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Adolor 10-Q 2011
Form 10-Q
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

FORM 10-Q

 

 

(Mark One)

 

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

For the quarterly period ended June 30, 2011

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: 000-30039

 

 

ADOLOR CORPORATION

(Exact Name of Registrant as Specified in Its Charter)

 

 

 

Delaware   31-1429198

(State or Other Jurisdiction of

Incorporation or Organization)

 

(I.R.S. Employer

Identification Number)

700 Pennsylvania Drive

Exton, Pennsylvania 19341

(Address of Principal Executive Offices and Zip Code)

484-595-1500

(Registrant’s Telephone Number, Including Area Code)

Not Applicable

(Former Name, Former Address and Former Fiscal Year, If Changed Since Last Report)

 

 

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.    x  Yes    ¨  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) 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   ¨    Accelerated filer   ¨
Non-accelerated filer   ¨    Smaller reporting company   x

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

Indicate the number of shares outstanding of each class of the registrant’s common stock, as of the latest practicable date

 

Class

 

Outstanding as of July 15, 2011

Common Stock, par value $0.0001 per share   46,464,484 shares

 

 

 


Table of Contents

ADOLOR CORPORATION AND SUBSIDIARY

FORM 10-Q

June 30, 2011

INDEX

 

          Page No.  
   CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS      ii   
PART I.    FINANCIAL INFORMATION   

ITEM 1.

  

Consolidated Financial Statements (unaudited):

  
  

Consolidated Balance Sheets at June 30, 2011 and December 31, 2010

     1   
  

Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2011 and 2010

     2   
  

Consolidated Statements of Comprehensive Loss for the Three and Six Months Ended June 30, 2011 and 2010

     3   
  

Consolidated Statement of Stockholders’ Equity for the Six Months Ended June 30, 2011

     4   
  

Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2011 and 2010

     5   
  

Notes to Consolidated Financial Statements

     6   

ITEM 2.

  

Management’s Discussion and Analysis of Financial Condition and Results of Operations

     11   

ITEM 3.

  

Quantitative and Qualitative Disclosures About Market Risk

     18   

ITEM 4.

  

Controls and Procedures

     18   
PART II.    OTHER INFORMATION   

ITEM 1.

   Legal Proceedings      19   

ITEM 1A.

   Risk Factors      19   

ITEM 6.

   Exhibits      29   
   Signatures      30   

 

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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

In addition to historical facts or statements of current condition, this report and the documents into which this report is and will be incorporated contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements contained in this report or incorporated herein by reference constitute our expectations or forecasts of future events as of the date this report was filed with the Securities and Exchange Commission and are not statements of historical fact. You can identify these statements by the fact that they do not relate strictly to historical or current facts. Such statements may include words such as “anticipate,” “will,” “estimate,” “expect,” “project,” “intend,” “should,” “plan,” “believe,” “hope” and other words and terms of similar meaning in connection with any discussion of, among other things, sales, future operating or financial performance, strategic initiatives and business strategies, regulatory or competitive environments, our intellectual property and product development. In particular, these forward-looking statements include, among others, statements about:

 

   

our dependence on sales of ENTEREG® (alvimopan) in the United States and the commercial prospects and future marketing efforts for this product;

 

   

our ability to attract future partners to finance development and commercialization of our product candidates;

 

   

our anticipated progress in our research and development of potential pharmaceutical products, including our ongoing or planned clinical trials, the status, timing, costs and results of such trials, the ability to secure regulatory approval for our product candidates and the likelihood or timing of revenues from these products, if any;

 

   

the scope and duration of our intellectual property protection for our products and product candidates, our ability to adequately protect our technologies and enforce our intellectual property rights and the future expiration of patent and/or regulatory exclusivity on alvimopan;

 

   

our anticipated operating losses and cash requirements, projections regarding the levels of our cash, cash equivalents and investments and our ability to raise additional funds in light of our current and projected level of operations; and

 

   

other statements regarding matters that are not historical facts or statements of current condition.

Any or all of our forward-looking statements in this report and in the documents that we have referred you to may turn out to be wrong. They can be affected by inaccurate assumptions we might make or by known or unknown risks and uncertainties. Therefore, you should not place undue reliance on any such forward-looking statements. The factors that could cause actual results to differ from those expressed or implied by our forward-looking statements include, among others:

 

   

the acceptance of ENTEREG by hospital formularies and pharmacies, physicians and patients in the marketplace;

 

   

our ability to successfully market and sell ENTEREG following the announced reacquisition of Glaxo Group Limited’s rights to ENTEREG;

 

   

delays or setbacks with respect to research programs, clinical trials or manufacturing or commercial activities;

 

   

the timing and unpredictability of regulatory actions;

 

   

our ability to develop and commercialize new products effectively;

 

   

unanticipated cash requirements to support current operations, to expand our business or for capital expenditures;

 

   

the inability to adequately protect our key intellectual property rights;

 

   

the loss of key management or scientific personnel;

 

   

the activities of our competitors;

 

   

regulatory, legal or other setbacks with respect to our operations or business;

 

   

market conditions in the capital markets and the biopharmaceutical industry that make raising capital or consummating acquisitions difficult, expensive or both; and

 

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enactment of new government laws, regulations, court decisions, regulatory interpretations or other initiatives that are adverse to us or our interests.

We do not intend to update publicly any forward-looking statement, whether as a result of new information, future events or otherwise, except as required by law. We discuss in more detail the risks that we anticipate in Part II, Item 1A of this report. This discussion is permitted by the Private Securities Litigation Reform Act of 1995.

 

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ADOLOR CORPORATION AND SUBSIDIARY

Consolidated Balance Sheets

(Unaudited)

 

     June 30,
2011
    December 31,
2010
 

Assets

    

Current assets:

    

Cash and cash equivalents

   $ 8,151,236      $ 4,603,327   

Short-term investments

     23,997,582        41,983,210   

Accounts receivable

     3,328,935        3,105,493   

Inventory

     1,278,748        933,857   

Prepaid expenses and other current assets

     830,258        1,560,725   
                

Total current assets

     37,586,759        52,186,612   

Equipment and leasehold improvements, net

     401,792        464,052   

Other assets

     107,000        107,000   

Intangible asset (Note 3)

     19,363,196        —     
                

Total assets

   $ 57,458,747      $ 52,757,664   
                

Liabilities and Stockholders’ Equity

    

Current liabilities:

    

Accounts payable

   $ 787,840      $ 272,607   

Accrued expenses

     8,598,936        8,923,508   

Payable to Glaxo—current (Note 3)

     2,500,000        —     

Deferred revenue and rent—current

     17,015,726        4,645,674   
                

Total current liabilities

     28,902,502        13,841,789   

Deferred revenue and rent—non-current

     157,417        19,257,551   

Payable to Glaxo—non-current (Note 3)

     16,863,196        —     
                

Total liabilities

     45,923,115        33,099,340   
                

Commitments

    

Stockholders’ equity:

    

Series A Junior Participating preferred stock, $0.01 par value; 35,000 shares authorized; none issued and outstanding

     —          —     

Preferred stock, $0.01 par value; 1,000,000 shares authorized; none issued and outstanding

     —          —     

Common stock, $0.0001 par value; 99,000,000 shares authorized; 46,488,675 and 46,433,663 shares issued; 46,464,484 and 46,414,759 shares outstanding at June 30, 2011 and December 31, 2010, respectively

     4,649        4,643   

Additional paid-in capital

     550,907,639        549,929,447   

Treasury stock, at cost, 24,191 and 18,904 shares at June 30, 2011 and December 31, 2010, respectively

     (33,227     (26,301

Unrealized gains on available for sale securities

     4,444        5,660   

Accumulated deficit

     (539,347,873     (530,255,125
                

Total stockholders’ equity

     11,535,632        19,658,324   
                

Total liabilities and stockholders’ equity

   $ 57,458,747      $ 52,757,664   
                

The accompanying notes are an integral part of these consolidated financial statements.

 

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ADOLOR CORPORATION AND SUBSIDIARY

Consolidated Statements of Operations

(Unaudited)

 

     Three Months Ended June 30,     Six Months Ended June 30,  
     2011     2010     2011     2010  

Revenues:

        

Product sales, net

   $ 8,222,865      $ 6,259,271      $ 15,673,715      $ 11,549,502   

Contract revenues

     5,967,502        4,687,022        7,547,150        10,064,878   
                                

Total revenues, net

     14,190,367        10,946,293        23,220,865        21,614,380   
                                

Operating expenses incurred:

        

Cost of product sales

     948,235        677,283        1,818,155        1,267,235   

Research and development

     6,638,278        9,595,492        13,489,424        20,113,632   

Selling, general and administrative

     8,555,176        9,002,026        17,252,494        18,229,255   
                                

Total operating expenses

     16,141,689        19,274,801        32,560,073        39,610,122   
                                

Loss from operations

     (1,951,322     (8,328,508     (9,339,208     (17,995,742

Interest income

     10,374        51,458        31,000        119,153   

Other income, net

     104,572        —          215,460        —     
                                

Net loss

   $ (1,836,376   $ (8,277,050   $ (9,092,748   $ (17,876,589
                                

Basic and diluted net loss per share

   $ (0.04   $ (0.18   $ (0.20   $ (0.39
                                

Shares used in computing basic and diluted net loss per share

     46,408,293        46,332,301        46,398,849        46,323,266   
                                

The accompanying notes are an integral part of these consolidated financial statements.

 

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ADOLOR CORPORATION AND SUBSIDIARY

Consolidated Statements of Comprehensive Loss

(Unaudited)

 

     Three Months Ended June 30,     Six Months Ended June 30,  
     2011     2010     2011     2010  

Net loss

   $ (1,836,376   $ (8,277,050   $ (9,092,748   $ (17,876,589

Other comprehensive income (loss):

        

Unrealized gains (losses) on available for sale securities, net

     1,670        5,064        (1,216     (12,753
                                

Comprehensive loss

   $ (1,834,706   $ (8,271,986   $ (9,093,964   $ (17,889,342
                                

The accompanying notes are an integral part of these consolidated financial statements.

 

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ADOLOR CORPORATION AND SUBSIDIARY

Consolidated Statement of Stockholders’ Equity

(Unaudited)

 

    Common Stock     Additional
Paid-in

Capital
    Treasury Stock     Unrealized
Gains
on Available
for Sale
Securities
    Accumulated
Deficit
    Total
Stockholders’
Equity
 
  Number of
Shares
    Amount       Number of
Shares
    Amount        

Balance, January 1, 2011

    46,433,663      $ 4,643      $ 549,929,447        18,904      $ (26,301   $ 5,660      $ (530,255,125   $ 19,658,324   

Vesting of deferred stock

    55,012        6        (6     —          —          —          —          —     

Stock-based compensation expense

    —          —          978,198        —          —          —          —          978,198   

Treasury stock acquired

    —          —          —          5,287        (6,926     —          —          (6,926

Unrealized losses on available for sale securities, net

    —          —          —          —          —          (1,216     —          (1,216

Net loss

    —          —          —          —          —          —          (9,092,748     (9,092,748
                                                               

Balance, June 30, 2011

    46,488,675      $ 4,649      $ 550,907,639        24,191      $ (33,227   $ 4,444      $ (539,347,873 )(    $ 11,535,632   
                                                               

The accompanying notes are an integral part of these consolidated financial statements.

