Annual Reports

  • 10-K (Feb 24, 2011)
  • 10-K (Mar 2, 2010)
  • 10-K (Feb 26, 2009)
  • 10-K (Feb 28, 2008)
  • 10-K (Feb 26, 2008)
  • 10-K (Feb 28, 2007)

 
Quarterly Reports

 
8-K

 
Other

Human Genome Sciences 10-K 2011
e10vk
 
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 
Form 10-K
 
 
 
For the fiscal year ended December 31, 2010
 
Commission File Number 001-14169
HUMAN GENOME SCIENCES, INC.
 
     
Delaware
(State of organization)
  22-3178468
(I.R.S. employer
identification number)
14200 Shady Grove Road, Rockville, Maryland 20850-7464
(address of principal executive offices and zip code)
 
(301) 309-8504
(Registrant’s telephone number)
Securities registered pursuant to Section 12(b) of the Act:
 
     
Title of Each Class
 
Name of Each Exchange on Which Registered
 
Common stock, par value $0.01 per share
  The NASDAQ Stock Market LLC
 
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes þ     No o
 
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Exchange Act.  Yes o     No þ
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.  Yes þ     No o
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes o     No o
 
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
 
             
Large accelerated filer þ
  Accelerated filer o   Non-accelerated filer o
(Do not check if a smaller reporting company)
  Smaller reporting company o
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o     No þ
 
The number of shares of the registrant’s common stock outstanding on January 31, 2011 was 189,007,876. As of June 30, 2010, the aggregate market value of the common stock held by non-affiliates of the registrant based on the closing price reported on the National Association of Securities Dealers Automated Quotations System was approximately $3,386,315,952.*
 
DOCUMENTS INCORPORATED BY REFERENCE
 
Portions of Human Genome Sciences, Inc.’s definitive proxy statement for the 2011 annual meeting of stockholders are incorporated by reference into Part III of this Annual Report.
 
Excludes 38,706,406 shares of common stock deemed to be held by officers and directors and stockholders whose ownership exceeds five percent of the shares outstanding at June 30, 2010. Exclusion of shares held by any person should not be construed to indicate that such person possesses the power, direct or indirect, to direct or cause the direction of the management or policies of the registrant, or that such person is controlled by or under common control with the registrant.
 


 

TABLE OF CONTENTS

PART I
ITEM 1. BUSINESS
ITEM 1A. RISK FACTORS
COMMERCIAL RISKS
ITEM 1B. UNRESOLVED STAFF COMMENTS
ITEM 2. PROPERTIES
ITEM 3. LEGAL PROCEEDINGS
ITEM 4. (REMOVED AND RESERVED)
PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
ITEM 9. CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
ITEM 9A. CONTROLS AND PROCEDURES
ITEM 9B. OTHER INFORMATION
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ON INTERNAL CONTROL OVER FINANCIAL REPORTING
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
ITEM 11. EXECUTIVE COMPENSATION
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
 
 
ITEM 1.   BUSINESS
 
This annual report on Form 10-K contains forward-looking statements, within the meaning of the Securities Exchange Act of 1934 and the Securities Act of 1933, that involve risks and uncertainties. In some cases, forward-looking statements are identified by words such as “believe,” “anticipate,” “expect,” “intend,” “plan,” “will,” “may” and similar expressions. You should not place undue reliance on these forward-looking statements, which speak only as of the date of this report. All of these forward-looking statements are based on information available to us at this time, and we assume no obligation to update any of these statements. Actual results could differ from those projected in these forward-looking statements as a result of many factors, including those identified in “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and elsewhere. We urge you to review and consider the various disclosures made by us in this report, and those detailed from time to time in our filings with the Securities and Exchange Commission, that attempt to advise you of the risks and factors that may affect our future results.
 
 
Human Genome Sciences, Inc. (“HGS”, the “Company”, “we”, “our” and “us”) is a biopharmaceutical company that exists to place new therapies into the hands of those battling serious disease. Our lead products in development are BENLYSTA® (belimumab) for systemic lupus erythematosus (“SLE”) and raxibacumab for inhalation anthrax.
 
BENLYSTA continues to progress toward commercialization. On November 16, 2010, the U.S. Food and Drug Administration (“FDA”) Arthritis Advisory Committee voted 13-2 to recommend that the FDA approve BENLYSTA for the treatment of autoantibody-positive patients with active SLE who are receiving standard therapy. The Advisory Committee provides non-binding recommendations for consideration by the FDA, which then makes the final decision on approval. In December 2010, the FDA extended the Prescription Drug User Fee Act (“PDUFA”) target date for its priority review of BENLYSTA from December 9, 2010 to March 10, 2011.
 
