was approved, in combination with prednisone, to treat men with metastatic castrate-resistant prostate cancer prior to receiving chemotherapy, and Xtandi (Enzalutamide), an androgen receptor inhibitor, was approved to treat men with metastatic castrate-resistant prostate cancer who previously received docetaxel chemotherapy. In 2013, Xofigo (radium RA 223 dichloride) injection was approved for the treatment of patients with castration-resistant prostate cancer (CRPC), symptomatic bone metastases and no known visceral metastatic disease. Other therapies such as Bavarian Nordic’s PROSTVAC® are the subject of ongoing clinical trials in men with metastatic castrate-resistant prostate cancer. PROSTVAC®, currently in Phase 3 clinical development, is a therapeutic cancer vaccine being studied in men with metastatic castrate-resistant prostate cancer.

Some of our competitors in the cancer therapeutics field have substantially greater research and development capabilities and manufacturing, marketing, financial and managerial resources than we do. Acquisitions of competing companies by large pharmaceutical and biotechnology companies could enhance our competitors’ resources. In addition, our competitors may obtain patent protection or FDA approval and commercialize products more rapidly than we do, which may impact future sales of our products. We expect that competition among products approved for sale will be based, among other things, on product efficacy, price, safety, reliability, availability, patent protection, and sales, marketing and distribution capabilities. Our profitability and financial position will suffer if our products receive regulatory approval, but cannot compete effectively in the marketplace.

 

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We could face competition for PROVENGE or other approved products from biosimilar products that could impact our profitability.

We may face competition in Europe from biosimilar products, and we expect we may face competition from biosimilars in the future in the United States as well. To the extent that governments adopt more permissive approval frameworks and competitors are able to obtain broader marketing approval for biosimilars, our products will become subject to increased competition. Expiration or successful challenge of applicable patent rights could trigger such competition, and we could face more litigation regarding the validity and/or scope of our patents. We cannot predict to what extent the entry of biosimilar products or other competing products could impact our future potential sale of PROVENGE in the E.U., where biosimilars to other innovator biological products are already available. Our inability to compete effectively in foreign territories would reduce global sales potential, which could have a material adverse effect on our results of operations.

On March 23, 2010, the Patient Protection and Affordable Care Act (“PPACA”) became law and authorized FDA approval of biosimilar products. PPACA established a period of 12 years of data exclusivity for reference products and outlined statutory criteria for science-based biosimilar approval standards. Under this framework, data exclusivity protects the data in the innovator’s regulatory application by prohibiting, for a period of 12 years, others from gaining FDA approval based in part on reliance or reference to the innovator’s data. FDA has not yet announced implementation of the biosimilars regulatory approval pathway; however, PPACA does not require the agency to do so before it may approve biosimilars. The new law does not change the duration of patents granted on biologic products. Because of this pathway for the approval of biosimilars in the U. S., we may in the future face greater competition from biosimilar products and downward pressure on our product prices, sales and revenues, subject to our ability to enforce our patents.

Failure to retain key personnel could impede our ability to develop and commercialize our products and to obtain new collaborations or other sources of funding.

We depend, to a significant extent, on the efforts of our key employees, including senior management and senior scientific, clinical, regulatory, operational and other personnel. The development of new therapeutic products requires expertise from a number of different disciplines, some of which are not widely available.

We depend upon our scientific staff to discover new product candidates and to develop and conduct preclinical studies of those new potential products. Our clinical and regulatory staff is responsible for the design and execution of clinical trials in accordance with FDA requirements and for the advancement of our product candidates toward FDA approval and submission of data supporting approval. The quality and reputation of our scientific, clinical and regulatory staff, especially the senior staff, and their success in performing their responsibilities, may directly influence the success of our product development programs. As we continue to pursue successful commercialization of PROVENGE, our sales and marketing, and operations executive management staff takes on increasing significance and influence upon our organizational success. In addition, our executive officers are involved in a broad range of critical activities, including providing strategic and operational guidance. The loss of these individuals, or our inability to retain or recruit other key management and scientific, clinical, regulatory, medical, operational and other personnel, may delay or prevent us from achieving our business objectives. We face intense competition for personnel from other companies, universities, public and private research institutions, government entities and other organizations.

Risks Relating to Collaboration Arrangements and Reliance on Third Parties

We must rely at present on relationships with third-party suppliers to supply necessary components used in our products, and such relationships are not easy to replace.

We rely upon contract manufacturers for components used in the manufacture and distribution of PROVENGE. Problems with any of our or our suppliers’ facilities or processes could result in failure to produce or a delay in production of adequate supplies of the antigen or other components we use in the manufacture of PROVENGE. This could delay or reduce commercial sales and materially harm our business. Any prolonged interruption in the operations of our suppliers’ facilities could result in cancellation of orders, loss of components in the process of being manufactured or a shortfall in availability of a necessary component. A number of factors could cause interruptions, including the inability of a supplier to provide raw materials, equipment malfunctions or failures, damage to a facility due to natural disasters, changes in FDA or equivalent other country authorities’ regulatory requirements or standards that require modifications to manufacturing processes, or action by us to implement process changes or other similar factors. Because manufacturing processes are complex and are subject to a lengthy FDA or equivalent non-United States regulatory approval process, alternative qualified supply may not be available on a timely basis or at all. Difficulties or delays in our suppliers’ manufacturing and supply of components could delay our clinical trials, increase our costs, damage our reputation and, for PROVENGE, cause us to lose revenue or market share if we are unable to timely meet market demands.

We are dependent on our leukapheresis network for raw materials required for the manufacture of PROVENGE.

The manufacture of each patient-specific dose of PROVENGE first requires that we obtain immune cells from the relevant patient, which is done through a leukapheresis process at a cell collection center with which we have contracted. We have entered into agreements with third-party cell collection and blood centers, including the American Red Cross, to perform this process for us.

 

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However there are a finite number of centers with the requisite skill, training, staffing and equipment to perform the leukapheresis procedure for PROVENGE patients and we cannot be certain that as our manufacturing capacity expands the leukapheresis network presently available to us will be sufficient to service demand at full capacity. We anticipate that we will need to expand the leukapheresis network available to us prospectively through additional partnerships or other endeavors. There can be no assurance that we will be able to secure sufficient appropriate leukapheresis capacity to manufacture PROVENGE when and as desired. If we are unable to expand our access to these services as necessary, our revenues will suffer and our business would be harmed.

We rely on single source vendors for some key components for PROVENGE and our active immunotherapy product candidates, which could impair our ability to manufacture and supply our products.

We currently depend on single source vendors for components used in PROVENGE and other active immunotherapy candidates. For example, we have a long-term contract with Fujifilm Diosynth Biotechnologies (“Fujifilm”) for the production of the antigen used in the manufacturing of PROVENGE. Any production shortfall on the part of Fujifilm that impairs the supply of the antigen to us could have a material adverse effect on our business, financial condition and results of operations. If we are unable to obtain a sufficient quantity of antigen, there could be a substantial delay in successfully developing a second source supplier. In addition, we rely on single-source unaffiliated third-party suppliers for certain other raw materials, medical devices and components necessary for the formulation, fill and finish of our products. Certain of these raw materials, medical devices and components are the proprietary products of these unaffiliated third-party suppliers and are specifically cited in the drug application with regulatory agencies so that they must be obtained from that specific sole source and could not be obtained from another supplier unless and until the regulatory agency approved such supplier. An inability to continue to source product from any of these suppliers, which could be due to regulatory actions or requirements affecting the supplier, adverse financial or other strategic developments experienced by a supplier, labor disputes or shortages, unexpected demands or quality issues, could adversely affect our ability to satisfy demand for PROVENGE or other products, which could adversely and materially affect our product sales and operating results or our ability to conduct clinical trials, either of which could significantly harm our business.

If we fail to enter into any needed collaboration agreements for our product candidates, we may be unable to commercialize them effectively or at all.

Product collaborations are complex and any potential discussions may not result in a definitive agreement for many reasons. For example, whether we reach a definitive agreement for a collaboration would depend, among other things, upon our assessment of the collaborator’s resources and expertise, the terms and conditions of the proposed collaboration, and the proposed collaborator’s evaluation of a number of factors. Those factors may include the design or results of clinical trials, the potential market for the product candidate, the costs and complexities of manufacturing and delivering the product candidate to patients, the potential of competing products or other products approved in our indication, the existence of uncertainty with respect to our ownership of technology, which can exist if there is a challenge to such ownership without regard to the merits of the challenge, and industry and market conditions generally. If we were to determine that a collaboration for a particular product is necessary to commercialize it and we were unable to enter into such a collaboration on acceptable terms, we might elect to delay or scale back the commercialization of a product in order to preserve our financial resources or to allow us adequate time to develop the required physical resources and systems and expertise ourselves.