 

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ADOLOR CORPORATION AND SUBSIDIARY

Consolidated Statements of Cash Flows

(Unaudited)

 

     Six Months Ended June 30,  
     2011     2010  

Net cash flows from operating activities:

    

Net loss

   $ (9,092,748   $ (17,876,589

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

    

Stock-based compensation expense

     977,942        1,598,008   

Amortization of premiums and discounts on short-term investments

     (24,334     (47,692

Amortization of deferred revenue and rent

     (6,730,082     (6,669,202

Depreciation and amortization expense

     159,029        214,199   

Changes in assets and liabilities:

    

Accounts receivable

     (223,442     188,076   

Inventory

     (344,635     (122,164

Prepaid expenses and other current assets

     730,467        906,846   

Accounts payable

     515,233        (590,200

Accrued expenses

     (324,572     1,490,392   
                

Net cash used in operating activities

     (14,357,142     (20,908,326
                

Net cash flows from investing activities:

    

Purchases of equipment and leasehold improvements

     (97,108     (37,520

Proceeds from disposal of equipment

     339        37,967   

Purchases of short-term investments

     (13,991,254     (29,941,931

Maturities of short-term investments

     32,000,000        48,000,000   
                

Net cash provided by investing activities

     17,911,977        18,058,516   
                

Net cash flows from financing activities:

    

Payment of withholding taxes related to deferred stock units

     (6,926     (17,931
                

Net cash used in financing activities

     (6,926     (17,931
                

Net increase (decrease) in cash and cash equivalents

     3,547,909        (2,867,741

Cash and cash equivalents at beginning of period

     4,603,327        7,213,666   
                

Cash and cash equivalents at end of period

   $ 8,151,236      $ 4,345,925   
                

Supplemental disclosure of cash flow information:

    

Unrealized losses on available for sale securities, net

   $ (1,216   $ (12,753

Payable to Glaxo (Note 3)

     19,363,196        —     

The accompanying notes are an integral part of these consolidated financial statements.

 

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ADOLOR CORPORATION AND SUBSIDIARY

Notes to Consolidated Financial Statements

June 30, 2011

(Unaudited)

 

1. ORGANIZATION AND BUSINESS ACTIVITIES

Adolor Corporation (the Company) is a biopharmaceutical company focused on the discovery, development and commercialization of novel prescription pain and pain-management products. The Company’s commercial product, ENTEREG® (alvimopan), is indicated to accelerate upper and lower gastrointestinal (GI) recovery following partial large or small bowel resection surgery with primary anastomosis. Delayed GI recovery following bowel resection surgery can postpone hospital discharge until its resolution, resulting in an increased cost burden on healthcare providers. Since the launch of ENTEREG in the United States in mid-2008, the Company has co-promoted ENTEREG in collaboration with Glaxo Group Limited (Glaxo). On June 14, 2011, the Company announced that it has entered into an agreement with Glaxo whereby the Company will reacquire Glaxo’s rights to ENTEREG. The transaction is expected to close no later than September 2011 (see Note 3).

The Company is conducting two Phase 2 clinical trials of ADL5945 to treat opioid-induced constipation (OIC), a condition that often results from long-term use of opioid analgesics in the management of chronic pain conditions. In addition, the Company is continuing limited development efforts on ADL7445, a second peripherally-acting mu opioid receptor antagonist, which is considered a back-up compound to ADL5945 in the Company’s OIC program.

The Company has a number of other product candidates in various stages of clinical and preclinical development. The Company has completed Phase 1 clinical evaluation of ADL6906 (beloxepin), a compound with a novel and potentially differentiating pharmacological profile for treating chronic pain. Adolor’s preclinical pipeline includes novel, selective centrally-acting mu opioid receptor antagonists (CAMORs) currently in development for the treatment of l-DOPA-induced dyskinesia associated with Parkinson’s disease.

Interim Financial Information

The accompanying unaudited consolidated financial statements have been prepared in accordance with U.S. 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, they do not include all of the information and footnote disclosures required by GAAP for complete consolidated financial statements. In the opinion of management, all adjustments (consisting only of normal recurring adjustments) considered necessary for a fair presentation have been included. These consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K, filed with the Securities and Exchange Commission (SEC), which includes audited financial statements as of December 31, 2010 and 2009 and for each of the years in the three-year period ended December 31, 2010. The results of the Company’s operations for any interim period are not necessarily indicative of the results of operations for any other interim period or full year.

Basis of Presentation and Consolidation

The accompanying consolidated financial statements include the accounts of Adolor and its wholly-owned subsidiary. All intercompany balances and transactions have been eliminated in consolidation.

Use of Estimates

The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosure of assets and liabilities. The estimates made are principally in the areas of revenue recognition, research and development accruals and stock option expense. Management bases its estimates on historical experience and various assumptions that are believed to be reasonable under the circumstances. Actual results may differ from those estimates.

Product Sales Recognition

ENTEREG was approved by the FDA in May 2008 and product shipments to hospitals began in June 2008. Hospital orders are processed through wholesalers; however, ENTEREG currently is drop-shipped from Glaxo directly to an ordering hospital registered under the ENTEREG Access Support and Education (E.A.S.E.®) Program. Wholesalers remit payment to Glaxo and, on a monthly basis, Glaxo remits the net proceeds to the

 

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Company. The Company recognizes revenue from product sales when the following four revenue recognition criteria are met: persuasive evidence of an arrangement exists, delivery has occurred, the selling price is fixed or determinable and collectability is reasonably assured.

The Company records product sales net of prompt payment discounts, returns, group purchasing organization fees, chargebacks and other discounts as currently reported to it by Glaxo. Calculating these allowances requires significant estimates and judgments and while the Company undertakes certain procedures to review the reasonableness of the information, it cannot obtain absolute assurance over the accuracy of such information provided by Glaxo. Upon the closing date of the Company’s reacquisition of ENTEREG rights, Glaxo will no longer be involved in the distribution of ENTEREG or the recording of allowances on gross sales and the Company will assume full responsibility for these obligations (see Note 3).

 

2. RECENT ACCOUNTING PRONOUNCEMENTS

In June 2011, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2011-05, Comprehensive Income (Topic 220): Presentation of Comprehensive Income (ASU 2011-05), which amends current comprehensive income guidance. This accounting update eliminates the option to present the components of other comprehensive income as part of the statement of shareholders’ equity. Instead, the Company must report comprehensive income in either a single continuous statement of comprehensive income which contains two sections, net income and other comprehensive income, or in two separate but consecutive statements. ASU 2011-05 will be effective for public companies during the interim and annual periods beginning after December 15, 2011 with early adoption permitted. The adoption of ASU 2011-05 will not have an impact on the Company’s consolidated financial statements as it only requires a change in the format of the current presentation.

In December 2010, the FASB ratified a consensus of the Emerging Issues Task Force related to an annual fee to be paid to the federal government by pharmaceutical manufacturers that meet certain sales levels as mandated by the Patient Protection and Affordable Care Act as amended by the Health Care and Education Reconciliation Act. This consensus requires the liability related to the annual fee to be estimated and recorded in full upon the first qualifying sale with a corresponding deferred cost that is amortized to expense generally using a straight-line method of allocation over the calendar year that it is payable. This guidance is effective for calendar years beginning after December 31, 2010, when the fee initially became effective. The adoption of this guidance during the first quarter of 2011 did not impact the Company’s consolidated financial statements.

In September 2009, the FASB issued ASU 2009-13, Revenue Recognition (Topic 605): Multiple-Deliverable Revenue Arrangements (ASU 2009-13), which requires companies to allocate revenue in arrangements involving multiple deliverables based on the estimated selling price of each deliverable when such deliverables are not sold separately either by the company or other vendors. ASU 2009-13 eliminates the requirement that all undelivered elements must have objective and reliable evidence of fair value before a company can recognize the portion of the overall arrangement fee that is attributable to items that already have been delivered. As a result, the new guidance may allow some companies to recognize revenue on transactions that involve multiple deliverables earlier than under previous requirements. ASU 2009-13 is effective for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010. The adoption of ASU 2009-13 during the first quarter of 2011 did not impact the Company’s consolidated financial statements.

 

3. REACQUISITION OF GLAXO’S RIGHTS TO ENTEREG

On June 14, 2011, the Company and Glaxo entered into a Termination Agreement (the Termination Agreement) whereby the Company and Glaxo agreed to terminate the Collaboration Agreement dated April 14, 2002, as amended (the Collaboration Agreement), the Distribution Services Agreement dated as of June 29, 2004, as amended, and certain other agreements between the parties related to ENTEREG. Pursuant to the terms of the Termination Agreement, the Company agreed to reacquire Glaxo’s rights to ENTEREG and pay Glaxo: $25.0 million cash, payable in seven installments over a six-year period, with $2.5 million payable upon the effective date of the transaction; tiered, mid-single digit royalties on annual net sales of ENTEREG and a one-time, sales-related milestone of $15.0 million. As a result of the Termination Agreement, the Company will assume all responsibilities related to the commercialization of ENTEREG. The Termination Agreement will become effective on August 31, 2011, unless extended to September 30, 2011 by the Company at its option upon written notice to Glaxo.

As a result of the Termination Agreement, the Company recorded an intangible asset and a corresponding payment obligation of $19.4 million based on the present value of the $25.0 million of payments due to Glaxo. The present value was calculated using a discount rate of 8.0%, which the Company estimated to be its incremental borrowing rate as of June 2011. The payment obligation has been allocated between current and non-current liabilities based on the contractual payment dates and amortization of the intangible asset will commence upon the effective date of the transaction. Also as a result of the Termination Agreement, the Company revised its estimated performance period under the Collaboration Agreement on a prospective basis to August 31, 2011, which resulted in additional amortization of deferred revenue for the three months ended June 30, 2011 (see Note 7).

 

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4. SHORT-TERM INVESTMENTS

Short-term investments consist of investment-grade, fixed-income securities with original maturities of greater than three months. All investments are classified as available for sale and are considered current assets as the contractual maturities of the Company’s short-term investments are all less than one year.

The following summarizes the short-term investments at June 30, 2011 and December 31, 2010:

 

     Amortized
Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
    Fair Value  

U.S. Government obligations at June 30, 2011

   $ 23,993,138       $ 4,931       $ (487   $ 23,997,582   
                                  

U.S. Government obligations at December 31, 2010

   $ 41,977,550       $ 7,301       $ (1,641   $ 41,983,210   
                                  

Accounting Standards Codification (ASC) 820, Fair Value Measurements and Disclosures, establishes a valuation hierarchy for disclosure of the inputs to valuations techniques used to measure fair value. This hierarchy prioritizes the inputs into three broad levels. Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities. Level 2 inputs include quoted prices for identical or similar assets and liabilities that are not active, quoted prices for similar assets and liabilities in active markets or inputs that are observable for the asset or liability, either directly or indirectly through market corroboration, for substantially the full term of the financial instrument. Level 3 inputs are unobservable inputs based on management’s own assumptions used to measure assets and liabilities at fair value. The classification of a financial asset or liability within the hierarchy is determined based on the lowest level input that is significant to the fair value measurement.

