Income Taxes

12 Months Ended

Dec. 31, 2011

Income Taxes

Income Taxes

7. Income Taxes

We have net deferred tax assets relating primarily to net operating loss carryforwards, or NOL’s, and research and development tax credit carryfowards.  Subject to certain limitations, we may use these deferred tax assets to offset taxable income in future periods.  Since we have a history of losses and the likelihood of future profitability is not assured, we have provided a full valuation allowance for the deferred tax assets in our balance sheet as of December 31, 2011.  If we determine that we are able to realize a portion or all of these deferred tax assets in the future, we will record an adjustment to increase their recorded value and a corresponding adjustment to increase income or additional paid in capital, as appropriate, in that same period.

Primarily as a result of the significant upfront funding that we received from our strategic alliance with Genzyme in 2008 and the gain we recognized on the sale of Ibis to AMI in January 2009, we had a substantial amount of taxable income in 2009.  To reduce our tax liability, we offset a portion of the taxable income with our 2009 loss from continuing operations.  We also used some of our NOL’s to reduce our federal income taxes in 2009.  The tax law changes that were enacted with the 2008/2009 California Budget suspended our ability to use NOL’s to offset our California tax expense for 2009.  However, we offset our California income tax liability to the fullest extent allowed under the tax regulations with our research and development tax credit carryforwards, which California tax regulations limit to 50 percent of our California liability.  After using all of our allowable losses and tax credits to reduce our tax liability, our 2009 tax expense was $20.0 million.

We were required to allocate our 2009 tax expense between discontinued operations and continuing operations in our consolidated statement of operations.  Accordingly, we recorded tax expense of $3.2 million in continuing operations and $16.8 million in discontinued operations in 2009.

We are subject to taxation in the United States and various state jurisdictions. Our tax years for 1993 and forward are subject to examination by the U.S. tax authorities and our tax years for 1989 and forward are subject to examination by the California tax authorities due to the carryforward of unutilized net operating losses and research and development credits. Our tax years for 2001, 2002, 2006 and 2007 are currently being audited by California’s Franchise Tax Board.  We do not expect that the results of these examinations will have a material effect on our financial condition or results of operations.

The provision for taxes on earnings from continuing operations, were as follows (in thousands):

	Year Ended December 31,
	2011		2010
Current:
Federal	$	—	$	(73	)
State	11		165
	11		92
Deferred:
Federal	—		—
State	—		—
Foreign	—		—
	—		—
Income Tax Expense	$	11	$	92

The reconciliation between the Company’s effective tax rate on income from continuing operations and the statutory U.S. tax rate is as follows (in thousands):

	Year Ended December 31,
	2011					2010					2009
Pre tax income	$	(84,790	)			$	(61,251	)			$	(31,765	)
Statutory rate	(29,677		)	35.0	%	(21,438		)	35.0	%	(11,118		)	35.0	%
State income tax net of federal benefit	(4,870		)	5.7	%	(3,518		)	5.7	%	(1,825		)	5.7	%
Net change in federal valuation allowance	41,136			(48.5	)%	26,869			(43.9	)%	12,275			(38.6	)%
Tax credits	(4,202		)	5.0	%	(3,175		)	5.2	%	3,401			(10.7	)%
Expired NOL’s	—			—		—			—		(879		)	2.8	%
Noncontrolling interest	1,448			(1.7	)%	908			(1.5	)%	3,562			(11.2	)%
Deferred tax true-up	(4,236		)	5.0	%	—			—		—			—
Other	412			(0.5	)%	446			(0.7	)%	(2,225		)	7.0	%
Effective rate	$	11		(0.1	)%	$	92		(0.2	)%	3,191			(10.0	)%

Significant components of our deferred tax assets and liabilities as of December 31, 2011 and 2010 are as follows (in thousands):

	Year Ended December 31,
	2011			2010
Deferred Tax Assets:
Net operating loss carryovers	$	195,399		$	148,688
R&D credits	44,970			38,989
Capitalized R&D	23,212			26,932
Deferred revenue	20,541			38,409
Accrued restructuring	10,888			10,888
Other	25,606			19,396
Total deferred tax assets	$	320,616		$	283,302
Deferred Tax Liabilities:
Convertible debt	$	(9,426	)	$	(12,275	)
Intangible and capital assets	(3,702		)	(5,156		)
Net deferred tax asset	$	307,488		$	265,871
Valuation allowance	(307,488		)	(265,871		)
Net deferreds	$	—		$	—

The deferred tax assets and liabilities shown above do not include certain deferred tax assets at December 31, 2011 and 2010 that arose directly from (or the use of which was postponed by) tax deductions related to equity compensation in excess of compensation recognized for financial reporting. Those deferred tax assets include non-qualified stock options and incentive stock options we issued. We will increase stockholders’ equity by approximately $10.3 million if and when we ultimately realize such deferred tax assets. We use tax return ordering for purposes of determining when excess tax benefits have been realized.

At December 31, 2011, we had federal and California tax net operating loss carryforwards of approximately $510.6 million and $428.1 million, respectively. The Federal and California tax loss carryforwards will expire at various dates starting in 2014, unless we use them before then. We also have federal and California research and development tax credit carryforwards of approximately $41.1 million and $16.0 million, respectively and federal Orphan Drug credits of $1.8 million. The Federal research and development tax credit carryforwards began expiring in 2004 and will continue to expire unless we use them before then. The California research and development tax credit carryforwards are available indefinitely. The difference between the tax loss carryforwards for federal and California purposes is attributable to the capitalization of research and development expenses for California tax purposes and the shorter carryforward periods related to the state loss carryforwards.

We analyze filing positions in all of the federal and state jurisdictions where we are required to file income tax returns, and all open tax years in these jurisdictions to determine if we have any uncertain tax positions on any of our income tax returns.  We recognize the impact of an uncertain tax position on an income tax return at the largest amount that the relevant taxing authority is more-likely-than not to sustain upon audit.  We do not recognize uncertain income tax positions if they have less than 50 percent likelihood of being sustained.

The following table summarizes the gross amounts of unrecognized tax benefits without regard to reduction in tax liabilities or additions to deferred tax assets and liabilities if such unrecognized tax benefits were settled.

Reconciliation of unrecognized tax benefits (in thousands):

Unrecognized tax benefits balance at January 1, 2011	$	8,968
Decrease for prior period tax positions	(97		)
Increase for current period tax positions	963
Unrecognized tax benefits balance at December 31, 2011	$	9,834

The balance of unrecognized tax benefits at December 31, 2011 of $9.8 million are tax benefits that, if we recognize them, would not impact our effective tax rates as long as they remain subject to a full valuation allowance.  The net effect on the deferred tax assets and corresponding decrease in the valuation allowance at December 31, 2011 resulting from unrecognized tax benefits is $742,000.  We have not recognized any accrued interest and penalties related to unrecognized tax benefits during the year ended December 31, 2011 due to our NOL and research credit carryforwards. We do not foresee any material changes to unrecognized tax benefits within the next twelve months.  We recognize interest and/or penalties related to income tax matters in income tax expense.