If we enter into a collaboration agreement we consider acceptable, the collaboration may not proceed as quickly, smoothly or successfully as we plan. The risks in a collaboration agreement generally include:

 

   

the collaborator may not apply the expected financial resources or required expertise in developing the physical resources and systems necessary to successfully commercialize a product;

 

   

the collaborator may not invest in the development of a sales and marketing force and the related infrastructure at levels that ensure that sales of a product reach their full potential;

 

   

disputes may arise between us and a collaborator that delay the commercialization of the product or adversely affect its sales or profitability; or

 

   

the collaborator may independently develop, or develop with third parties, products that could compete with the product.

With respect to a collaboration for any of our products or product candidates, we are dependent on the success of our collaborators in performing their respective responsibilities and the continued cooperation of our collaborators. Our collaborators may not cooperate with us to perform their obligations under our agreements with them. We cannot control the amount and timing of our collaborators’ resources that will be devoted to activities related to our collaboration agreements with them. Our collaborators may choose to pursue existing or alternative technologies in preference to those being developed in collaboration with us. A collaborator may have the right to terminate the collaboration at its discretion. Any termination may require us to seek a new collaborator, which we may not be able to do on a timely basis, if at all, or require us to delay or scale back the commercialization efforts. The occurrence of any of these events could adversely affect the commercialization of product candidates we may commercialize and materially harm our business and stock price by slowing the pace of growth of such sales, by reducing the profitability of the product or by adversely affecting the reputation of the product in the market.

 

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Risks Relating to Our Clinical Trial and Product Development Initiatives

Our clinical and preclinical candidates in the pipeline for other potential cancer immunotherapies and small molecule products may never reach the commercial market for a number of reasons.

To sustain our business, we focus substantial resources on the search for new pharmaceutical products. These activities include engaging in discovery research and product development, conducting preclinical and clinical studies, and seeking regulatory approval in the United States for product candidates and in other countries for PROVENGE and other products we may market in the future. Our long-term success depends on the discovery and development of new drugs that we can commercialize. Our cancer immunotherapy and small molecule program pipeline candidates are still at a relatively early stage in the development process. There can be no assurance that these product candidates or any other potential therapies we may pursue will become a marketed drug. In addition, we may find that certain products cannot be manufactured on a commercial scale and, therefore, they may not be economical to produce, or may be precluded from commercialization by proprietary rights of third parties.

A significant portion of the research that we are conducting involves new and unproven technologies. Research programs to identify disease targets and product candidates require substantial technical, financial and human resources, whether or not we ultimately identify any candidates. Our research programs may initially show promise in identifying potential product candidates, yet fail to yield candidates for clinical development for a number of reasons, including difficulties in formulation which cannot be overcome, timing and competitive concerns.

An Investigative New Drug (“IND”) application must become effective before human clinical trials may commence. The IND application is automatically effective 30 days after receipt by the FDA unless before that time, the FDA raises concerns or questions about the product’s safety profile or the design of the trials as described in the application. In the latter case, any outstanding concerns must be resolved with the FDA before clinical trials can proceed. Thus, the submission of an IND may not result in FDA authorization to commence clinical trials in any given case. After authorization is received, the FDA retains the authority to place the IND, and clinical trials under that IND, on clinical hold. If we are unable to commence clinical trials or clinical trials are delayed indefinitely, we would be unable to develop additional product candidates and our business could be materially harmed. Clinical trials, both in the United States and in other countries, can be delayed for a variety of reasons, including:

 

   

delays or failures in obtaining regulatory authorization to commence a trial because of safety concerns of regulators relating to our product candidates or similar product candidates of our competitors or failure to follow regulatory guidelines;

 

   

delays or failures in obtaining clinical materials and manufacturing sufficient quantities of the product candidate for use in trials;

 

   

delays or failures in reaching agreement on acceptable terms with prospective study sites;

 

   

delays or failures in obtaining approval of our clinical trial protocol from an institutional review board (“IRB”) or ethics committee (“EC”) to conduct a clinical trial at a prospective study site;

 

   

delays in recruiting patients to participate in a clinical trial;

 

   

failure of our clinical trials and clinical investigators to be in compliance with the FDA’s Good Clinical Practices or equivalent other country regulations and requirements;

 

   

safety issues, including negative results from ongoing preclinical studies;

 

   

inability to monitor patients adequately during or after treatment;

 

   

adverse events occurring during the clinical trial;

 

   

failure by third-party clinical trial managers to comply with regulations concerning protection of patient health data;

 

   

difficulty monitoring multiple study sites;

 

   

failure of our third-party clinical trial managers to satisfy their contractual duties, comply with regulations or meet expected deadlines; and

 

   

determination by regulators that the clinical design of the trials is not adequate.

The nature and efforts required to complete a prospective research and development project are typically indeterminable at very early stages when research is primarily conceptual and may have multiple applications. Once a focus towards developing a specific product candidate has been developed, we obtain more visibility into the efforts that may be required to reach conclusion of the development phase. However, there are inherent risks and uncertainties in developing novel biologics in a rapidly changing industry environment. To obtain approval of a product candidate from the FDA or other country regulatory authorities, we must, among other requirements, submit data supporting safety and efficacy as well as detailed information on the manufacture and composition of the product candidate. In most cases, this entails extensive laboratory tests and preclinical and clinical trials. The collection of this data, as well as the preparation of applications for review by the FDA and other regulatory agencies outside the United States, is costly in time and effort, and may require significant capital investment.

 

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We may encounter significant difficulties or costs in our efforts to obtain FDA approvals or approvals to market products in foreign markets. For example, the FDA or the equivalent in jurisdictions outside the United States may determine that our data is not sufficiently compelling to warrant marketing approval, or may require we engage in additional clinical trials or provide further analysis which may be costly and time consuming. Regardless of the nature of our efforts to complete development of our products and receive marketing approval, we may encounter delays that render our product candidates uncompetitive or otherwise preclude us from marketing products.

We may be required to obtain additional funding to complete development of product candidates or in order to commercialize approved products. However such funding may not be available to us on terms we deem acceptable or at all. Our ability to access additional capital is dependent on the success of our business and the perception by the market of our future business prospects. In the event we were unable to obtain necessary funding, we might halt or temporarily delay ongoing development projects.

Preclinical testing and clinical trials for product candidates must satisfy stringent regulatory requirements or we may be unable to utilize the results.

The preclinical testing and clinical trials of any product candidates that we develop must comply with regulations by numerous federal, state and local government authorities in the United States, principally the FDA, and by similar governmental authorities in other countries. Clinical trials are subject to continuing oversight by governmental regulatory authorities and institutional review boards and must meet the requirements of these authorities in the United States and other countries, including those for informed consent and good clinical practices. We may not be able to comply with these requirements, which could disqualify completed or ongoing clinical trials. We may experience numerous unforeseen events during, or as a result of, the testing process that could delay or prevent commercialization of our product candidates, including the following:

 

   

safety and efficacy results from human clinical trials may show the product candidate to be less effective or safe than desired or earlier results may not be replicated in later clinical trials;

 

   

the results of preclinical studies may be inconclusive or they may not be indicative of results that will be obtained in human clinical trials;

 

   

after reviewing relevant information, including preclinical testing or human clinical trial results, we may abandon or substantially restructure programs that we might previously have believed to be promising;

 

   

we, the FDA, an IRB, an EC, or similar regulatory authorities in other countries may suspend or terminate clinical trials if the participating patients are being exposed to unacceptable health risks or for other reasons; and

 

   

the effects of our product candidates may not be the desired effects or may include undesirable side effects or other characteristics that interrupt, delay or cause us or the FDA, or equivalent governmental authorities in other countries, to halt clinical trials or cause the FDA or non-United States regulatory authorities to deny approval of the product candidate for any or all target indications.

Each phase of clinical testing is highly regulated, and during each phase there is risk that we will encounter serious obstacles or will not achieve our goals, and accordingly we may abandon a product in which we have invested substantial amounts of time and money. In addition, we must provide the FDA and foreign regulatory authorities with preclinical and clinical data that demonstrate that our product candidates are safe and effective for each target indication before they can be approved for commercial distribution. We cannot state with certainty when or whether any of our products now under development will be approved or launched, or whether any products, once approved and launched, will be commercially successful.

The FDA, other non-United States regulatory authorities, or an Advisory Committee may determine our clinical trials data regarding safety or efficacy are insufficient for regulatory approval.