The following table provides the Company’s assets and liabilities carried at fair value measured on a recurring basis as of June 30, 2011 and December 31, 2010:

 

            Fair Value Measurements Using  
     Total Carrying
Value
     Quoted Prices
in
Active  Markets
(Level 1)
     Significant
Other
Observable
Inputs
(Level 2)
     Significant
Unobservable
Inputs
(Level 3)
 

U.S. Government obligations at June 30, 2011

   $ 23,997,582       $ 23,997,582       $ —         $ —     
                                   

U.S. Government obligations at December 31, 2010

   $ 41,983,210       $ 41,983,210       $ —         $ —     
                                   

 

5. INVENTORY

As of June 30, 2011 and December 31, 2010, inventory consisted of the following:

 

     June 30,      December 31,  
     2011      2010  

Raw materials

   $ 688,022       $ 67,648   

Work-in-process

     —           157,536   

Finished goods

     590,726         708,673   
                 

Total inventory

   $ 1,278,748       $ 933,857   
                 

Inventories are stated at the lower of cost or market, as determined on a first-in, first-out, or FIFO, basis. The above inventory was manufactured subsequent to the approval of ENTEREG by the FDA. As of June 30, 2011 and December 31, 2010, $0.3 million and $0.6 million, respectively, of ENTEREG finished goods inventory held at Glaxo warehouses was classified as “inventory consigned to others.” Costs associated with the manufacture of alvimopan prior to the FDA approval of ENTEREG were expensed to research and development when incurred. As a result, at June 30, 2011 and December 31, 2010, the Company has inventory related to alvimopan, including raw material, which carries a zero-cost and is not reflected on the consolidated balance sheets at June 30, 2011 and December 31, 2010.

 

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6. STOCKHOLDERS’ EQUITY

During the six months ended June 30, 2011, the Company granted options to purchase 516,500 shares of common stock to employees and non-employee directors. The employee stock options vest annually over a four-year period beginning from the date of grant and the non-employee director stock options vest annually over either a one- or two-year period beginning from the date of grant. All stock options were granted with an exercise price equal to the fair market value of the Company’s common stock on the date of grant. The weighted-average exercise price of options granted during the six months ended June 30, 2011 was $1.44. The grant-date fair value of the options granted during the six months ended June 30, 2011 was $0.4 million and such amount will be recognized over the vesting periods of the options.

During the six months ended June 30, 2011, 55,012 deferred stock awards vested under the terms of employee and non-employee director grant agreements. In connection with the vesting of these restricted stock awards, 49,725 shares of the Company’s common stock were issued to employees and non-employee directors and 5,287 employee shares were surrendered to the Company in satisfaction of minimum tax withholding obligations. The surrendered shares were recorded as treasury stock on the Company’s consolidated balance sheet.

For the six months ended June 30, 2011, compensation expense recognized related to outstanding stock options as well as deferred and restricted stock awards was $1.0 million.

 

7. CONTRACT REVENUES

Contract revenues consist of the following:

 

     Three Months Ended June 30,      Six Months Ended June 30,  
     2011      2010      2011      2010  

Amortization of deferred revenue

   $ 5,525,732       $ 3,291,668       $ 6,644,219       $ 6,583,338   

Cost reimbursement under collaboration agreements

     441,770         1,395,354         902,931         3,481,540   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total contract revenues

   $ 5,967,502       $ 4,687,022       $ 7,547,150       $ 10,064,878   
  

 

 

    

 

 

    

 

 

    

 

 

 

In April 2002, the Company entered into the Collaboration Agreement with Glaxo for the exclusive worldwide development and commercialization of ENTEREG for certain indications. Under the terms of the agreement, Glaxo paid the Company a non-refundable and non-creditable signing fee of $50.0 million. The $50.0 million signing fee was recorded as deferred revenue and is being recognized as revenue on a straight-line basis over the estimated performance period under the Collaboration Agreement. Prior to the execution of the Termination Agreement (see Note 3), the estimated performance period extended through March 2016. As a result of the Termination Agreement, the estimated performance period was revised on a prospective basis to August 31, 2011, which is the expected closing date of the Termination Agreement. Revenue related to the Glaxo Collaboration Agreement of $4.0 million and $0.8 million was recognized in the three months ended June 30, 2011 and 2010, respectively, and $4.8 million and $1.6 million was recognized in the six months ended June 30, 2011 and 2010, respectively.

During the first quarter of 2009, the Company and Glaxo entered into Amendment No. 4 to the Collaboration Agreement, under which Glaxo paid the Company $8.4 million. The $8.4 million was recorded as deferred revenue and is being recognized as revenue on a straight-line basis over the estimated remaining performance period under the Collaboration Agreement. Revenue related thereto of $1.5 million and $0.3 million was recognized in the three months ended June 30, 2011 and 2010, respectively, and $1.8 million and $0.6 million was recognized in the six months ended June 30, 2011 and 2010, respectively.

The effect of the change in the estimated performance period under the Collaboration Agreement was a decrease to net loss of $4.4 million, or $0.09 per share, for the three and six months ended June 30, 2011. In addition, $12.4 million of deferred revenue was reclassified from non-current liabilities to current liabilities in June 2011 due to this change.

Certain external expenses incurred in the United States by each party are reimbursed pursuant to contractually agreed percentages. Reimbursement amounts owed to the Company by Glaxo are recorded gross in the consolidated statements of operations as contract revenues. The Company recorded Collaboration Agreement

 

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reimbursements from Glaxo of $0.4 million and $0.2 million during the three months ended June 30, 2011 and 2010, respectively, and $0.8 million and $0.5 million during the six months ended June 30, 2011 and 2010, respectively. As of June 30, 2011, $0.4 million was receivable from Glaxo for reimbursement of expenses incurred by the Company pursuant to the Collaboration Agreement. Effective upon the closing of the Termination Agreement, all expenses will be incurred by the Company.

In December 2007, the Company entered into a collaboration agreement with Pfizer for the exclusive worldwide development and commercialization of ADL5859 and ADL5747. Under the terms of the agreement, Pfizer paid the Company an up-front payment of $30.0 million and reimbursed $1.9 million of Phase 2a development costs incurred by the Company prior to entering into the collaboration agreement. The $31.9 million up-front fee was recorded as deferred revenue and was recognized as revenue on a straight-line basis over the estimated performance period under the collaboration agreement, which ended in December 2010. The Company recorded revenue related to the deferred license fees under the collaboration agreement with Pfizer of $2.2 million for the three months ended June 30, 2010 and $4.4 million for the six months ended June 30, 2010. In December 2010, Pfizer and the Company announced that they were discontinuing further development of ADL5859 and ADL5747 and terminating their collaboration agreement, effective as of March 16, 2011. Based on the clinical evaluation of ADL5859 and ADL5747 in multiple indications, the companies concluded that there was not compelling evidence to continue the development program. As the Company had completed substantially all performance under the collaboration agreement as of December 31, 2010, the performance period was not extended beyond December 2010.

The Company recorded no collaboration cost reimbursement from Pfizer for the three months ended June 30, 2011 and $1.2 million of collaboration cost reimbursement for the three months ended June 30, 2010. Cost reimbursements were $0.1 million and $3.0 million for the six months ended June 30, 2011 and 2010, respectively. As of June 30, 2011, $37,000 was receivable from Pfizer for reimbursement of expenses incurred by the Company pursuant to the collaboration agreement. The Company does not expect to incur any significant additional expenses associated with the termination.

 

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

Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A) is intended to provide information to assist you in better understanding and evaluating our financial condition and results of operations. We encourage you to read this MD&A in conjunction with our consolidated financial statements, included in Part I, Item 1 of this Quarterly Report on Form 10-Q, and our Annual Report on Form 10-K for the fiscal year ended December 31, 2010.

EXECUTIVE SUMMARY

We are a biopharmaceutical company focused on the discovery, development and commercialization of novel prescription pain and pain-management products. Our commercial product, ENTEREG® (alvimopan), is indicated to accelerate upper and lower gastrointestinal (GI) recovery following partial large or small bowel resection surgery with primary anastomosis. Delayed GI recovery following bowel resection surgery can postpone hospital discharge until its resolution, resulting in an increased cost burden on healthcare providers.

We are conducting two Phase 2 clinical trials of ADL5945 to treat opioid-induced constipation (OIC), a condition that often results from long-term use of opioid analgesics in the management of chronic pain conditions. In addition, we are continuing limited development efforts on ADL7445, a second peripherally-acting mu opioid receptor antagonist, which is considered a back-up compound to ADL5945 in our OIC program.

We have a number of product candidates in various stages of clinical and preclinical development. We have completed Phase 1 clinical evaluation of ADL6906 (beloxepin), a compound with a novel and potentially differentiating pharmacological profile for treating chronic pain. Our preclinical pipeline includes novel, selective centrally-acting mu opioid receptor antagonists (CAMORs) currently in development for the treatment of l-DOPA-induced dyskinesia (LID) associated with the management of Parkinson’s disease.

On June 14, 2011, Glaxo Group Limited (Glaxo) and we entered into a Termination Agreement (the Termination Agreement) whereby we agreed to reacquire Glaxo’s rights to ENTEREG in exchange for our agreement to pay Glaxo: $25.0 million cash, payable in seven installments over a six-year period, with $2.5 million payable in 2011; tiered, mid-single digit royalties on annual net sales of ENTEREG; and a one-time, sales-related milestone of $15.0 million. As a result of the Termination Agreement, we will assume all responsibilities related to the commercialization of ENTEREG and we intend to double the size of our ENTEREG field force to approximately 50 employees. The Termination Agreement will become effective on August 31, 2011, unless extended to September 30, 2011 by us at our option upon written notice to Glaxo. Upon the closing of the Termination Agreement, the existing Collaboration Agreement dated April 14, 2002, as amended (the Collaboration Agreement), the Distribution Services Agreement dated as of June 29, 2004, as amended, and certain other ENTEREG-related agreements will be terminated.

For the six months ended June 30, 2011, our total revenues and net loss were $23.2 million and $9.1 million, respectively. Net sales of ENTEREG for the six months ended June 30, 2011 were $15.7 million. We will need net sales of ENTEREG to increase significantly beyond current levels before we will be able to achieve profitability and positive cash flow from operations. Ultimately, we may never generate sufficient revenues from ENTEREG for us to reach profitability, generate positive cash flow or sustain, on an ongoing basis, our current or projected levels of operations. In addition, our long-term success is highly dependent on the results of our Phase 2 clinical trials with respect to ADL5945, our most advanced development candidate. There is no assurance that these studies will yield positive results, and even if the results are positive, our currently available resources are insufficient to fund a Phase 3 clinical program for ADL5945 without securing a collaboration partner or raising proceeds in the capital markets.

ENTEREG

ENTEREG currently is detailed primarily by Glaxo’s national hospital-based sales organization, pending our reacquisition of Glaxo’s rights to ENTEREG as discussed above. In certain hospitals, we co-promote ENTEREG with a field force that numbers approximately 25 persons. ENTEREG was approved by the FDA subject to a Risk Evaluation and Mitigation Strategy under which the product is available only to hospitals that perform bowel resections and are enrolled in the ENTEREG Access Support and Education (E.A.S.E.®) Program.