In June 2010, GlaxoSmithKline (“GSK”), our partner in the co-development and commercialization of BENLYSTA, submitted a Marketing Authorization Application (“MAA”) to the European Medicines Agency (“EMA”) for approval to market BENLYSTA in Europe. We expect to have the EMA decision in the second half of 2011. GSK has also submitted regulatory applications in Canada, Australia, Switzerland, Russia, Brazil and The Philippines. Regulatory submissions in other countries are planned in 2011.
 
In preparation for the anticipated launch and commercialization of BENLYSTA, we have hired and trained a specialized commercial team including sales, marketing and medical affairs. We are also building our own HGS commercial team to work alongside GSK in Europe. We believe we have produced sufficient BENLYSTA inventory to meet the anticipated global market need for at least one year, and are increasing our capacity to meet long-term demand.
 
We continue to deliver raxibacumab to the U.S. Strategic National Stockpile (“SNS”) for emergency use in treating inhalation anthrax. In 2009, we completed the delivery of 20,001 doses of raxibacumab to the SNS under an initial order and as a result recognized $162.5 million in product sales and manufacturing and development services revenue. In July 2009, the U.S. Government (“USG”) exercised its option to purchase 45,000 additional doses of raxibacumab, with delivery to be completed over a three-year period. HGS expects to receive approximately $142.0 million from this second order as deliveries are completed, $64.9 million of which has been recognized as revenue through December 31, 2010. In May 2009, we submitted a Biologics License Application (“BLA”) to the FDA for raxibacumab for the treatment of inhalation anthrax. We received a Complete Response Letter in November 2009, and we will continue to work closely with the FDA to obtain approval. HGS will receive approximately $20.0 million from the USG upon FDA licensure of raxibacumab.
 
In addition to these products in our internal pipeline, we have substantial financial rights to two novel drugs that GSK has advanced to late-stage development. The first of these is darapladib, which was discovered by GSK using HGS technology. In two pivotal Phase 3 trials, GSK is currently evaluating whether darapladib can reduce the


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risk of adverse cardiovascular events such as heart attack or stroke in patients with chronic coronary heart disease and acute coronary syndrome, respectively. With a planned enrollment of more than 27,000 patients in the two trials, the Phase 3 clinical program for darapladib is among the largest ever conducted to evaluate the safety and efficacy of any cardiovascular medication. The second is albiglutide. GSK has eight Phase 3 trials in progress to evaluate the long-term efficacy, safety and tolerability of albiglutide as monotherapy and add-on therapy for patients with type 2 diabetes mellitus. Albiglutide was created by HGS using its proprietary albumin-fusion technology, and the product was licensed to GSK in 2004.
 
We are also working to expand and advance our mid- and early-stage pipeline beyond potential additional indications for BENLYSTA, with a primary focus on immunology and oncology. We continue to develop our oncology portfolio around our expertise in the apoptosis, or programmed cell death, pathway and we plan to initiate Phase 2 development of our human monoclonal antibody to the CCR5 receptor for the treatment of ulcerative colitis.
 
Strategic partnerships are an important driver of our commercial success. We have a co-development and commercialization agreement with GSK for BENLYSTA and raxibacumab is being developed under a contract with the Biomedical Advanced Research and Development Authority (“BARDA”) of the Office of the Assistant Secretary for Preparedness and Response (“ASPR”), U.S. Department of Health and Human Services (“HHS”). Our strategic partnerships with leading pharmaceutical and biotechnology companies allow us to leverage our strengths and gain access to sales and marketing infrastructure, as well as complementary technologies. Some of these partnerships provide us with licensing or other fees, clinical development cost-sharing, milestone payments and rights to royalty payments as products are developed and commercialized. In some cases, we are entitled to certain commercialization, co-promotion, revenue-sharing and other product rights.
 
As of December 31, 2010, we had $933.4 million in cash and investments. With a strong cash position, a management team experienced in bringing products to market, an experienced drug development organization and significant capabilities in biologicals manufacturing, we believe HGS has the resources and capabilities necessary to achieve near-term commercial success while sustaining a viable pipeline that supports the long-term growth of the Company.
 
We are a Delaware corporation established in 1992, headquartered at 14200 Shady Grove Road, Rockville, Maryland, 20850-7464. Our telephone number is (301) 309-8504. Our website address is www.hgsi.com. Information contained on our website is not a part of, and is not incorporated into, this annual report on Form 10-K. Our filings with the SEC are available without charge on our website as soon as reasonably practicable after filing. HGS, Human Genome Sciences, BENLYSTA, and ZALBIN are trademarks of Human Genome Sciences, Inc. Other trademarks referenced are the property of their respective owners.
 