Although we obtain guidance from regulatory authorities on certain aspects of our clinical development activities, these discussions are not binding obligations on regulatory authorities. Regulatory authorities may revise or retract previous guidance or may disqualify a clinical trial in whole or in part from consideration in support of approval of a potential product for commercial sale or otherwise deny approval of that product. Even if we obtain successful clinical safety and efficacy data, we may be required to conduct additional, expensive trials to obtain regulatory approval. The FDA, or equivalent other country authorities, may elect to obtain advice from outside experts regarding scientific issues and/or marketing applications under FDA or other country authority review through the FDA’s Advisory Committee process or other country procedures. Views of the Advisory Committee or other experts may differ from those of the FDA, or equivalent other country authority, and may impact our ability to commercialize a product candidate.

If we encounter difficulties enrolling patients in our clinical trials, our trials could be delayed or otherwise adversely affected.

Clinical trials for our product candidates may require that we identify and enroll a large number of patients with the disease under investigation. We may not be able to enroll a sufficient number of patients, or those with required or desired characteristics to achieve diversity in a study, to complete our clinical trials in a timely manner.

 

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Patient enrollment is affected by factors including:

 

   

design of the trial protocol;

 

   

the size of the patient population;

 

   

eligibility criteria for the study in question;

 

   

perceived risks and benefits of the product candidate under study;

 

   

availability of competing therapies and clinical trials;

 

   

efforts to facilitate timely enrollment in clinical trials;

 

   

patient referral practices of physicians;

 

   

the ability to monitor patients adequately during and after treatment; and

 

   

geographic proximity and availability of clinical trial sites for prospective patients.

Additionally, even if we are able to identify an appropriate patient population for a clinical trial, there can be no assurance that the patients will continue in the clinical trial through completion.

If we have difficulty enrolling or maintaining a sufficient number of patients with sufficient diversity to conduct our clinical trials as planned, we may need to delay or terminate ongoing or planned clinical trials, either of which would have a negative effect on our business.

Risks Related to Regulation of the Pharmaceutical Industry

PROVENGE and our other products in development cannot be sold if we do not maintain or gain required regulatory approvals.

Our business is subject to extensive regulation by numerous state and federal governmental authorities in the United States, including the FDA, and potentially by foreign regulatory authorities, with regulations differing from country to country. In the United States, the FDA regulates, among other things, the preclinical testing, clinical trials, manufacturing, safety, efficacy, potency, labeling, storage, record keeping, quality systems, advertising, promotion, sale and distribution of therapeutic products. Other applicable non-United States regulatory authorities have equivalent powers. Failure to comply with applicable requirements could result in, among other things, one or more of the following actions: withdrawal of product approval, notices of violation, untitled letters, warning letters, fines and other monetary penalties, unanticipated expenditures, delays in approval or refusal to approve a product candidate; product recall or seizure; interruption of manufacturing or clinical trials; operating restrictions; injunctions; and criminal prosecution. We are required in the United States and in foreign countries to obtain approval from regulatory authorities before we can manufacture, market and sell our products.

Obtaining regulatory approval for marketing of a product candidate in one country does not assure we will be able to obtain regulatory approval in other countries. However, a failure or delay in obtaining regulatory approval in one country may have a negative effect on the regulatory process in other countries. Once approved, the FDA and other United States and non-United States regulatory authorities have substantial authority to limit the uses or indications for which a product may be marketed, restrict distribution of the product, require additional testing, change product labeling or mandate withdrawal of our products. The marketing of our approved products will be subject to extensive regulatory requirements administered by the FDA and other regulatory bodies, including: the manufacturing, testing, distribution, labeling, packaging, storage, reporting and record-keeping related to the product, advertising, promotion, and adverse event reporting requirements. In addition, incidents of adverse drug reactions, unintended side effects or misuse relating to our products could result in required post-marketing studies, additional regulatory controls or restrictions, or even lead to withdrawal of a product from the market.

In general, the FDA and equivalent other country authorities require labeling, advertising and promotional materials to be truthful and not misleading, and marketed only for the approved indications and in accordance with the provisions of the approved label. If the FDA or other regulatory authorities were to challenge our promotional materials or activities, they may bring enforcement action.

Our failure to obtain approval, significant delays in the approval process, or our failure to maintain approval in any jurisdiction will prevent us from selling a product in that jurisdiction. Any product and its manufacturer will continue to be subject to strict regulations after approval, including but not limited to, manufacturing, quality control, labeling, packaging, adverse event reporting, advertising, promotion and record-keeping requirements. Any problems with an approved product, including the later exhibition of adverse effects or any violation of regulations could result in restrictions on the product, including its withdrawal from the market, which could materially harm our business. The process of obtaining approvals in foreign countries is subject to delay and failure for many of the same reasons.

 

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Regulatory authorities could also add new regulations or change existing regulations at any time, which could affect our ability to obtain or maintain approval of our products. PROVENGE and our investigational cellular immunotherapies are novel. As a result, regulatory agencies lack experience with them, which may lengthen the regulatory review process, increase our development costs and delay or prevent commercialization of PROVENGE outside the United States and with respect to our active immunotherapy products under development. We are unable to predict when and whether any changes to regulatory policy affecting our business could occur, and such changes could have a material adverse impact on our business. If regulatory authorities determine that we have not complied with regulations in the research and development of a product candidate, a new indication for an existing product or information to support a current indication, they may not approve the product candidate or new indication or maintain approval of the current indication in its current form or at all, and we would not be able to market and sell it. If we were unable to market and sell our products or product candidates, our business and results of operations would be materially and adversely affected.

Failure to comply with foreign regulatory requirements governing human clinical trials and failure to obtain marketing approval for product candidates could prevent us from selling our products in foreign markets, which may adversely affect our operating results and financial condition.

The requirements governing the conduct of clinical trials, manufacturing, testing, product approvals, pricing and reimbursement outside the United States vary greatly from country to country. In addition, the time required to obtain approvals outside the United States may differ significantly from that required to obtain FDA approval. We may not obtain foreign regulatory approvals on the timeframe we may desire, if at all. Approval by the FDA does not assure approval by regulatory authorities in other countries, and foreign regulatory authorities could require additional testing. Failure to comply with these regulatory requirements or obtain required approvals could impair our ability to develop foreign markets for our products and may have a material adverse effect on our business and future prospects.

Our product sales depend on adequate coverage and reimbursement from third-party payers.

Our sale of PROVENGE is dependent on the availability and extent of coverage and reimbursement from third-party payers, including government healthcare programs and private insurance plans. We rely in large part on the reimbursement coverage by federal and state sponsored government programs such as Medicare and Medicaid in the United States and equivalent programs in other countries. In the event we seek approvals to market PROVENGE in foreign territories, we will need to work with the government-sponsored healthcare systems in Europe and other foreign countries that are the primary payers of healthcare costs in those regions. Governments and private payers may regulate prices, reimbursement levels and/or access to PROVENGE and any other products we may market to control costs or to affect levels of use of our products. We cannot predict the availability or level of coverage and reimbursement for PROVENGE or our product candidates. A reduction in coverage and/or reimbursement for our products could have a material adverse effect on our product sales and results of operations.

*The availability and amount of reimbursement for PROVENGE and our product candidates and the manner in which government and private payers may reimburse for our potential products is uncertain.

In many of the markets where we may do business in the future, the prices of pharmaceutical products are subject to direct price controls pursuant to applicable law or regulation and to drug reimbursement programs with varying price control mechanisms. Many of the patients in the United States who seek treatment with PROVENGE or any other of our products that are approved for marketing will be eligible for Medicare benefits. Other patients may be covered by private health plans. The Medicare program is administered by the Centers for Medicare & Medicaid Services (“CMS”), and coverage and reimbursement for products and services under Medicare are determined pursuant to statute, regulations promulgated by CMS, and CMS’s subregulatory coverage and reimbursement determinations. CMS’s regulations and interpretive determinations are subject to change, as are the procedures and criteria by which CMS makes coverage and reimbursement determinations and the reimbursement amounts established by statute, particularly because of budgetary pressures facing the Medicare program. For example, Medicare reimbursement for drugs and biologicals administered in physician offices, including PROVENGE, is set at average sales price (“ASP”) plus six percent by statute. ASP is a price calculated by the manufacturer and reported to CMS on a quarterly basis. In addition, the statute establishes the payment rate for new drugs and biologicals administered in hospital outpatient departments that are granted “pass-through status” at the rate applicable in physicians’ offices (i.e., ASP plus six percent) for two to three years after FDA approval. PROVENGE was granted pass-through status effective October 1, 2010, allowing reimbursement in hospital outpatient departments at ASP plus six percent, and this status expired on December 31, 2012. CMS establishes the payment rates for drugs and biologicals that do not have pass-through status by regulation. For 2013, these drugs, including PROVENGE, are reimbursed at ASP plus six percent if they have an average cost per day exceeding $80; drugs with an average cost per day of less than $80 are not separately reimbursed. In future years, CMS could change both the payment rate and the average cost threshold, and these changes could adversely affect payment for PROVENGE. In addition, Congress has considered amending the statute to reduce Medicare’s payment rates for drugs and biologicals, and if such legislation is enacted, it could adversely affect payment for PROVENGE.