Under the current Collaboration Agreement with Glaxo, we have a profit-sharing arrangement pursuant to which we receive 45% and Glaxo receives 55% of profits and losses, as defined, through June 2011, after which the split is 50% each. Profits and losses are calculated as net sales of ENTEREG in the United States less certain agreed-upon costs, subject to certain adjustments.

 

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Opioid-induced Constipation (OIC) Program

Peripheral mu opioid receptors in the GI tract regulate functions such as motility, secretion and absorption. Stimulation of these GI mu opioid receptors by morphine, or other opioid analgesics, disrupts normal gut motility ultimately delaying transit time of intestinal contents.

We are developing two molecules, ADL5945 and ADL7445, to treat OIC. These compounds are small molecule, potent, peripherally-acting mu opioid receptor antagonists intended to block the adverse effects of opioid analgesics on the GI tract without affecting analgesia. During 2010, we conducted our initial clinical evaluation of both ADL5945 and ADL7445. The single dose and multiple-ascending dose studies of ADL5945 and the single-ascending dose and multiple-ascending dose studies of ADL7445 enrolled both healthy volunteers and chronic non-cancer pain patients on long-term opioid therapy with OIC. At target therapeutic doses, both compounds were well-tolerated and, in the patients with OIC, produced greater increases (over baseline) in weekly average number of spontaneous bowel movements (SBMs) as compared with placebo.

In October 2010, we initiated a Phase 2 study of ADL5945 in chronic non-cancer pain patients suffering from OIC. The study will evaluate two doses of ADL5945 (0.10 mg and 0.25 mg given twice daily) versus placebo over a 4-week, double-blind treatment period, with approximately 120 patients expected to enroll (n = 40/treatment group). In January 2011, we initiated a second Phase 2 study of ADL5945 (0.25 mg) in patients suffering from OIC. The study design is similar to the Phase 2 study initiated in October 2010; however, once-daily dosing will be evaluated with approximately 80 patients (n = 40/treatment group) expected to enroll. The primary endpoint of the studies will be the change from baseline in the weekly average number of SBMs over the 4-week treatment period. In June 2011, we announced that we had completed enrollment in both Phase 2 studies of ADL5945. Results from these studies are expected in August 2011.

We are continuing limited development efforts on ADL7445, which is a back-up compound in our OIC program.

Other Development Programs

ADL6906 (beloxepin) for Chronic Pain

We are developing ADL6906 (beloxepin), a dual NE reuptake inhibitor and 5-HT2 receptor antagonist, which we believe gives ADL6906 a potentially differentiated pharmacological profile for treating chronic pain. ADL6906 is active in several preclinical models of pain after oral administration. We have completed a Phase 1 multiple ascending dose study of ADL6906 that evaluated the safety, tolerability and pharmacokinetics of ADL6906 and we currently are evaluating the initiation of Phase 2 testing of ADL6906, either independently or in collaboration with a potential partner.

CAMOR Program for Parkinson’s Disease

Scientific evidence suggests that increased opioid peptide transmission in the basal ganglia might underlie dyskinesia after chronic l-DOPA treatment and that opioid antagonists might, therefore, be useful as adjuncts to l-DOPA therapy for Parkinson’s disease. We have discovered a family of novel, selective CAMORs that have been shown to be highly efficacious, after oral administration, in well-validated, non-human primate preclinical models of LID. During the fourth quarter of 2010, the Michael J. Fox Foundation for Parkinson’s Research awarded us a second round of funding to support our development of CAMORs for the treatment of LID associated with Parkinson’s disease. The $0.4 million award will be paid over a period of 18 months.

Delta Opioid Receptor Agonist Program

We previously collaborated with Pfizer Inc. (Pfizer) for the development and commercialization of the delta opioid receptor agonist compounds ADL5859 and ADL5747 for the treatment of pain.

In December 2010, Pfizer and we announced that we were discontinuing further development of ADL5859 and ADL5747 and terminating our collaboration agreement, effective as of March 16, 2011. Based on the clinical evaluation of ADL5859 and ADL5747 in multiple indications, the companies concluded that there was not compelling evidence to continue the development program.

 

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LIQUIDITY AND CAPITAL RESOURCES

Cash, cash equivalents and short-term investments were $32.1 million at June 30, 2011 and $46.6 million at December 31, 2010, representing 56% and 88% of our total assets, respectively. We invest excess cash in U.S. Treasury obligations. Our working capital, which is calculated as current assets less current liabilities, was $8.7 million at June 30, 2011 compared to $38.3 million at December 31, 2010. The decrease in cash, cash equivalents and short-term investments and working capital was driven by the use of cash to fund our operations during the six months ended June 30, 2011. In addition, working capital also decreased by $12.4 million as a result of the reclassification of the non-current portion of Glaxo deferred revenue to current liabilities in June 2011 due to the change in the estimated performance period under the Collaboration Agreement, which is expected to end on August 31, 2011.

The following is a summary of selected cash flow information for the six months ended June 30, 2011 and 2010:

 

     Six Months ended June 30,  
     2011     2010  

Net loss

   $ (9,092,748   $ (17,876,589

Adjustments for non-cash operating items

     (5,617,445     (4,904,687
                
     (14,710,193     (22,781,276

Net change in assets and liabilities

     353,051        1,872,950   
                

Net cash used in operating activities

   $ (14,357,142   $ (20,908,326
                

Net cash provided by investing activities

   $ 17,911,977      $ 18,058,516   
                

Net cash used in financing activities

   $ (6,926   $ (17,931 )
                

Net Cash Used in Operating Activities

Net operating cash outflows of $14.4 million and $20.9 million for the six months ended June 30, 2011 and 2010, respectively, resulted primarily from research and development expenditures associated with our product candidates and selling, general and administrative expenses.

Net Cash Provided by Investing Activities

Net cash provided by investing activities relates to purchases and maturities of investment securities, expenditures for property and equipment and proceeds from the sale of equipment. Capital expenditures are primarily for the purchase of furniture and fixtures, office equipment and leasehold improvements associated with our leased facility.

Net cash provided by investing activities was $17.9 million for the six months ended June 30, 2011 as compared to $18.1 million for the six months ended June 30, 2010.

We expect to fund a significant portion of our future operations through the sale or maturities of investments in our portfolio, which consists of U.S. Treasury obligations.

Outlook

We expect to use our cash, cash equivalents and short-term investments to fund our operations. Since inception, we have experienced significant operating losses and negative operating cash flow and have funded our operations primarily from the proceeds received from the sale of our equity securities and amounts received under collaboration agreements. Our accumulated deficit at June 30, 2011 was $539.3 million and we expect to continue to incur substantial losses for at least the next several years. In addition, under our Termination Agreement with Glaxo, we are required to pay Glaxo $25.0 million in seven installments over a six-year period, including $2.5 million upon the closing of the transaction in 2011. We recorded an intangible asset and a corresponding payment obligation on our balance sheet as of June 30, 2011 based on the present value of the $25.0 million of payments. Commencing upon our closing of the Termination Agreement, this intangible asset and payable will result in additional amortization expense and interest expense for us over the next several years. Also, as a result of revising the estimated performance period under the Collaboration Agreement, we expect to record the remaining deferred revenue balance of $16.8 million to contract revenues during the third quarter of 2011.

We may never generate significant product sales, achieve profitable operations or generate positive cash flows from operations and, even if profitable operations are achieved, they may not be sustained on a continuing basis or sufficient to support our current or projected levels of investment in our research and development programs

 

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and our other operations. At this time, we cannot accurately assess a number of factors that will influence the levels of future product sales, such as the degree of market acceptance, patent protection and exclusivity of ENTEREG, the impact of competition, the effectiveness of our sales and marketing efforts for ENTEREG and the outcome of our current efforts to develop, receive approval for and successfully launch other product candidates. However, at current expenditure levels, we will need ENTEREG sales to increase significantly beyond current levels before we will be able to achieve profitability and positive cash flows from operations.

We expect to continue to incur significant levels of research and development expenditures related to our clinical product candidates. During 2011, we have funded Phase 2 studies of ADL5945 in OIC and our ongoing Phase 4 study of ENTEREG in patients undergoing radical cystectomy. We also expect to continue to conduct research, preclinical studies and process development activities on our other product candidates, although as a result of our restructurings in 2009 and 2010, the level of such expenditures will be significantly reduced compared to previous years. Should these programs advance to later stages of development, it is likely that expenses related to these efforts will increase over time. There is no assurance that these studies will yield positive results, and even if the results are positive, our currently available resources are insufficient to fund a Phase 3 clinical program for ADL5945 without either securing a collaboration partner or raising proceeds in the capital markets.

We believe that our existing cash, cash equivalents and short-term investments are adequate to fund our operations through mid-2012 based upon the level of research and development and marketing and administrative activities we believe will be necessary to achieve our strategic objectives. We anticipate that we will need to obtain funding to support our operational needs in the future, and we cannot be certain that funding will be available on terms acceptable to us, or at all.

RESULTS OF OPERATIONS

This section should be read in conjunction with the discussion above under “Liquidity and Capital Resources.”

Revenues

The following table sets forth revenues for the three and six months ended June 30, 2011 and 2010:

 

     Three Months Ended June 30,      Six Months Ended June 30,  
     2011      2010      2011      2010  

Product sales, net

   $ 8,222,865       $ 6,259,271       $ 15,673,715       $ 11,549,502   

Contract revenues

     5,967,502         4,687,022         7,547,150         10,064,878   
                                   

Total revenues, net

   $ 14,190,367       $ 10,946,293       $ 23,220,865       $ 21,614,380   
                                   

Product Sales, Net

Net product sales are derived solely from ENTEREG. ENTEREG was approved by the FDA in May 2008 and product shipments to hospitals began in June 2008. Net sales of ENTEREG were $8.2 million and $6.3 million for the three months ended June 30, 2011 and 2010, respectively, and $15.7 million and $11.5 million for the six months ended June 30, 2011 and 2010, respectively. The increases in net product sales during 2011 as compared to the same periods in 2010 were driven primarily by an increase in the number of hospitals ordering ENTEREG and increased penetration within existing hospital customers, as well as the impact of pricing changes since the first quarter of 2010.

Contract Revenues

Contract revenues are derived from our collaboration agreements with Glaxo and Pfizer and include milestone payments, cost reimbursement, amortization of up-front license fees and other revenue. For the three months ended June 30, 2011 and 2010, contract revenues were $6.0 million and $4.7 million, respectively. This increase, as compared to the same period in 2010, was due primarily to $4.4 million of additional amortization of deferred revenue resulting from the prospective revision of the estimated performance period of the Collaboration Agreement from March 2016 to August 2011. This increase was partially offset by decreases resulting from the termination of the Pfizer collaboration agreement in December 2010. As of December 31, 2010, the up-front Pfizer license fees were fully amortized and substantially all development activities under the collaboration agreement had been completed.