 
Over the last few years, we have made strategic decisions that have transformed HGS on multiple levels and contributed to our progress toward becoming a fully commercial biopharmaceutical company capable of generating sustainable revenues and sustainable growth into the future. Key strategies to help us achieve this goal include:
 
Execute the successful launch and commercialization of BENLYSTA assuming regulatory approval.
 
Over the last year, we have taken steps to prepare for the approval and successful launch of BENLYSTA. We have hired and trained a specialized commercial team, including sales, marketing and medical affairs, that understands how to communicate effectively with rheumatologists and other stakeholders. The combined HGS and GSK team, including a U.S. sales force of approximately 150, will work closely together following approval to communicate effectively and appropriately with rheumatologists and other stakeholders and work to ensure that appropriate patients with systemic lupus who need BENLYSTA will have access to it. HGS and GSK also plan to support physicians and patients with reimbursement and access programs.
 
Under the terms of the 2006 co-development and co-commercialization agreement with GSK, and assuming regulatory approval, HGS will have responsibility for the global supply of BENLYSTA. We believe we have produced sufficient BENLYSTA inventory to meet anticipated global market needs for at least one year, and we


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believe our large-scale manufacturing facility has sufficient capacity to provide worldwide supply for the first two to three years following launch. However, HGS and GSK also anticipate that additional capacity will be required. In July 2010, HGS announced an agreement with Lonza that will provide for the future manufacture of BENLYSTA, eventually tripling capacity with production starting in 2012.
 
Make BENLYSTA globally available so patients with need will have access.
 
HGS and GSK expect a decision on the European approval of BENLYSTA in the second half of 2011. GSK has also submitted regulatory applications in Canada, Australia, Switzerland, Russia, Brazil and The Philippines. Regulatory submissions in other countries are planned in 2011. HGS is building its own commercialization team to work alongside GSK in Europe, with HGS headquarters in Switzerland and local organizations in Germany, France and Spain. Elsewhere, GSK will lead local implementation, with HGS sharing costs and profits equally with GSK.
 
Work to achieve the full therapeutic and commercial potential of BENLYSTA by developing it for other B-cell mediated diseases.
 
Where patients with B-cell mediated autoimmune or other diseases need new treatment options and we have scientific evidence supporting the therapeutic potential and commercial viability, we are committed to continuing the development of BENLYSTA. In 2011, we are considering initiating Phase 2 trials of BENLYSTA in vasculitis and post-renal transplant. We also plan to initiate a Phase 3 trial of BENLYSTA in a subcutaneous formulation that may improve convenience for some patients. In addition, a number of exploratory studies are currently planned in Sjögren’s syndrome, Waldenstrom’s disease, pre-transplant, idiopathic thrombocytopenic purpura (ITP) and others.
 
Find and develop new therapies for our late-stage pipeline.
 
We will pursue external opportunities to acquire high-potential innovative products, with a priority given to products that have the potential to be first-in-class or best-in class, and address large markets or markets on the verge of escalating growth. We will maintain our primary therapeutic focus on oncology and immunology — indications in which we have special expertise and which can be commercialized with small specialty sales forces. We will be open to both biologics and small molecule opportunities. We also look forward to GSK’s continuing progress with late-stage products to which we have substantial financial rights, such as darapladib for cardiovascular disease.
 
Continue to build a robust mid-and early-stage pipeline.
 
Strength in our pipeline is important to our long-term future growth. In 2011, we plan to initiate Phase 2 trials of BENLYSTA in additional indications, and our CCR5 monoclonal antibody in ulcerative colitis. In addition, we plan to begin randomization for our Phase 2 trial of mapatumumab in hepatocellular cancer. All of these products are investigational and were developed based on HGS discoveries. We also plan to initiate Phase 1b combination trials of our in-licensed small-molecule oncology drug, HGS1029. We are expanding our new targets program to increase the number of new Investigational New Drugs per year, and have multiple research collaborations ongoing to complement our internal efforts.
 
Remain strategically opportunistic and vigilant.
 
Strategically appropriate partnerships and collaborations will continue to play an important role in our future. We will continue our partnership with GSK as we explore the full potential of BENLYSTA. As we bring more products forward in the future that address large and international markets, other partnerships with leading companies may allow us to bring new therapies more quickly to patients who need them on a global basis. We will also pursue strategic acquisitions and collaborations to expand our portfolio of new drug candidates, provide access to complementary technologies, or reduce the cost and speed the early development of HGS-discovered targets.
 
Capitalize on our intellectual property portfolio.
 
We pursue patents to protect our intellectual property and have developed a significant intellectual property portfolio, with hundreds of issued patents covering genes, proteins, antibodies and proprietary technologies.


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We have also filed U.S. patent applications covering many additional discoveries and inventions. We will seek opportunities to monetize intellectual property assets that we do not plan to develop internally.
 