Beginning April 1, 2013, Medicare payments for all items and services, including drugs and biologicals, were reduced by up to 2% under the sequestration (i.e., automatic spending reductions) required by the Budget Control Act of 2011, Pub. L. No. 112-25 (“BCA”), as amended by the American Taxpayer Relief Act of 2012, Pub. L. 112-240 (“ATRA”). The BCA requires sequestration for most federal programs, excluding Medicaid, Social Security, and certain other programs, because Congress failed to enact legislation by January 15, 2012, to reduce federal deficits by $1.2 trillion over ten years. The BCA caps the cuts to Medicare payments or items

 

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and services at 2%, and requires the cuts to be implemented on the first day of the first month following the issuance of a sequestration order. The ATRA delayed implementation of sequestration from January 2, 2013, to March 1, 2013, and as a result, the Medicare cuts took effect April 1, 2013. These cuts may adversely impact payment for PROVENGE and related procedures.

PROVENGE also is made available to patients that are eligible for Medicaid benefits. A condition of federal funds being made available to cover our products under Medicaid and Medicare Part B is our participation in the Medicaid drug rebate program, established by the Omnibus Budget Reconciliation Act of 1990, Pub. L. 101-508, and as amended by subsequent legislation, including the Patient Protection and Affordable Care Act and the Health Care and Education Affordability Reconciliation Act, as amended by the Health Care and Education Affordability Reconciliation Act of 2010 (collectively “PPACA”). Under the Medicaid rebate program, we pay a rebate to each state Medicaid program for each unit of our drug paid for by those programs. The rebate amount for a drug varies by quarter, and is based on pricing data reported by us on a monthly and quarterly basis to CMS. These data include the monthly and quarterly average manufacturer price (“AMP”) for the drug, and in the case of innovator products such as PROVENGE, the quarterly best price (“BP”), which is our lowest price in a quarter to any commercial or non-governmental customer. The formula for determining the rebate amount, using those data, is set by law, and for innovator products like PROVENGE is the greater of 23.1% of AMP or the difference between AMP and BP. The rebate amount for innovator products also must be adjusted upward for price increases that outpace inflation.

We cannot predict the availability or level of coverage and the amount of reimbursement for PROVENGE or our product candidates, or the manner in which government and private payers may reimburse for our potential products. A reduction in coverage and/or reimbursement for our products could have a material adverse effect on our product sales and results of operations.

Healthcare law and policy changes, including those based on recently enacted legislation, may impact our business in ways that we cannot currently predict and these changes could have a material adverse effect on our business and financial condition.

In March 2010, the President signed PPACA. This law substantially changes the way healthcare is financed by both governmental and private insurers in the U.S., and significantly impacts the pharmaceutical industry. The PPACA contains a number of provisions that are expected to impact our business and operations, in some cases in ways we cannot currently predict. Changes that may affect our business include those governing enrollment in federal healthcare programs, reimbursement changes, rules regarding prescription drug benefits under the health insurance exchanges, and fraud and abuse and enforcement. These changes will impact existing government healthcare programs and will result in the development of new programs.

PPACA significantly changed the Medicaid rebate program. Rebates previously were due only on utilization under Medicaid fee-for-service plans, but PPACA expanded our rebate liability to include the utilization of Medicaid managed care organizations, effective upon enactment, March 23, 2010. PPACA also increased the minimum rebate due for innovator drugs such as PROVENGE, from 15.1% of AMP to 23.1% of AMP, effective the first quarter of 2010, and capped the total rebate amount for innovator drugs at 100% of AMP. PPACA and subsequent legislation also changed the definition of AMP, effective the fourth quarter of 2010. CMS has issued a proposed rule to implement PPACA’s changes to the Medicaid rebate program, but does not anticipate finalizing this rule until later in 2013. This rule may have the effect of increasing our rebates or other costs and charges associated with participating in the Medicaid rebate program.

PPACA is expected to impact the United States pharmaceutical industry substantially, including with regard to how health care is financed by both governmental and private insurers. Some of the other key PPACA provisions include:

 

   

The establishment of an annual, non-deductible fee on any entity that manufactures or imports certain branded prescription drugs and biologics, beginning 2011. Each individual pharmaceutical manufacturer will pay a prorated share of the branded prescription drug fee (set at a total of $2.8 billion for 2012 and 2013 and increasing thereafter) based on the dollar value of its branded prescription drug sales to certain federal programs identified in the law;

 

   

An expansion of the eligibility criteria for Medicaid programs by, among other things, allowing states to offer Medicaid coverage to additional individuals beginning April 2010 and by adding new mandatory eligibility categories for certain individuals with income at or below 133% of the Federal Poverty Level beginning 2014, thereby potentially increasing manufacturers’ Medicaid rebate liability. In 2012, the Supreme Court of the United States heard challenges to the constitutionality of the individual mandate and the viability of certain provisions of PPACA. The Supreme Court’s decision upheld most of PPACA and determined that requiring individuals to maintain “minimum essential” health insurance coverage or pay a penalty to the Internal Revenue Service was within Congress’s constitutional taxing authority. However, the Supreme Court struck down a provision in PPACA that penalized states that choose not to expand their Medicaid programs. As a result of the Supreme Court’s ruling, it is unclear whether states will expand their Medicaid programs by raising the income limit to 133% of the federal poverty level and whether there will be more uninsured patients in 2014 than anticipated when Congress passed PPACA; and

 

   

The establishment of a new Patient-Centered Outcomes Research Institute to oversee, identify priorities in, and conduct comparative clinical effectiveness research.

 

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Although the constitutionality of key provisions of the PPACA was recently upheld by the Supreme Court, legislative changes to the PPACA remain possible. The issuance of additional regulations and the passage of additional or amended legislation may increase our costs and the complexity of compliance. Moreover, a number of state and federal legislative and regulatory proposals aimed at reforming the healthcare system in the United States continue to be proposed, the effect of which, if enacted, could adversely impact our product sales and results of operations.

If we fail to comply with our obligation to accurately track and report ASP, AMP and BP data to the relevant state and federal authorities, we may face fines or penalties and could be subject to additional reimbursement requirements, which could have a material adverse effect on our business, financial condition, results of operations and growth prospects.

As a result of our participation in the Medicaid and Medicare programs, we are required to report ASP, AMP and BP data to state and federal authorities. The calculations for our reported pricing data, including AMP, BP, as well as ASP, are complex and the governing legal requirements may be subject to interpretation by us, governmental or regulatory agencies, and the courts. If we become aware that our reported AMP and best price figures for prior quarters are incorrect or should be changed to reflect late-arriving pricing data, we are obligated to submit the corrected data for a period not to exceed 12 quarters from the quarter in which the data originally were due. Such restatements and recalculations serve to increase our costs for complying with the laws and regulations governing the Medicaid rebate program. Any corrections to our pricing data could result in an overage or underage in our rebate liability for past quarters, depending on the nature of the correction.

Our failure to submit AMP, BP, ASP, and other required data on a timely basis could result in a civil monetary penalty of $10,000 per day for each day the submission is late beyond the due date. In addition, if we are found to have knowingly submitted false information to the government, we could be liable for civil monetary penalties not to exceed $100,000 per item of false information, in addition to other penalties the government may impose. As to ASP specifically, if a manufacturer is found to have made a misrepresentation in the reporting of ASP, the statute provides for civil monetary penalties of up to $10,000 for each misrepresentation for each day in which the misrepresentation was applied. In all cases, this conduct also could result in the termination of our Medicaid rebate agreement. In the event that CMS terminates our rebate agreement, no federal payments would be available under Medicaid or Medicare Part B for PROVENGE or any other of our products that are approved for marketing.