 

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Contract revenues were $7.5 million and $10.1 million for the six months ended June 30, 2011 and 2010, respectively. The decrease period-over-period primarily resulted from the termination of the Pfizer collaboration agreement in December 2010, offset partially by the $4.4 million of additional deferred revenue amortization resulting from the Termination Agreement with Glaxo.

Operating Expenses

The following table sets forth operating expenses for the three and six months ended June 30, 2011 and 2010:

 

     Three Months Ended June 30,      Six Months Ended June 30,  
     2011      2010      2011      2010  

Cost of product sales

   $ 948,235       $ 677,283       $ 1,818,155       $ 1,267,235   

Research and development

     6,638,278         9,595,492         13,489,424         20,113,632   

Selling, general and administrative

     8,555,176         9,002,026         17,252,494         18,229,255   
                                   

Total operating expenses

   $ 16,141,689       $ 19,274,801       $ 32,560,073       $ 39,610,122   
                                   

Cost of Product Sales

Cost of product sales was $0.9 million and $0.7 million for the three months ended June 30, 2011 and 2010, respectively, and $1.8 million and $1.3 million for the six months ended June 30, 2011 and 2010, respectively, and consisted of royalty payments under certain alvimopan license agreements, FDA fees and manufacturing costs. The increases were primarily due to increased sales of ENTEREG and higher FDA fees. Cost of product sales as a percentage of net product sales was 12% and 11% for the three and six months ended June 30, 2011 and 2010, respectively.

Costs associated with the manufacture of alvimopan prior to FDA approval of ENTEREG in May 2008 were expensed to research and development. As a result, at June 30, 2011, we have inventory related to alvimopan that carries a zero-cost and is not reflected on the consolidated balance sheet. To the extent that this inventory is sold, our cost of product sales will not reflect all costs associated with such product manufacture, and our gross margins will be favorably impacted. We currently are unable to estimate the timing of the impact to future profitability resulting from the sell-through of any inventory manufactured after FDA approval of ENTEREG.

Research and Development Expenses

Our research and development expenses can be identified as internal or external expenses. External expenses include expenses incurred with clinical research organizations, contract manufacturers and other third-party vendors. Internal expenses include expenses such as personnel and overhead expenses.

Research and development expenses were $6.6 million and $9.6 million for the three months ended June 30, 2011 and 2010, respectively, and $13.5 million and $20.1 million for the six months ended June 30, 2011 and 2010, respectively, and consisted of the following:

 

     Three Months Ended June 30,      Six Months Ended June 30,  
     2011      2010      2011      2010  

External research and development expenses:

           

OIC program

   $ 3,028,649       $ 1,962,080       $ 6,477,313       $ 4,128,003   

ENTEREG

     1,010,470         579,122         1,744,535         1,145,124   

Delta agonist program

     —           2,302,198         214,374         5,281,492   

Other programs

     88,429         665,352         166,029         1,140,705   
                                   

Total external research and development expenses

     4,127,548         5,508,752         8,602,251         11,695,324   

Total internal research and development expenses

     2,510,730         4,086,740         4,887,173         8,418,308   
                                   

Total research and development expenses

   $ 6,638,278       $ 9,595,492       $ 13,489,424       $ 20,113,632   
                                   

We report all expenses gross within our consolidated statements of operations and, as such, the ENTEREG and delta agonist program lines in the above table do not reflect any cost reimbursements from Glaxo and Pfizer, respectively.

 

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Total research and development expenses decreased during the three and six months ended June 30, 2011 as compared to the same periods in 2010 primarily due to lower delta agonist program expenses resulting from the December 2010 decision to terminate our collaboration agreement with Pfizer, lower expenses in other programs and reductions in internal research and development expenses resulting from our restructuring in July 2010. These decreases were partially offset by higher OIC program costs, which resulted from our Phase 2 clinical testing for ADL5945 that was initiated during the third quarter of 2010. Also, ENTEREG expenses increased due to a higher level of activity in the Phase 4 radical cystectomy trial.

There are significant risks and uncertainties inherent in the preclinical and clinical studies associated with each of our research and development programs. These studies may yield varying results that could delay, limit or prevent the advancement of a program through the various stages of product development and significantly impact the costs to be incurred, and time involved, in bringing a program to completion. As a result, the cost to complete such programs, as well as the period in which net cash inflows from significant programs are expected to commence, are not reasonably estimable.

Selling, General and Administrative Expenses

Our selling, general and administrative expenses were $8.6 million and $9.0 million for the three months ended June 30, 2011 and 2010, respectively, and $17.3 million and $18.2 million for the six months ended June 30, 2011 and 2010, respectively. Included in selling, general and administrative expenses for the three months ended June 30, 2011 and 2010 were $3.2 million and $1.7 million, respectively, of profit-sharing expenses under the Glaxo collaboration agreement. Profit-sharing expenses were $6.1 million and $2.9 million for the six months ended June 30, 2011 and 2010, respectively. The higher profit-sharing expenses were driven by improved profitability resulting primarily from increased sales of ENTEREG. Remaining selling, general and administrative expenses decreased for the three and six months ended June 30, 2011 as compared to the same periods in 2010 primarily due to a reduction in general and administrative expenses as a result of our July 2010 restructuring and lower marketing expenses period-over-period.

Interest Income and Other Income, Net

The following table sets forth interest income and other income, net, for the three and six months ended June 30, 2011 and 2010:

 

     Three Months Ended June 30,      Six Months Ended June 30,  
     2011      2010      2011      2010  

Interest income

   $ 10,374       $ 51,458       $ 31,000       $ 119,153   

Other income, net

     104,572         —           215,460         —     
                                   

Total interest income and other income, net

   $ 114,946       $ 51,458       $ 246,460       $ 119,153   
                                   

Interest Income

Our interest income was $10,000 and $51,000 for the three months ended June 30, 2011 and 2010, respectively, and $31,000 and $119,000 for the six months ended June 30, 2011 and 2010, respectively. The decreases period-over-period were due to lower investment balances resulting primarily from the use of cash in operating activities.

Other Income, Net

Other income, net, was $0.1 million and $0.2 million for the three and six months ended June 30, 2011, respectively, and consisted primarily of sublease income related to certain laboratory and office space at our corporate office.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

Management’s Discussion and Analysis of Financial Condition and Results of Operations discusses our consolidated financial statements, which we have prepared in accordance with U.S. generally accepted accounting principles. In preparing these consolidated financial statements, we must make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of

 

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the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. We develop and periodically change these estimates and assumptions based on historical experience and various other factors that we believe are reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions. A summary of significant accounting policies and a description of accounting policies that are considered critical may be found in our Annual Report on Form 10-K for the year ended December 31, 2010 in the “Critical Accounting Policies and Estimates” section and the “Recently Issued Accounting Pronouncements” section of Part II, Item 7 and in Note 2 to the consolidated financial statements within Part II, Item 8.

 

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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Our investment assets consist of U.S. Treasury obligations. The market value of such investments fluctuates with current market interest rates. In general, as rates increase, the market value of a debt instrument would be expected to decrease. The opposite also is true. To minimize such market risk, we have in the past held, and to the extent possible will continue in the future to hold, such debt instruments to maturity at which time the debt instrument will be redeemed at its stated, or face, value. Due to the short duration and nature of these instruments, we do not believe that we have a material exposure to interest rate risk related to our investment portfolio. The fair value of our investment portfolio at June 30, 2011 totaled $24.0 million, and the weighted-average yield-to-maturity was approximately 0.1% with maturities ranging up to 12 months.

 

ITEM 4. CONTROLS AND PROCEDURES

 

(a) Evaluation of Disclosure Controls and Procedures

For the quarterly period ended June 30, 2011, we carried out an evaluation, under the supervision and with the participation of our management, including our President and Chief Executive Officer and our Senior Vice President, Finance and Chief Financial Officer (the principal financial and accounting officer), of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, as of the end of the period covered by this report.

Our management, including our President and Chief Executive Officer and our Senior Vice President, Finance and Chief Financial Officer, does not expect that our disclosure controls and procedures will prevent all errors or fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met and our disclosure controls and procedures are designed to provide this reasonable assurance. Based upon the evaluation discussed above, our President and Chief Executive Officer and our Senior Vice President, Finance and Chief Financial Officer concluded that, as of June 30, 2011, our disclosure controls and procedures were effective at providing such reasonable assurance.

 

(b) Changes in Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting during the three-month period ended June 30, 2011 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

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PART II. OTHER INFORMATION

 

ITEM 1. LEGAL PROCEEDINGS

None.

 

ITEM 1A. RISK FACTORS

You should carefully consider the risks described below, in addition to the other information contained in this report, before making an investment decision. Our business, financial condition or results of operations could be harmed by any of these risks. The risks and uncertainties described below are not the only ones we face. Additional risks not presently known to us or other factors not perceived by us to present significant risks to our business at this time also may impair our business operations.

Our OIC program may not lead to successful drug candidates or commercially successful products.

Our future success is highly dependent on the results of our clinical development efforts, particularly with respect to our OIC program where we are testing ADL5945 in Phase 2 clinical trials. While earlier studies of ADL5945 supported the initiation of the Phase 2 studies, there is no assurance that these studies will yield positive results. If the results are not positive, we may need to discontinue development of our OIC program, which currently is our most advanced clinical program. Even if the results are positive, our currently available resources are insufficient to fully fund a Phase 3 clinical program in OIC without securing a partner for this program or raising proceeds in the capital markets. We cannot be certain that such a partnership or capital raising transaction would be available on terms acceptable to us, if at all, particularly in light of current economic and capital market conditions. Even if we are able to successfully develop ADL5945, we still face significant commercial hurdles. There are a number of other products in various stages of clinical development for OIC that could have a material adverse impact on our ability to successfully market and sell ADL5945.

Ultimately, drug development is a highly uncertain process; our OIC product candidates may not be safe or effective and we may not be successful in our clinical development programs. Development of our OIC product candidates may not lead to commercially successful products.

We are and will continue to be highly dependent on the commercial success of ENTEREG, and we may be unable to attain profitability and/or positive cash flow from operations based solely on product sales of ENTEREG.

ENTEREG is indicated for in-hospital use only and is available only to hospitals that have been registered under our E.A.S.E.® Program. The commercial success of ENTEREG depends on several factors, including the following:

 

   

the acceptance of ENTEREG in the medical community and the marketplace, particularly with respect to whether healthcare professionals and hospitals view ENTEREG as safe and effective for its labeled indication, whether the product carries with it an acceptable benefit-to-risk profile and whether the product offers sufficient pharmacoeconomic benefit to hospitals in light of its cost;

 

   

the number of hospitals that register for the E.A.S.E. Program;

 

   

the ability to obtain formulary acceptance of ENTEREG at registered hospitals;

 

   

the effectiveness of our sales and marketing efforts;

 

   

the occurrence of any side effects, adverse reactions or misuse (or any unfavorable publicity relating thereto) stemming from the use of ENTEREG; and

 

   

the development of competing products or therapies that accelerate GI recovery following bowel resection surgery.

Ultimately, we may never generate sufficient revenues from ENTEREG for us to reach profitability, generate positive cash flow or sustain, on an ongoing basis, our current or projected levels of operations.

 

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Upon our reacquisition of Glaxo’s rights to ENTEREG, we will be solely responsible for all commercialization activities for the product. We have both limited resources and limited experience with respect to commercial activities and may be unsuccessful in our efforts to increase ENTEREG sales.

Since 2008, we have been highly dependent on the efforts and expertise of Glaxo for the distribution, marketing and selling of ENTEREG. Glaxo’s active participation in the promotion of ENTEREG is expected to end in August 2011, after which we will become solely responsible for all sales, marketing and distribution activities related to the product. While we have co-promoted ENTEREG alongside Glaxo for the past three years in certain geographic areas, we have never been solely responsible for the selling efforts in these areas. In a number of other regions where Adolor currently does not have a sales presence, we will have to hire, train and deploy new sales personnel to cover accounts currently covered by Glaxo. Even with the combination of our existing force and newly hired force, we will have a smaller number of sales representatives promoting ENTEREG than are currently detailing the product. In addition, there will be certain geographic areas where we no longer will rely on personal promotion. We will need to rapidly integrate newly hired personnel into our existing organization and seamlessly transition Glaxo’s selling activities without impacting our customer relationships or sales of ENTEREG. If these future sales efforts are less successful than the current Adolor-Glaxo efforts, there could be a material adverse effect on the level of ENTEREG sales.

We also have been highly dependent on efforts and expertise of Glaxo for all aspects of the distribution of ENTEREG. In anticipation of the transition of these responsibilities to us, we have entered into agreements with third-parties to provide all distribution and logistics services for ENTEREG, including warehousing of finished product, accounts receivable management, billing, collection, recordkeeping and government price reporting obligations. If our third-party service providers do not provide these services in a timely or professional manner, it could significantly disrupt our commercial operations, damage our relationships with customers and negatively impact sales of ENTEREG.

We expect to continue to incur significant operating losses over the next several years and without additional funding, we likely will be unable to continue our operations.

We have generated operating losses in each year since we began operations in November 1994, and as of June 30, 2011, our accumulated deficit was $539.3 million and our cash, cash equivalents and short-term investments were $32.1 million. Our losses have resulted principally from costs incurred in research and development, including clinical trials, and from selling, general and administrative expenses associated with our operations. We expect to continue to generate substantial losses and utilize substantial amounts of cash, cash equivalents and short-term investments for the foreseeable future, driven primarily by expenditures related to research and development and sales and marketing activities. In addition, under our Termination Agreement with Glaxo, we are required to pay Glaxo $25.0 million in seven installments over a six-year period, including $2.5 million payable upon the effective date of the transaction.

We believe that our existing cash, cash equivalents and short-term investments are adequate to fund our operations through mid-2012 based upon the level of research and development and marketing and administrative activities we believe will be necessary to achieve our strategic objectives. We cannot be sure that we will ever achieve significant product revenue from ENTEREG or any of our other product candidates sufficient for us to generate positive cash flows from operations. Sales of ENTEREG will need to increase significantly beyond current levels before we will be able to achieve profitability and/or positive cash flows from operations. Even if we are able to achieve profitability, we may be unable to maintain profitability on a continuing basis or at a level sufficient to support our current or projected levels of continuing investment. We anticipate that we will need to obtain funding to support our operational needs in the future, and we cannot be certain that such funding will be available on terms acceptable to us, if at all, particularly in light of current economic and capital market conditions. Any capital raising necessary to continue our operations may be through one or a combination of approaches, which could include public or private financing, issuances of equity or debt, sale or partnering of one or more of our development programs or other strategic initiatives. Any public or private financings involving issuances of common stock or other classes of our equity would likely dilute existing stockholders’ percentage ownership. If we are unable to obtain funding to support operations, we will be forced to curtail our operations and we may be less likely to develop products successfully.

Restrictions on ENTEREG may have the effect of limiting the commercial prospects for the product.

In April 2007, Glaxo and we announced the results of Study 014, a Phase 3 long-term safety study of alvimopan in patients taking opioids for chronic non-cancer pain and experiencing opioid bowel dysfunction. Results from Study 014 showed a higher number of myocardial infarctions reported by patients treated long-term (1

 

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year) with alvimopan compared to placebo. As a result, ENTEREG was approved in its labeled indication by the FDA subject to a Risk Evaluation and Mitigation Strategy (REMS). The FDA determined that a REMS is necessary to ensure that the benefits of ENTEREG outweigh the risks. The REMS is subject to modification by the FDA at anytime and it is possible that the FDA could require changes to the REMS or other restrictions that would make it even more difficult to market and sell ENTEREG.

Our ENTEREG product labeling carries a boxed warning that ENTEREG is available only for short-term (15 doses) use in hospitalized patients. The REMS and the boxed warning may make it more difficult to market and sell ENTEREG. We are not permitted to sell ENTEREG to hospitals that do not register in the E.A.S.E.® Program. Hospitals may be unwilling or unable to comply with the requirements for registration in the E.A.S.E.® Program. For example, hospitals may not have systems, order sets, protocols or other measures in place to limit the use of ENTEREG to no more than 15 doses per patient and to ensure in-hospital use only. Hospitals also may not have controls in place to ensure that ENTEREG will neither be dispensed for outpatient use nor be transferred to unregistered hospitals. In such cases, we will be unable to register these hospitals in the E.A.S.E.® Program.

Selling a pharmaceutical product in the hospital setting presents certain challenges. Hospitals differ widely and each hospital’s or hospital group’s prescribing is influenced by a list of accepted drugs called a formulary. Most hospitals have a committee, often called a pharmacy and therapeutics (P&T) committee, which meets periodically to determine which pharmaceutical products to add to the formulary. Many factors are assessed by such committees, including the cost of the drug and its pharmacoeconomic profile. Once a pharmaceutical is on formulary, it is easier for a physician within a hospital or hospital group to prescribe the drug. Hospital formulary approval is critical if ENTEREG is to become a commercial success and we cannot assure you that a sufficient number of hospitals will include ENTEREG on their formulary.

Notwithstanding success in registering hospitals in the E.A.S.E.® Program and having those registered hospitals include ENTEREG on their formulary, there can be no assurance that such hospitals will order ENTEREG in meaningful amounts, if at all.

Our stock price has been highly volatile, and your investment in our stock could decline significantly in value.

The market price for our common stock has been, and in the future, may continue to be, highly volatile. For example, during the period January 1, 2008 through June 30, 2011, the price of our common stock reached a low of $1.00 per share on July 7, 2010 and a high of $6.09 per share on May 21, 2008.

The market price for our common stock is highly dependent on, among other things, the performance of ENTEREG in the market, the success of our product development efforts, the amount of our available cash and investments and our level of cash utilization. Negative announcements, including, among others:

 

   

disappointing sales of ENTEREG;

 

   

negative clinical trial results or adverse regulatory decisions for our product candidates;

 

   

disappointing developments concerning potential business partners for our product candidates;

 

   

capital-raising transactions that are dilutive to existing stockholders or involve the issuance of debt securities;

 

   

adverse period-to-period fluctuations in our sales or operating results or financial results that fall below the market’s expectations; or

 

   

legal challenges, disputes and/or other adverse developments impacting patents or other proprietary rights that protect our products,

could trigger a significant decline in the price of our common stock. In addition, external events, such as news concerning economic or market conditions in the general economy or within our industry, the activities of our competitors or our customers, changes in U.S. or foreign government regulations impacting our industry or the movement of capital into or out of our industry, also are likely to affect the price of our common stock, regardless of our operating performance. Further declines in our stock price or our failure to meet other conditions required by the NASDAQ Global Market could impact our continued listing on the NASDAQ Global Market.

 

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Our success is highly dependent on the efforts of our third-party contractors and on our ability to secure future partnerships.

Because we have limited resources, we seek to enter into, and in the past we have entered into, agreements with other pharmaceutical companies and third-party contractors. These agreements may call for these third-parties to control or play a significant role in, among other things:

 

   

the development of a product candidate, including, among other things, toxicology, formulation and clinical research efforts;

 

   

the design and execution of clinical studies;

 

   

the process of obtaining regulatory approval to market the product; and

 

   

the distribution, manufacturing, marketing and selling of any approved product.

In each of these areas, our partners may not support fully our research and commercial interests since our programs may compete for time, attention and resources with other programs at these partners. As such, we cannot be sure that our partners will share our perspectives on the relative importance of our program, that they will commit sufficient resources to our program to move it forward effectively or that the program will advance as rapidly as it might if we had retained complete control of all research, development, regulatory and commercialization decisions.

Any failure by our partners to perform their obligations or any decision by our partners to terminate these agreements could negatively impact our ability to successfully develop, obtain regulatory approvals for and commercialize our product and product candidates, which would likely materially impact our financial condition, results of operations and outlook. In addition, any termination of our collaboration agreements will terminate the funding we may receive under the relevant collaboration agreement and may materially and adversely impact our ability to fund further development efforts and our progress in our development programs. For example, in December 2010, Pfizer and we announced that we were discontinuing further development of our delta opioid receptor agonist compounds, ADL5859 and ADL5747, and terminating our collaboration agreement effective as of March 16, 2011. We had been developing these compounds under an exclusive worldwide license and collaboration agreement; however, clinical evaluation in multiple indications had not yielded compelling evidence for either party to continue the development program.

In the future, we will likely seek to enter into other collaborative arrangements for the development, marketing, sale and/or distribution of certain of our product candidates, including in our OIC program, which may require us to share profits or revenues. Despite our efforts, we may be unable to secure additional collaborative licensing or other arrangements that are necessary for us to further develop and commercialize our product candidates. Moreover, we may not realize the contemplated benefits from such collaborative licensing or other arrangements. These arrangements may place responsibility on our collaborative partners for preclinical testing, the design and conduct of human clinical trials, the preparation and submission of applications for regulatory approval, or for marketing, sales and distribution support for product commercialization. These arrangements also may require us to transfer certain material rights or issue our equity securities to corporate partners, licensees or others. Moreover, we may ultimately not derive any revenues or profits from these arrangements.

If competitors develop and market products that are more effective, have fewer side effects, are less expensive than our product or product candidates or offer other advantages, our commercial opportunities will be limited.

Other companies have product candidates in development to treat the conditions we are seeking to treat and they may develop effective and commercially successful products. Our competitors may succeed in developing products that are more effective than those that we may develop, that have fewer side effects, that are less expensive or that reach the market before any products we may develop.

We are aware of other products in various stages of clinical development for the acceleration of GI recovery following bowel resection surgery, OIC and other manifestations of opioid bowel dysfunction. For the acceleration of GI recovery following bowel resection surgery, we are aware of molecules in development by Tranzyme Pharma, Helsinn Therapeutics and other companies that could compete with ENTEREG at some point in the future. For OIC, we are aware of molecules in development by Sucampo Pharmaceuticals, Inc. in collaboration with Takeda Pharmaceutical Company Limited, Progenics Pharmaceuticals, Inc. in collaboration with Salix Pharmaceuticals Inc., AstraZeneca PLC in collaboration with Nektar Therapeutics, Theravance Inc. and Alkermes, Inc. that could compete with our OIC product candidates. There are additional competitive products being developed that could have a material adverse effect on our ability to successfully develop, market and sell our product and product candidates.