The availability of federal funds under Medicaid and Medicare Part B to pay for PROVENGE and any other products that are approved for marketing also is conditioned on our participation in the Public Health Service 340B drug pricing program. The 340B drug pricing program requires participating manufacturers to agree to charge statutorily-defined covered entities no more than the 340B “ceiling price” for the manufacturer’s covered outpatient drugs. These covered entities include hospitals that serve a disproportionate share of poor Medicare beneficiaries, as well as a variety of community health clinics and other recipients of health services grant funding. PPACA expanded the 340B program to include additional entity types: certain free standing cancer hospitals, critical access hospitals, rural referral centers and sole community hospitals, each as defined by the Act. The 340B ceiling price for a drug is calculated using a statutory formula that is based on the AMP and Medicaid rebate amount for the drug. To the extent PPACA, as discussed above, changes the statutory and regulatory definitions of AMP and the Medicaid rebate amount, these changes will also affect our 340B ceiling price for PROVENGE or any other of our products that are approved for marketing. Any revisions to previously reported Medicaid pricing data also may require revisions to the 340B ceiling prices that were based on those data and could require the issuance of refunds.

We also make PROVENGE available for purchase by authorized users of the Federal Supply Schedule (“FSS”), of the General Services Administration pursuant to an FSS contract with the Department of Veterans Affairs (“VA”) that was awarded to Dendreon in mid-2012. Under the Veterans Health Care Act of 1992 (“VHCA”), we are required to offer deeply discounted FSS contract pricing to four federal agencies commonly referred to as the “Big Four” — the Department of Veterans Affairs, the Department of Defense (“DoD”), the Coast Guard and the Public Health Service (including the Indian Health Service) — for federal funding to be made available for reimbursement of any of our products under the Medicaid program, Medicaid Part B and for our products to be eligible to be purchased by those four federal agencies and certain federal grantees. FSS pricing to those four federal agencies must be equal to or less than the federal ceiling price (“FCP”). The FCP is based on a weighted average wholesaler price known as the non-federal average manufacturer price (“Non-FAMP”). We are required to report Non-FAMP to the VA on a quarterly and annual basis. If we misstate Non-FAMP or FCP, we must restate these figures. In addition, if we are found to have knowingly submitted false information to the government, the VHCA provides for civil monetary penalties of $100,000 per item of false information in addition to other penalties the government may impose.

The FSS contract is a federal procurement contract that includes standard government terms and conditions and extensive disclosure and certification requirements. The FSS contract has a five-year base term and five (5) one-year option periods. All items on FSS contracts are subject to a standard FSS contract clause that requires FSS contract price reductions under certain circumstances where pricing is reduced to an agreed “tracking customer.” Further, in addition to the “Big Four” agencies, all other federal agencies and some non-federal entities are authorized to access FSS contracts. If we overcharge the government in connection with our FSS contract, whether due to a misstated FCP or otherwise, we are required to refund the difference to the government. Failure to make necessary disclosures and/or to identify contract overcharges can result in allegations against us under the Federal False Claims Act and other laws and regulations. Unanticipated refunds to the government, and responding to a government investigation or enforcement action, would be expensive and time-consuming, and could have a material adverse effect on our business, financial condition, results of operations and growth prospects.

 

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Pricing and rebate calculations vary among products, and programs and are complex. Governmental agencies may also make changes in program interpretations, requirements or conditions of participation, some of which may have implications for amounts previously estimated or paid. We cannot assure you that our submissions will not be found by CMS or VA to be incomplete or incorrect.

*The pharmaceutical industry is subject to significant regulation and oversight to prevent an inappropriate inducement and health care fraud pursuant to anti-kickback laws, false claims statutes, and anti-corruption laws, which may result in significant additional expense and limit our ability to commercialize our products. In addition, any failure to comply with these regulations could result in substantial fines or penalties.

In the United States, we are also subject to health care fraud and abuse regulation and enforcement by both the federal government and the states in which we conduct our business. The laws that may affect our ability to operate include:

 

   

the Federal health care programs’ Anti-Kickback Law, which prohibits, among other things, persons from knowingly and willfully soliciting, receiving, offering or paying remuneration, directly or indirectly, in exchange for or to induce either the referral of an individual for, or the purchase, lease, order or recommendation of, any good or service for which payment may be made under federal health care programs such as the Medicare and Medicaid programs;

 

   

federal false claims laws which prohibit, among other things, individuals or entities from knowingly presenting, or causing to be presented, claims for payment from Medicare, Medicaid, or other federal health care programs that are false or fraudulent. This false claims liability may attach in the event that a company is found to have knowingly submitted false AMP, BP, ASP or other pricing data to the government or to have unlawfully promoted its products;

 

   

federal “sunshine” laws that require transparency regarding financial arrangements with health care providers, such as the reporting and disclosure requirements imposed by PPACA on drug manufacturers regarding any “payment or transfer of value” made or distributed to physicians and teaching hospitals; and

 

   

state law equivalents of each of the above federal laws, such as anti-kickback and false claims laws which may apply to items or services reimbursed by any third-party payer, including commercial insurers.

The risk of our being found in violation of these laws is increased by the fact that many of them have not been fully interpreted by the regulatory authorities or the courts, and their provisions are open to a variety of interpretations. Moreover, recent health care reform legislation has strengthened many of these laws. For example, PPACA, among other things, amends the intent requirement of the federal anti-kickback and criminal health care fraud statutes to clarify that a person or entity does not need to have actual knowledge of this statute or specific intent to violate it. In addition, PPACA provides that a claim including items or services resulting from a violation of the federal anti-kickback statute constitutes a false or fraudulent claim for purposes of the false claims statutes.

Dendreon’s products are subject to rigorous regulation by the U.S. Food and Drug Administration (“FDA”). These requirements include, among other things, regulations regarding manufacturing practices, quality control, product labeling, packaging, safety surveillance, adverse event reporting, storage, and advertising and post-marketing reporting. Dendreon’s facilities and procedures are subject to ongoing regulation, including periodic inspection by the FDA and other regulatory authorities. Dendreon must spend time and effort to ensure compliance with these complex regulations. Possible regulatory actions could include warning letters, fines, damages, injunctions, civil penalties, recalls, seizures of Dendreon’s products, and criminal prosecution. These actions could result in substantial modifications to Dendreon’s business practices and operations that could disrupt Dendreon’s business.

In addition, a number of states have laws that require pharmaceutical companies to track and report payments, gifts and other benefits provided to physicians and other health care professionals and entities. Similarly, the federal Physician Payments Sunshine Act within PPACA will require pharmaceutical companies to report to the federal government certain payments to physicians and teaching hospitals. The Physician Payments Sunshine Act provisions required manufacturers that participate in federal health care programs to begin collecting such information on August 1, 2013. Manufacturers are required to report such data to CMS by March 13, 2014. Other state laws require pharmaceutical companies to adopt and or disclose specific compliance policies to regulate the company’s interactions with healthcare professionals. Moreover, some states, such as Minnesota and Vermont, also impose an outright ban on certain gifts to physicians.

Violations of some of these laws may result in substantial fines. These laws affect our promotional activities by limiting the kinds of interactions we may have with hospitals, physicians or other potential purchasers or users of our products. Both the disclosure laws and gift bans impose additional administrative and compliance burdens on us. In addition to the federal and state disclosure and gift ban laws, certain countries outside of the United States have similarly enacted disclosure laws for which the company in its activities may be subjected to from time to time. Although we seek to structure our interactions in compliance with all applicable requirements, these laws are broadly written, and it is often difficult to determine precisely how a law will be applied in specific circumstances. If an employee were to offer an inappropriate gift to a customer, we could be subject to a claim under an applicable state law. Similarly if we fail to comply with a reporting requirement, we could be subject to penalties under applicable federal or state laws or laws outside the United States.

 

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The United States and other countries have adopted anti-corruption laws such as the U.S. Foreign Corrupt Practices Act (FCPA) and the U.K. Bribery Act, which generally prohibit directly or indirectly giving, offering or promising inducements to public officials to elicit an improper commercial advantage. Under the FCPA, this prohibition has been interpreted to apply to doctors and other medical professionals who work in state-run hospitals and state-run healthcare systems outside the United States. Some of these laws, including the U.K. Bribery Act, also prohibit directly or indirectly giving, offering or promising (and, in some cases, accepting or soliciting) inducements to (or from) private parties to elicit (or grant) an improper commercial advantage.

As we begin to commercialize our products outside the United States, there is an increased risk that we (or others acting on our behalf) will engage in transactions or activities that could be deemed to violate applicable anti-corruption laws. Although we believe that we have appropriate compliance policies and procedures in place to mitigate such risk, our personnel and others acting on our behalf could nevertheless engage in conduct that violates such laws, for which we could be held responsible. Under such circumstances, we could be subject to civil and/or criminal penalties, and the resulting negative publicity could adversely affect our brand, our reputation, and our commercial activities.