 

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Our competitors include fully-integrated pharmaceutical companies and biotechnology companies, universities and public and private research institutions. Many of the organizations competing with us have substantially greater capital resources, larger research and development staffs and facilities, greater experience in drug development and in obtaining regulatory approvals, and greater manufacturing and marketing capabilities than we do. These organizations also compete with us to:

 

   

attract partners for acquisitions, joint ventures or other collaborations;

 

   

license proprietary technology; and

 

   

attract qualified personnel.

The results and timing of future clinical trials cannot be predicted and future setbacks may materially and adversely affect our business.

We must demonstrate through preclinical testing and clinical trials that a product candidate is safe and efficacious. The results from preclinical testing and early clinical trials may not be predictive of results obtained in subsequent clinical trials, and we cannot be sure that these clinical trials will demonstrate the safety and efficacy necessary to obtain regulatory approval for any product candidates.

Many companies in the biotechnology and pharmaceutical industries have suffered significant setbacks in advanced clinical trials. Product candidates that appear to be promising at earlier stages of development may not reach the market or be marketed successfully for a number of reasons, including, but not limited to, the following:

 

   

researchers may find during later preclinical testing or clinical trials that the product candidate is ineffective or has harmful side effects;

 

   

new information about the mechanisms by which a drug candidate works may adversely affect its development;

 

   

one or more competing products may be approved for the same or a similar condition, raising the hurdles to approval of the product candidate;

 

   

the product candidate may fail to receive necessary regulatory approval or clearance; or

 

   

competitors may market equivalent or superior products.

The completion of clinical trials of our product candidates may be delayed by many factors, one of which is the rate of enrollment of patients. Neither we nor our collaborators can control the rate at which patients present themselves for enrollment, and we cannot be sure that the rate of patient enrollment will be consistent with our expectations or be sufficient to enable clinical trials of our product candidates to be completed in a timely manner. In addition, we contract with third parties to conduct our clinical trials, and are subject to the risk that these third parties fail to perform their obligations properly and in compliance with applicable FDA and other governmental regulations. Any significant delays in, or termination of, clinical trials of our product candidates may have a material adverse effect on our business and the price of our common stock.

We cannot be sure that we will be permitted by regulatory authorities to undertake additional clinical trials for any of our product candidates, or that if such trials are conducted, any of our product candidates will prove to be safe and efficacious or will receive regulatory approvals. In addition, we, or a regulatory authority, may suspend ongoing clinical trials at any time if the subjects participating in the trial are exposed to unacceptable health risks or if the regulatory agency finds deficiencies in the conduct of the trials. Any delays in or termination of these clinical trial efforts could have a material and adverse effect on our business.

We have no commercial manufacturing capability and infrastructure, and we rely on third parties to manufacture our product and product candidates in sufficient quantities, at an acceptable cost and in compliance with regulatory requirements.

Our approved suppliers of the active pharmaceutical ingredient in ENTEREG and of finished ENTEREG capsules have been inspected by the FDA but are subject to periodic re-inspection. In the event that these vendors cannot supply material for any reason, FDA approval is required to change or add new suppliers and manufacturers

 

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and obtaining such approval could result in delays that disrupt the supply of the product. While we seek to maintain inventories of the active pharmaceutical ingredient and finished products to protect against supply disruptions, if they were to occur they could materially and adversely affect the commercial success of ENTEREG.

Completion of our clinical trials and commercialization of our product candidates require access to, or development of, facilities to manufacture a sufficient supply of our product candidates. We have depended, and expect to continue to depend, on third parties for the manufacture of our product candidates for preclinical, clinical and commercial purposes. While we have established relationships with a number of different third-party manufacturing service providers, we may not be able to contract for the manufacture of sufficient quantities of the products we develop, or meet our needs for preclinical or clinical development. Our products may be in competition with other products for manufacturing capacity of third parties and suitable alternatives may be unavailable. Consequently, our products may be subject to manufacturing delays if outside contractors give their own or other products greater priority than ours. It is difficult, time consuming and expensive to change contract manufacturers for pharmaceutical products. Our dependence upon others for the manufacture of our products may adversely affect our future profit margin and our ability to commercialize products, if additional products are approved, on a timely and competitive basis.

To receive regulatory approval for any future product, contract manufacturers will need to be identified that can obtain FDA approval of their manufacturing facilities used to manufacture that product, and there is a risk that such approval may not be obtained. In a New Drug Application (NDA), we are required to submit information and data regarding chemistry, manufacturing and controls which satisfy the FDA that our contract manufacturers are able to make that product in accordance with Good Manufacturing Practices (cGMPs). Under cGMPs, our manufacturers and we will be required to manufacture our products and maintain records in a prescribed manner with respect to manufacturing, testing and quality control activities. We are dependent on our third-party manufacturers to comply with these regulations in the manufacture of our products and these parties may have difficulties complying with cGMPs. The failure of any third-party manufacturer to comply with applicable government regulations could cause us substantial harm by delaying or preventing regulatory approval and marketing of our products.

It is difficult and costly to protect our intellectual property rights, and we cannot ensure the protection of these rights; we may be sued by others for infringing their intellectual property.

Our commercial success will depend, in part, on obtaining patent protection for new technologies, products and processes and successfully defending these patents against third-party challenges. To that end, we file applications for patents covering the compositions, uses and proprietary processes for the manufacture of our product and product candidates. The patent positions of pharmaceutical and biotechnology companies can be highly uncertain and involve complex legal, scientific and factual questions. Accordingly, we cannot predict the breadth of claims allowed in our patents or those of our collaborators. The patents and patent applications relating to our products, product candidates and technologies may be challenged, invalidated or circumvented by third parties and might not protect us against competitors with similar products or technology. Patent disputes in our industry are frequent and can preclude commercialization of products. If we ultimately engage in and lose any such disputes, we could be subject to competition and/or significant liabilities, we could be required to enter into third-party licenses or we could be required to cease using the technology or product in dispute. In addition, even if such licenses are available, the terms of any license requested by a third party could be unacceptable to us.

Others have filed, and in the future are likely to file, patent applications covering products and technologies that are similar, identical or competitive to ours, or important to our business. We cannot be certain that any patent application owned by a third party will not have priority over patent applications filed or in-licensed by us, or that we or our licensors will not be involved in interference proceedings before U.S. or foreign patent offices.

Although no third party has asserted a claim of infringement against us, others may hold proprietary rights that could prevent our product candidates from being marketed unless we can obtain a license to those proprietary rights. Any patent-related legal action against our collaborators or us claiming damages and seeking to enjoin commercial activities relating to our products and processes could subject us to potential liability for damages and require our collaborators or us to obtain a license to continue to manufacture or market the affected products and processes. We cannot predict whether our collaborators or we would prevail in any such actions or that any license required under any of these patents would be made available on commercially acceptable terms, if at all.

There has been, and we believe that there will continue to be, significant litigation in the industry regarding patent and other intellectual property rights. The results of patent litigation among third parties has caused, and may continue to cause, changes to the ways patents are interpreted, enforced and/or challenged. These changes may adversely affect our ability to protect our products. If we become involved in litigation, it could consume substantial managerial and financial resources.

 

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We also rely on trade secrets to protect technology in cases when we believe patent protection is not appropriate or obtainable. However, trade secrets are difficult to protect. While we require employees, academic collaborators, consultants and other contractors to enter into confidentiality agreements, we may not be able to adequately protect our trade secrets or other proprietary information. Our research collaborators and scientific advisors have rights to publish data and information in which we have rights. If we cannot maintain the confidentiality of our technology and other confidential information in connection with our collaborators and advisors, our ability to receive patent protection or protect our proprietary information may be imperiled.

We are a party to various license agreements that give us rights to use specified technologies in our research and development processes. If we are not able to continue to license such technology on commercially reasonable terms, our product development and research may be delayed. In addition, we generally do not fully control the prosecution of patents relating to in-licensed technology (or technology subject to a collaboration) and, accordingly, are unable to exercise the same degree of control over this intellectual property as we exercise over our internally developed technology.

Our long-term success depends upon our ability to discover, license and develop, receive regulatory approval for and commercialize our product candidates.

Our product candidates require governmental approvals prior to commercialization. Because these product candidates are in development, we face the substantial risks of failure inherent in developing drugs based on new technologies. Our product candidates must satisfy rigorous standards of safety and efficacy before the FDA and foreign regulatory authorities will approve them for commercial use. There can be no assurance that these standards will remain consistent over time, further complicating our ability to obtain marketing approvals for our product candidates. To satisfy these standards, we will need to conduct significant additional research, preclinical testing and clinical trials.

Preclinical testing and clinical development are long, expensive and highly uncertain processes. Failure can occur at any stage of testing. Success in preclinical testing and early clinical trials does not ensure that later clinical trials will be successful. Based on results at any stage of clinical trials, we may decide to discontinue development of our product candidates. Even if we obtain approval and begin marketing a product, ongoing clinical trials, including for other indications, may result in additional information that could affect our ability or decision to continue marketing the product. Even if we receive regulatory approval for our product candidates, we must comply with applicable FDA post-marketing regulations governing manufacturing, promotion, labeling, risk management and reporting of adverse events and other information, as well as other regulatory requirements. Failure to comply with applicable regulatory requirements could subject us to criminal penalties, civil penalties, recall or seizure of products, withdrawal of marketing approval, total or partial suspension of production or injunction, as well as other regulatory actions against our product or us.

During 2011, we are funding Phase 2 studies of ADL5945 in OIC and our ongoing Phase 4 study of ENTEREG in patients undergoing radical cystectomy. While we also expect to continue to conduct research, preclinical studies and process development activities on our other product candidates, the level of such expenditures will be significantly reduced compared to previous years, which may limit or delay our ability to discover new products or develop our product candidates and may increase the risk that our long-term business objectives will not be met.

Despite our limited resources, we intend to explore opportunities to expand our product portfolio by acquiring or in-licensing product candidates. Although we conduct extensive evaluations of product candidate opportunities as part of our due diligence efforts, there can be no assurance that our product candidate development efforts related thereto will be successful or that we will not become aware of issues or complications that will cause us to alter, delay or terminate our product candidate development efforts.

If we market products in a manner that violates healthcare fraud and abuse laws, or if we violate government price reporting laws, we may be subject to civil or criminal penalties.

In addition to FDA restrictions on marketing of pharmaceutical products, several other types of state and federal healthcare fraud and abuse laws have been applied in recent years to restrict certain marketing practices in the pharmaceutical industry. These laws include false claims statutes and anti-kickback statutes. Because of the breadth of these laws and the narrowness of the safe harbors, it is possible that some of our business activities could be subject to challenge under one or more of these laws.

 

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Federal false claims laws prohibit any person from knowingly presenting, or causing to be presented, a false claim for payment to the federal government or knowingly making, or causing to be made, a false statement to get a false claim paid. The federal healthcare program anti-kickback statute prohibits, among other things, knowingly and willfully offering, paying, soliciting or receiving remuneration to induce, or in return for, purchasing, leasing, ordering or arranging for the purchase, lease or order of any healthcare item or service reimbursable under Medicare, Medicaid or other federally financed healthcare programs. This statute has been interpreted to apply to arrangements between pharmaceutical manufacturers on the one hand and prescribers, purchasers and formulary managers on the other. Although there are several statutory exemptions and regulatory safe harbors protecting certain common activities from prosecution, the exemptions and safe harbors are drawn narrowly, and practices that involve remuneration intended to induce prescribing, purchasing or recommending may be subject to scrutiny if they do not qualify for an exemption or safe harbor. Our practices may not in all cases meet all of the criteria for safe harbor protection from anti-kickback liability.

Over the past several years, numerous pharmaceutical and other healthcare companies have been prosecuted under these laws for a variety of alleged promotional and marketing activities, such as: allegedly providing free trips, free goods, sham consulting fees and grants and other monetary benefits to prescribers; reporting to pricing services inflated average wholesale prices that were then used by federal programs to set reimbursement rates; engaging in off-label promotion that caused claims to be submitted to Medicaid for non-covered, off-label uses; and submitting inflated best price information to the Medicaid Rebate Program to reduce liability for Medicaid rebates. Most states also have statutes or regulations similar to the federal anti-kickback law and false claims laws, which apply to items and services reimbursed under Medicaid and other state programs, or, in several states, apply regardless of the payor. Sanctions under these federal and state laws may include civil monetary penalties, exclusion of a manufacturer’s products from reimbursement under government programs, criminal fines and imprisonment.

We are required to submit pricing data to the federal government as a condition of selling ENTEREG to healthcare facilities of the VA, Department of Defense (DoD), Public Health Service and U.S. Coast Guard (collectively, the VA Network). These price reports are used to determine the amount of discount that must be provided to the VA Network. Pharmaceutical manufacturers have been prosecuted under false claims laws for knowingly submitting inaccurate pricing information to the government to reduce their liability for providing discounts. The rules governing the calculation of these reported prices are complex. We currently depend upon Glaxo to calculate these prices for ENTEREG and upon closing of the Termination Agreement will be solely responsible for these calculations; it is possible that the methodologies used for calculating these prices could be challenged under false claims laws or other laws. If our methodologies are incorrect, we could face substantial liability.

We face product liability risks, which may have a negative effect on our financial performance.

The administration of drugs to humans, whether in clinical trials or commercially, can result in product liability claims regardless of whether or not the drugs are actually at fault for causing an injury. The product labeling for ENTEREG includes a boxed warning that ENTEREG is available only for short-term (15 doses) use in hospitalized patients. The product label informs physicians that there were more reports of myocardial infarctions in patients treated with alvimopan 0.5 milligrams twice daily compared with placebo-treated patients in a 12-month study of patients treated with opioids for chronic pain. ENTEREG also is marketed and sold under a REMS.

If ENTEREG is used more widely or if physicians prescribe the product for conditions other than its labeled indication, the likelihood of an adverse drug reaction, unintended side effect or incident of misuse may increase. Product liability claims can be expensive to defend and may result in large judgments or settlements against us, which could have a negative effect on our financial performance or condition. We maintain product liability insurance and self-insurance retentions in amounts we believe to be commercially reasonable, but which may not cover the potential liability associated with significant product liability claims. Even if a product liability claim is not successful, the adverse publicity and time and expense of defending such a claim may harm the commercial prospects for the product or otherwise interfere with our business. Regardless of whether we face product liability lawsuits, we may be required to disclose adverse events associated with ENTEREG. Although ENTEREG may not be the cause of these adverse events, these disclosures could nevertheless have a material adverse effect on our sales of ENTEREG and our financial condition.

Additionally, we enter into various agreements where we indemnify third parties such as manufacturers and investigators for certain product liability claims related to our products. These indemnification obligations may require us to pay significant sums of money for claims that are covered by these indemnifications.

 

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Reductions in the use of opioid analgesics would reduce the potential market for ENTEREG and any products developed to treat OIC.

ENTEREG and our OIC development candidates are peripherally acting mu opioid receptor antagonists intended to mitigate the gastrointestinal side effects associated with acute postoperative or chronic (long-term) opioid pain management. If the use of drugs or techniques that reduce the requirement for opioid analgesics becomes more widespread, the market for ENTEREG and our OIC product candidates would decrease. For example, postoperative use of non-opioid analgesics (e.g. non-steroidal anti-inflammatory drugs, parenteral acetominophen) may reduce total opioid requirements. Novel analgesics which target other opioid receptor subtypes, non-opioid receptors or pain pathways are under development that may, if approved, compete with mu opioid analgesics for acute or chronic pain management. If these analgesics significantly reduce the use of more traditional opioid analgesics, it would have a negative impact on the potential market for ENTEREG and our OIC product candidates.

Our ability to generate product sales could diminish if we fail to obtain acceptable prices or an adequate level of reimbursement for our products from third-party payors.

Our ability to successfully commercialize pharmaceutical products, alone or with collaborators, may depend in part on the extent to which reimbursement is available from government and health administration authorities or private health insurers and third-party payors.

The continuing efforts of government and third-party payors to contain or reduce the costs of healthcare through various means may limit our commercial opportunity. Increasing emphasis on managed care in the United States will continue to put pressure on the pricing of in-patient hospital procedures and pharmaceutical products. Significant uncertainty exists as to the reimbursement status of newly approved healthcare products. Cost control initiatives could adversely affect the commercialization of our products, decrease the price received for any products in the future and may impede patients’ ability to obtain reimbursement under their insurance programs for our products.

In the case of partial large or small bowel resection surgery, a hospital typically will be reimbursed a fixed fee for the procedure by a private health insurer or Medicare. Pharmaceutical products such as ENTEREG that may be used in connection with the surgery are not separately reimbursed and, therefore, a hospital must assess the cost of ENTEREG relative to its benefits. Current and future efforts to limit the level of reimbursement for in-patient hospital procedures could cause a hospital to decide to not use ENTEREG or to discontinue use of the product.

We are or may become involved in legal proceedings that, if adversely adjudicated or settled, could materially impact our financial condition.

As a public biopharmaceutical company, we are or may become a party to litigation in the ordinary course of our business, including, among others, matters alleging product liability, patent or other intellectual property rights infringement, patent invalidity, violations of securities laws, employment discrimination or breach of commercial contract. In general, litigation claims can be expensive and time consuming to bring or defend against and could result in settlements or damages that could significantly impact our results of operations and financial condition.

Our business could suffer if we are unable to attract, retain and motivate skilled personnel and cultivate key academic collaborations.

We are a small company, and our success depends on our continued ability to attract, retain and motivate highly-qualified management and scientific personnel. Moreover, we may not be successful in attracting qualified individuals to replace employees or to expand our business should the need arise. If we lose the services of any of our existing personnel or if we fail to appropriately motivate them, it could impede significantly the achievement of our objectives. We do not know if we will be able to attract, retain or motivate personnel or maintain important academic, scientific and commercial relationships. We do not maintain key man life insurance on any of our employees.

If we engage in an acquisition, reorganization or business combination, we will incur a variety of risks that could adversely affect our business operations or our stockholders.

From time to time we have considered, and we will continue to consider in the future, strategic business initiatives intended to further the development of our business. These initiatives may include acquiring businesses, technologies or products or entering into a business combination with another company. If we do pursue such a strategy, we could, among other things:

 

   

issue equity securities that would dilute our current stockholders’ percentage ownership;

 

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incur substantial debt that may place strains on our operations;

 

   

spend substantial operational, financial and management resources in integrating new businesses, technologies and products;

 

   

assume substantial actual or contingent liabilities; or

 

   

merge with, or otherwise enter into a business combination with, another company in which our stockholders would receive cash or shares of the other company or a combination of both on terms that our stockholders may not deem desirable.

We are not in a position to predict what, if any, collaborations, alliances or other transactions may result or how, when or if these activities would have a material effect on us or the development of our business.

Certain provisions of both our charter documents and Delaware law, our adoption of a stockholder rights plan and certain limitations within our collaboration agreements may make an acquisition of us, which may be beneficial to our stockholders, more difficult.

Provisions of our amended and restated certificate of incorporation and restated bylaws, as well as provisions of Delaware law, could make it more difficult for a third party to acquire us, even if doing so would benefit our stockholders.

Authorized shares of our common stock and preferred stock are available for future issuance without stockholder approval. The existence of unissued common stock and preferred stock may enable our Board of Directors to issue shares to persons friendly to current management or to issue preferred stock with terms that could render more difficult or discourage a third-party attempt to obtain control of us by means of a merger, tender offer, proxy contest or otherwise, which would protect the continuity of our management. In addition, we adopted a stockholder rights plan, the effect of which may be to make an acquisition of us more difficult.

Our amended and restated certificate of incorporation provides for our Board of Directors to be divided into three classes, with the term of one such class expiring each year, and we have eliminated the ability of our stockholders to consent in writing to the taking of any action pursuant to Section 228 of the Delaware General Corporation Law.

Under our collaboration agreements with Glaxo and Pfizer, there are certain limitations on the ability of Glaxo and Pfizer to acquire our securities. These limitations make it more difficult for Glaxo or Pfizer to acquire us, even if such an acquisition would benefit our stockholders. The limitations do not prevent Glaxo or Pfizer, among other things, from acquiring our securities in certain circumstances following initiation by a third party of an unsolicited tender offer to purchase more than a certain percentage of any class of our publicly traded securities. As a result of the termination of our collaboration agreement with Pfizer effective March 16, 2011, the limitations on Pfizer’s ability to acquire our securities will terminate effective March 16, 2013. In addition, as a result of the Termination Agreement with Glaxo, the limitations on Glaxo’s ability to acquire our securities are expected to terminate in the third quarter of 2012.

 

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ITEM 6. EXHIBITS

 

Exhibit
No.

  

Description

10.1*    Amendment No. 6, dated as of June 14, 2011, to the Collaboration Agreement by and between Glaxo Group Limited and Adolor Corporation.
10.2*    Termination Agreement, dated as of June 14, 2011, by and among Adolor Corporation, Glaxo Group Limited and GlaxoSmithKline LLC (formerly known as SmithKline Beecham Corporation d/b/a GlaxoSmithKline). (1)
10.3†    Adolor Corporation Amended and Restated 2011 Stock-based Incentive Compensation Plan, effective as of May 17, 2011, filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on May 18, 2011.
31.1*    Certification pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2*    Certification pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1#    Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2#    Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

* Filed herewith.
Compensation plans and arrangements for executive officers and others.
(1) Portions of the Exhibit have been omitted and filed separately pursuant to an application for confidential treatment filed with the Securities and Exchange Commission pursuant to Rule 24b-2 under the Securities Exchange Act of 1934, as amended.
# This exhibit shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to the liability of that section. Further, this exhibit shall not be deemed to be incorporated by reference in any document filed under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended.

 

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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.

 

  ADOLOR CORPORATION
Date: August 3, 2011   By:  

/s/ Michael R. Dougherty

    Michael R. Dougherty
    President and Chief Executive Officer
    (Principal executive officer)
  By:  

/s/ Stephen W. Webster

    Stephen W. Webster
   

Senior Vice President, Finance and

Chief Financial Officer

(Principal financial and accounting officer)

 

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