We expect there will continue to be U.S. and non-U.S. national and, in some cases, regional and local laws and/or regulations, proposed and implemented, that could impact our operations and business. The extent to which future legislation or regulations, if any, relating to health care fraud abuse laws and/or enforcement, may be enacted or what effect such legislation or regulation would have on our business remains uncertain. Because of the breadth of these laws and, in some cases, the lack of extensive legal guidance in the form of regulations or court decisions, it is possible that some of our business activities could be subject to challenge under one or more of these laws. If our operations are found to be in violation of any of the laws described above or any other governmental regulations that apply to us, we may be subject to penalties, including civil and criminal penalties, damages, fines, exclusion of a company’s products from reimbursement under governmental health care programs, and the curtailment or restructuring of our operations, any of which could adversely affect our ability to operate our business and our financial results. Any challenge that we or our business partners have failed to comply with applicable laws and regulations could have a material adverse effect on our business, financial condition, results of operations and growth prospects. If we or the other parties with whom we work fail to comply with applicable regulatory requirements, we or they could be subject to a range of regulatory actions that could affect our ability to commercialize our products and could harm or prevent sales of the affected products, or could substantially increase the costs and expenses of commercializing and marketing our products. Any threatened or actual government enforcement action could also generate adverse publicity and require that we devote substantial resources that could otherwise be used in other aspects of our business.

We may be subject to or otherwise affected by laws relating to privacy and security of personal information, including personal health information and our failure to comply could result in fines and penalties and significant reputational damage.

There are numerous United States federal and state laws governing the privacy and security of personal health information that we obtain, maintain or have access to in connection with manufacture of our product. Some of the laws that may apply include state security breach notification laws, state health information privacy laws and federal and state consumer protections laws which impose requirements for the collection, use, disclosure and transmission of personal information. Numerous other countries have, or are developing, laws governing the collection, use and transmission of personal information as well. Each of these laws may be subject to varying interpretations by courts and government agencies, creating complex compliance issues for us. If we fail to comply with applicable laws and regulations we could be subject to penalties or sanctions.

Although we are not a covered entity subject to HIPAA, most healthcare providers who prescribe our product and from whom we obtain personal health information are subject to HIPAA. Accordingly, we could be subject to criminal penalties if we knowingly obtain individually identifiable health information from a covered entity in a manner that is not authorized or permitted by HIPAA or for aiding and abetting the violation of HIPAA. We are unable to predict whether our actions could be subject to prosecution in the event of an impermissible disclosure of health information to us.

The receipt of personal health information in connection with our clinical trial initiatives is subject to state and federal human subject protection laws. These laws could create liability for us if one of our research collaborators were to use or disclose research subject information without consent and in violation of applicable laws.

If we do not ensure the effectiveness of our information security controls over patient personal information, cyber-attacks against our computing infrastructure may result in that information being accessed by unauthorized external individuals, which could result in substantial reputational damage, increase company costs, and may subject the company to financial penalties.

We receive personal information from our patients and our business partners in connection with business operations and the product manufacturing process. We have implemented information security measures to protect patients’ personal information against the risk of inappropriate and unauthorized external use and disclosure. However, despite these measures, and due to the ever changing information cyber-threat landscape, we may be subject to data breaches through cyber-attacks perpetrated by individuals that attempt to compromise our security controls.

 

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An attack that results in a breach of patient information may compromise our patient’s trust, resulting in devastating reputational damage, which could have major operational and financial impact on our business. Moreover, because we depend on information systems for our manufacturing process, a successful cyber-attack could limit the availability of our computing infrastructure thereby causing a disruption in our operations and negatively affecting our financial condition. Any such cyber-breach may subject the company to state and federal penalties. Finally, an information breach through cyber-attacks could require that we engage additional resources, thereby increasing our costs.

We use hazardous materials in our business and must comply with environmental laws and regulations, which can be expensive.

Our operations produce hazardous waste products, including chemicals and radioactive and biological materials. We are subject to a variety of federal, state and local laws and regulations relating to the use, handling, storage and disposal of these materials. Although we believe that our safety procedures for handling and disposing of these materials complies with the standards prescribed by state and federal laws and regulations, the risk of accidental contamination or injury from these materials cannot be eliminated. We generally contract with third parties for the disposal of such hazardous waste products and store our low level radioactive waste at our facilities in compliance with applicable environmental laws until the materials are no longer considered radioactive. We are also subject to regulation by the Occupational Safety and Health Administration (“OSHA”), and the Environmental Protection Agency (the “EPA”), and to regulation under the Toxic Substances Control Act, the Resource Conservation and Recovery Act and other regulatory statutes, and may in the future be subject to other federal, state or local regulations. OSHA and/or the EPA may promulgate regulations that may affect our research and development programs. We may be required to incur further costs to comply with current or future environmental and safety laws and regulations. In addition, in the event of accidental contamination or injury from these materials, we could be held liable for any damages that result, including remediation, and any such liability could exceed our resources.

Risks in Protecting Our Intellectual Property

If we are unable to protect our proprietary rights or to defend against infringement claims, we may not be able to compete effectively or operate profitably.

We invent and develop technologies that are the basis for or incorporated in our potential products. We protect our technology through United States and foreign patent filings, copyrights, trademarks and trade secrets. We have issued patents, and applications for United States and foreign patents in various stages of prosecution. We expect that we will continue to file and prosecute patent applications and that our success depends in part on our ability to establish and defend our proprietary rights in the technologies that are the subject of issued patents and patent applications.

The fact that we have filed a patent application or that a patent has issued, however, does not ensure that we will have meaningful protection from competition with regard to the underlying technology or product. Patents, if issued, may be challenged, invalidated, declared unenforceable or circumvented or may not cover all applications we may desire. Our pending patent applications as well as those we may file in the future may not result in issued patents. Patents may not provide us with adequate proprietary protection or advantages against competitors with, or who could develop, similar or competing technologies or who could design around our patents. Patent law relating to the scope of claims in the pharmaceutical field in which we operate is continually evolving and can be the subject of some uncertainty. The laws providing patent protection may change in a way that would limit protection.

We also rely on trade secrets and know-how that we seek to protect, in part, through confidentiality agreements. Our policy is to require our officers, employees, consultants, contractors, manufacturers, outside scientific collaborators and sponsored researchers and other advisors to execute confidentiality agreements. These agreements provide that all confidential information developed or made known to the individual during the course of the individual’s relationship with us be kept confidential and not disclosed to third parties except in specific limited circumstances. We also require signed confidentiality agreements from companies that receive our confidential data. For employees, consultants and contractors, we require confidentiality agreements providing that all inventions conceived while rendering services to us shall be assigned to us as our exclusive property. It is possible, however, that these parties may breach those agreements, and we may not have adequate remedies for any breach. It is also possible that our trade secrets or know-how will otherwise become known to or be independently developed by competitors.

We are also subject to the risk of claims, whether meritorious or not, that our products or product candidates infringe or misappropriate third-party intellectual property rights. Defending against such claims can be quite expensive even if the claims lack merit. If we are found to have infringed or misappropriated a third party’s intellectual property, we could be required to seek a license or discontinue our products or cease using certain technologies or delay commercialization of the affected products or product candidates, and we could be required to pay substantial damages, which could materially harm our business.

 

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We may be subject to litigation with respect to the ownership and use of intellectual property that will be costly to defend or pursue and uncertain in its outcome.

Our business may bring us into conflict with our licensees, licensors or others with whom we have contractual or other business relationships, or with our competitors or others whose interests differ from ours. If we are unable to resolve those conflicts on terms that are satisfactory to all parties, we may become involved in litigation brought by or against us. That litigation is likely to be expensive and may require a significant amount of management’s time and attention, at the expense of other aspects of our business.

Litigation relating to the ownership and use of intellectual property is expensive, and our position as a relatively small company in an industry dominated by very large companies may cause us to be at a disadvantage in defending our intellectual property rights and in defending against claims that our product or product candidates infringe or misappropriate third-party intellectual property rights. Even if we are able to defend our position, the cost of doing so may adversely affect our profitability. We may in the future be subject to patent litigation and may not be able to protect our intellectual property at a reasonable cost if such litigation is initiated. The outcome of litigation is always uncertain, and in some cases could include judgments against us that require us to pay damages, enjoin us from certain activities or otherwise affect our legal or contractual rights, which could have a significant adverse effect on our business.

We are exposed to potential product liability claims, and insurance against these claims may not be adequate and may not be available to us at a reasonable rate in the future.

Our business exposes us to potential liability risks inherent in the research, development, manufacturing and marketing of pharmaceutical products and product candidates. If any of our product candidates in clinical trials or our marketed products harm people or allegedly harm people, we may be subject to costly and damaging product liability claims. Most, if not all, of the patients who participate in our clinical trials are already seriously ill when they enter a trial. We have clinical trial insurance coverage, and commercial product liability insurance coverage. However, this insurance coverage may not be adequate to cover all claims against us. There is also a risk that adequate insurance coverage will not be available in the future on commercially reasonable terms, if at all. The successful assertion of an uninsured product liability or other claim against us could cause us to incur significant expenses to pay such a claim, could adversely affect our product development or product sales and could cause a decline in our product revenues. Even a successfully defended product liability claim could cause us to incur significant expenses to defend such a claim, could adversely affect our product development and could cause a decline in our product revenues. In addition, product liability claims could result in an FDA or equivalent non-United States regulatory authority investigation of the safety or efficacy of our products, our manufacturing processes and facilities, or our marketing programs. An FDA or equivalent non-United States regulatory authority investigation could also potentially lead to a recall of our products or more serious enforcement actions, limitations on the indications for which they may be used, or suspension or withdrawal of approval.

Risks Relating to an Investment in Our Common Stock

*We are currently subject to certain pending litigation and may be subject to similar claims in the future.

The Company and three current and former officers are named defendants in a consolidated putative securities class action proceeding filed in August 2011 with the United States District Court for the Western District of Washington (the “District Court”) under the caption In re Dendreon Corporation Class Action Litigation, Master Docket No. C 11-1291 JLR. Lead Plaintiff, San Mateo County Employees Retirement Association purports to state claims for violations of federal securities laws on behalf of a class of persons who purchased the Company’s common stock between April 29, 2010 and August 3, 2011. A consolidated amended complaint was filed on February 24, 2012. In general, the complaints allege that the defendants issued materially false or misleading statements concerning the Company, its finances, business operations and prospects with a focus on the market launch of PROVENGE and related forecasts concerning physician adoption, and revenue from sales of PROVENGE as reflected in the Company’s August 3, 2011 release of its financial results for the quarter ended June 30, 2011. On April 24, 2013, the parties entered into, and filed with the District Court, a Stipulation of Settlement (the “Stipulation”) setting forth terms of the settlement; in general, the litigation will be dismissed with prejudice and the defendants will receive full releases in exchange for a payment of $40 million, $38 million of which was funded by the Company’s directors’ and officers’ liability insurers. After notice to the settlement class, at a hearing held August 2, 2013, the District Court granted final approval to the settlement and entered judgment in accordance with terms of the Stipulation. The parties anticipate that the settlement will become final and effective as provided in the Stipulation.

On May 16, 2013, a group of individual shareholders who elected to opt out of the class action settlement commenced their own action alleging securities fraud. That action, captioned Christoph Bolling, et al. v. Dendreon Corporation, et al., Case No. 2:13-CV- 872 JLR, names the same defendant parties as the class action and bases its legal claims on substantially the same factual allegations relating to the same supposedly relevant period. In addition to claims under the federal securities laws, the plaintiff group also purports to assert certain claims under Washington state law. Based on information provided informally by plaintiffs’ counsel, the plaintiff group, which totals approximately 30 persons, purports to have purchased approximately 250,000 shares of Dendreon common stock during the relevant period, an amount that equates to under 0.5% of the estimated shares that comprised the plaintiff class in the class action. The Bolling plaintiffs filed an amended complaint July 16, 2013. Defendants’ response to the amended complaint is due August 9, and defendants plan to file a motion to dismiss; briefing is expected to extend through October 2013. Until the motion to dismiss is resolved, discovery in the Bolling action is stayed. We cannot predict the outcome of the motion. If the litigation proceeds, however, the Company intends to defend the claims vigorously.

 

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Related to the securities lawsuits, the Company also is the subject of stockholder derivative complaints first filed in August 2011 generally arising out of the facts and circumstances that are alleged to underlie the securities action. Derivative suits filed in the District Court were consolidated into a proceeding captioned In re Dendreon Corp. Derivative Litigation, Master Docket No. C 11-1345 JLR; others were filed in the Superior Court of Washington for King County and were consolidated into a proceeding captioned In re Dendreon Corporation Shareholder Derivative Litigation, Lead Case No. 11-2-29626-1 SEA. On June 22, 2012, another derivative action was filed in the Court of Chancery of the State of Delaware, captioned Herbert Silverberg, derivatively on behalf of Dendreon Corporation v. Mitchell H. Gold, et al., Case No. 7646-VCP. The complaints filed in Washington all name as defendants the three individuals who are defendants in the securities action together with the other members of the Company’s Board of Directors. While the complaints filed in Washington assert various legal theories of liability, the lawsuits generally allege that the defendants breached fiduciary duties owed to the Company in connection with the launch of PROVENGE and by purportedly subjecting the Company to potential liability for securities fraud. The complaints also include claims against certain defendants for supposed misappropriation of Company information and insider trading; the Silverberg complaint, which names one additional former officer of the Company as a defendant, asserts only this claim. The Company filed a motion to dismiss the Silverberg action on standing grounds; the motion is fully briefed, and the Company anticipates that the Court of Chancery will schedule an argument on the motion. Proceedings in the Silverberg action are otherwise stayed. We cannot predict the outcome of the motion to dismiss. While the Company has certain indemnification obligations, including obligations to advance legal expense to the named defendants for defense of these lawsuits, the purported derivative lawsuits do not seek relief against the Company. Additionally, the SEC is conducting a formal investigation, which the Company believes relates to some of the same issues raised in the securities and derivative actions. The Company is cooperating fully with the SEC investigation. The ultimate financial impact of these various proceedings, if any, is not yet determinable and therefore, no provision for loss, if any, has been recorded in the financial statements. With respect to all of the above-described proceedings, the Company has insurance that it believes affords coverage for much of the anticipated costs of these proceedings, subject to the policies’ terms and conditions.

The Company is not a defendant in the stockholder derivative actions as the defendants are the members of the Company’s board of directors and certain executive officers. Nevertheless, the Company is at risk of incurring significant costs in connection with these derivative actions, including for example costs associated with discovery and defense of the individual defendants. We cannot predict the outcome of any of these suits or proceedings. Monitoring and defending against legal actions, whether or not meritorious, and considering stockholder demands is time-consuming for our management and detracts from our ability to fully focus our internal resources on our business activities and we cannot predict how long it may take to resolve these matters. In addition, legal fees and costs incurred in connection with such activities can be significant. We cannot predict the outcome of the matters or the associated costs to us, nor the amounts that the Company may need to pay to settle them or satisfy an adverse judgment. The Company maintains directors’ and officers’ liability insurance that it believes is applicable to these various lawsuits; however, this insurance coverage may not be adequate to cover all claims against us. We have not established any reserves for any potential liability relating to the suits or other claims related to the same matters. It is possible that we could, in the future, be subject to judgments or enter into settlements of claims for monetary damages. A decision adverse to our interests on these actions or resulting from these matters could result in the payment of substantial damages and could have a material adverse effect on our cash flow, results of operations and financial position.

Our business may be affected by other legal proceedings.

We have been in the past, and may become in the future, involved in legal proceedings in addition to those described above. You should carefully review and consider the various disclosures we make in our reports filed with the SEC regarding legal matters that may affect our business. Civil and criminal litigation is inherently unpredictable and outcomes can result in excessive verdicts, fines, penalties and/or injunctive relief that affect how we operate our business. Monitoring and defending against legal actions, whether or not meritorious, and considering stockholder demands, is time-consuming for our management and detracts from our ability to fully focus our internal resources on our business activities. In addition, legal fees and costs incurred in connection with such activities may be significant. We cannot predict with certainty the outcome of any legal proceedings in which we become involved and it is difficult to estimate the possible costs to us stemming from these matters. Settlements and decisions adverse to our interests in legal actions could result in the payment of substantial amounts and could have a material adverse effect on our cash flow, results of operations and financial position. Refer to Part II Item 1 for further discussion of our legal proceedings.

Market volatility may affect our stock price, and the value of an investment in our common stock may be subject to sudden decreases.

The trading price for our common stock has been, and we expect it to continue to be, volatile. The price at which our common stock trades depends on a number of factors, including the following, many of which are beyond our control:

 

   

the relative success of our commercialization efforts for PROVENGE;

 

   

preclinical and clinical trial results and other product development activities;

 

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our historical and anticipated operating results, including fluctuations in our financial and operating results or failure to meet revenue guidance;

 

   

changes in government regulations affecting product approvals, reimbursement or other aspects of our or our competitors’ businesses;

 

   

announcements of technological innovations or new commercial products by us or our competitors;

 

   

developments concerning our key personnel;

 

   

our ability to protect our intellectual property, including in the face of changing laws;

 

   

announcements regarding significant collaborations or strategic alliances;

 

   

publicity regarding actual or potential performance of products under development by us or our competitors;

 

   

market perception of the prospects for biotechnology companies as an industry sector; and

 

   

general market and economic conditions.

During periods of extreme stock market price volatility, share prices of many biotechnology companies have often fluctuated in a manner not necessarily related to their individual operating performance. Furthermore, historically our common stock has experienced greater price volatility than the stock market as a whole.

Anti-takeover provisions in our charter documents and under Delaware law and our stockholders’ rights plan could make an acquisition of us, which may be beneficial to our stockholders, more difficult.

Provisions of our amended and restated certificate of incorporation, as amended (“certification of incorporation”) and amended and restated bylaws (“bylaws”) will make it more difficult for a third party to acquire us on terms not approved by our board of directors and may have the effect of deterring hostile takeover attempts. Our certificate of incorporation, as amended, authorizes our board of directors to issue up to 10,000,000 shares of preferred stock, of which 2,500,000 shares have been designated as “Series A Junior Participating Preferred Stock,” and to fix the price, rights, preferences, privileges and restrictions, including voting rights, of those shares without any further vote or action by the stockholders. The rights of the holders of our common stock will be subject to, and may be junior to the rights of the holders of any preferred stock that may be issued in the future. The issuance of preferred stock could reduce the voting power of the holders of our common stock and the likelihood that common stockholders will receive payments upon liquidation.

In addition, our certificate of incorporation divides our board of directors into three classes having staggered terms. This may delay any attempt to replace our board of directors. We have also implemented a stockholders’ rights plan, also called a poison pill, which would substantially reduce or eliminate the expected economic benefit to an acquirer from acquiring us in a manner or on terms not approved by our board of directors. These and other impediments to a third-party acquisition or change of control could limit the price investors are willing to pay in the future for shares of our common stock. Our executive officers have employment agreements that include change of control provisions providing severance benefits in the event that their employment terminates involuntarily without cause or for good reason within twelve months after a change of control of us. These agreements could affect the consummation of and the terms of a third-party acquisition.

We are also subject to provisions of Delaware law that could have the effect of delaying, deferring or preventing a change in control of our company. One of these provisions prevents us from engaging in a business combination with any interested stockholder for a period of three years from the date the person becomes an interested stockholder, unless specified conditions are satisfied.

We do not intend to pay cash dividends on our common stock in the foreseeable future.

We have never declared or paid cash dividends on our capital stock. We are not currently profitable. To the extent we become profitable, we intend to retain any future earnings to fund the development and growth of our business and do not currently anticipate paying any cash dividends in the foreseeable future. Accordingly, our stockholders will not realize a return on their investment unless and until they sell shares after the trading price of our shares appreciates from the price at which the shareholder purchased.

The fundamental change repurchase feature of our convertible notes may delay or prevent a takeover attempt of our company that would otherwise be beneficial to investors.

The indenture governing each of our 2014 Notes and 2016 Notes will require us to repurchase the notes for cash upon the occurrence of a fundamental change and, in certain circumstances, to increase the conversion rate for a holder that converts its notes in connection with a fundamental change. A takeover of our company may be a fundamental change that would trigger the requirement that we repurchase the notes and increase the conversion rate, which could make it more costly for a potential acquirer to engage in a combinatory transaction with us. Such additional costs may have the effect of delaying or preventing a takeover of our company that would otherwise be beneficial to investors.

 

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Changes in interest rates can affect the fair value of our investment portfolio and the debt we have issued and its interest earnings.

Our interest rate risk exposure results from our investment portfolio and our non-recourse notes. Our primary objectives in managing our investment portfolio are to preserve principal, maintain proper liquidity to meet operating needs and maximize yields. The securities we hold in our investment portfolio are subject to interest rate risk. At any time, sharp changes in interest rates can affect the fair value of the investment portfolio and its interest earnings. Currently, we do not hedge these interest rate exposures. We have established policies and procedures to manage exposure to fluctuations in interest rates. We place our investments with high quality issuers, limit the amount of credit exposure to any one issuer, and do not use derivative financial instruments in our investment portfolio.

The fair value of the 2014 Notes and 2016 Notes is affected by changes in the interest rates and by changes in the price of our common stock.

If securities or industry analysts publish research or reports or publish unfavorable research about our business, the price of our common stock and trading volume could decline.

The trading market for our common stock will depend in part on the research and reports that securities or industry analysts publish about us or our business. If one or more of the analysts who covers us downgrades our common stock, the price of our common stock would likely decline. If one or more of these analysts ceases to cover us or fails to publish regular reports on us, interest in the purchase of our common stock could decrease, which could cause the price of our common stock or trading volume to decline.

Risks Relating to Foreign Operations

*Risks associated with operating in foreign countries could materially adversely affect our business.

If PROVENGE is approved in Europe, we expect to import, market, sell and distribute our products in European countries. We expect to expand our presence in Europe. Our clinical and commercial supply chain activities could occur outside the United States. Consequently, we are, and will continue to be, subject to risks related to operating in foreign countries. Risks associated with conducting operations in foreign countries include:

 

   

differing regulatory requirements for drug approvals and regulation of approved drugs in foreign countries;

 

   

unexpected changes in tariffs, trade barriers and regulatory requirements;

 

   

economic weakness, including inflation, or political instability in particular foreign economies and markets;

 

   

compliance with tax, employment, immigration and labor laws for employees living or traveling abroad;

 

   

foreign taxes, including withholding of payroll taxes;

 

   

foreign currency fluctuations, which could result in increased operating expenses or reduced revenues, and other obligations incident to doing business or operating in another country;

 

   

workforce uncertainty in countries where labor unrest is more common than in the United States;

 

   

production shortages resulting from any events affecting raw material supply or manufacturing capabilities abroad; and

 

   

business interruptions resulting from geo-political actions, including war and terrorism.

These and other risks described elsewhere in these risk factors associated with our international operations could materially adversely affect our business.

 

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ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

Issuer Purchases of Equity Securities

Share Repurchases. The following sets forth information with respect to purchases of shares of common stock made during the three-month period ended June 30, 2013 by or on behalf of the Company or any “affiliated purchaser,” as defined by Rule 10b-18 of the Securities Exchange Act of 1934:

 

Period

   Total Number of
Shares
Purchased (1)
     Average Price Paid
per Share
     Total Number of
Shares
Purchased as
Part of Publicly
Announced Plans
or Programs
     Maximum
Number of
Shares that May
Yet be Purchased
Under the Plans
or Programs
 

April 1 — April 30, 2013

     9,136       $ 4.65         —           —     

May 1 — May 31, 2013

     —           —           —           —     

June 1 — June 30, 2013

     2,466         3.91         —           —     
  

 

 

       

 

 

    

 

 

 

Total

     11,602       $ 4.50         —           —     
  

 

 

       

 

 

    

 

 

 

 

(1) Represents shares withheld from vested restricted stock to satisfy the minimum withholding requirement for federal and state taxes.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable. 

ITEM 5. OTHER INFORMATION

None. 

ITEM 6. EXHIBITS

 

Exhibit

Number

  

Description

   10.1†    Third Amendment to Office Lease between FSP-RIC LLC and Dendreon Corporation, dated April 16, 2013
   31.1    Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
   31.2    Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
   32    Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C § 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 101.INS    XBRL INSTANCE DOCUMENT
 101.SCH    XBRL TAXONOMY EXTENSION SCHEMA DOCUMENT

 

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Exhibit

Number

  

Description

101.CAL    XBRL TAXONOMY EXTENSION CALCULATION LINKBASE DOCUMENT
101.DEF    XBRL TAXONOMY EXTENSION DEFINITION LINKBASE DOCUMENT
101.LAB    XBRL TAXONOMY EXTENSION LABELS LINKBASE DOCUMENT
101.PRE    XBRL TAXONOMY EXTENSION PRESENTATION LINKBASE DOCUMENT

 

Confidential information was omitted from this exhibit pursuant to a request for confidential treatment and filed separately with the Securities and Exchange Commission.

 

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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: August 8, 2013

 

DENDREON CORPORATION
By:  

/s/ John H. Johnson

  John H. Johnson
  President, Chief Executive Officer and Chairman of the Board of Directors (Principal Executive Officer)
By:  

/s/ Gregory T. Schiffman

  Gregory T. Schiffman
 

Executive Vice President,

Chief Financial Officer and Treasurer

(Principal Financial Officer)

By:  

/s/ Gregory R. Cox

  Gregory R. Cox
  Vice President, Finance
  (Principal Accounting Officer)

 

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