Build upon our core competencies in manufacturing and process development.
 
Our world-class manufacturing and process development capabilities represent a strategic advantage and allow us to control quality while maintaining flexibility.
 
Maintain a strong financial position.
 
A strong cash position is essential to our ability to commercialize new approved drugs, advance promising late-stage investigational therapies through large and expensive Phase 3 trials, and continue to invest in our earlier-stage pipeline. We view a strong financial position as a strategic imperative. Maintaining it requires sound financial controls and the ability to raise funds on the public or private markets. It also requires a willingness to advance creative approaches such as our manufacturing alliance program, through which we have capitalized on our process development and manufacturing capability to generate revenues — or raxibacumab, which is sold to one customer, the U.S. Government, and generates approximately $50.0 million a year of what amounts to non-dilutive financing.
 
 
HGS has two late stage products: BENLYSTA for systemic lupus and raxibacumab for inhalation anthrax. We also have financial rights to certain products in the GSK clinical pipeline. GSK has advanced two of these products to Phase 3 clinical trials: darapladib for cardiovascular disease and albiglutide for type 2 diabetes mellitus. In addition, we have a portfolio of novel drugs in earlier stages of development, led by our TRAIL receptor antibody mapatumumab, which is in mid-stage development for cancer.
 
 
 
BENLYSTA for systemic lupus has the potential to receive regulatory approval in the United States in March 2011 and in Europe in the second half of 2011. No new drug for lupus has been approved by regulatory authorities in more than 50 years. Raxibacumab for inhalation anthrax continues to generate revenue under our contract with the U.S. Government as we complete deliveries to the Strategic National Stockpile, and we continue to work closely with the FDA to achieve licensure.
 
BENLYSTA (belimumab)
 
BENLYSTA is a human monoclonal antibody and the first in a new class of drugs called BLYS-specific inhibitors. BENLYSTA inhibits the biological activity of a naturally occurring protein known as B-lymphocyte stimulator (BLyS), which was first discovered by HGS in 1996. In lupus and certain other autoimmune diseases, elevated levels of BLyS are believed to contribute to the production of autoantibodies — antibodies that attack and destroy the body’s own healthy tissues. BENLYSTA is being developed by HGS and GSK as a potential treatment for systemic lupus under a co-development and commercialization agreement entered into in 2006 (described below under “Lead Commercial Collaborations”).
 
On November 16, 2010, the FDA Arthritis Advisory Committee voted 13-2 to recommend that the FDA approve BENLYSTA for the treatment of autoantibody-positive patients with active SLE who are receiving standard therapy. In December 2010, the FDA extended the PDUFA target date for the priority review of BENLYSTA to March 10, 2011. In June 2010, GSK submitted an application to EMA seeking approval to market BENLYSTA in Europe. We expect to have the EMA decision in the second half of 2011. GSK has also submitted regulatory applications in Canada, Australia, Switzerland, Russia, Brazil and The Philippines. Regulatory submissions in other countries are planned in 2011.
 
We and GSK are examining a range of potential additional indications for BENLYSTA that might be explored in new clinical trials. In 2011, we are considering initiating Phase 2 trials of BENLYSTA in vasculitis and post-renal transplant. We also plan to initiate a Phase 3 trial of BENLYSTA in a subcutaneous formulation that may improve


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convenience for some patients. In addition, a number of exploratory studies are currently planned in Sjögren’s syndrome, Waldenstrom’s disease, pre-transplant, idiopathic thrombocytopenic purpura (ITP) and others.
 
Raxibacumab
 
Raxibacumab is a human monoclonal antibody that targets and blocks Bacillus anthracis protective antigen, which research has shown to be the key facilitator of the deadly toxicity of anthrax infection. Raxibacumab represents a new way to address the anthrax threat. While antibiotics can kill the anthrax bacteria, they are not effective against the deadly toxins the bacteria produce. Raxibacumab targets anthrax toxins after they are released by the bacteria into the blood and tissues. In an inhalation anthrax attack, people may not know they are infected with anthrax until the toxins already are circulating in their blood, and it may be too late for antibiotics alone to be effective.
 
We are developing raxibacumab under a contract entered into in 2006 with BARDA. The U.S. Government is currently our only customer for raxibacumab and has the right to terminate our contract for convenience at any time. In 2010, HGS continued delivery of raxibacumab to the U.S. Strategic National Stockpile. In July 2009, the U.S. Government exercised its option to purchase 45,000 additional doses of raxibacumab for the Stockpile for emergency use in treating inhalation anthrax, with delivery to be completed over a three-year period. HGS expects to receive approximately $142.0 million from this second order as deliveries are completed. In 2010, we recognized $47.2 million in raxibacumab product sales revenue. Also under our contract, HGS submitted a BLA to the FDA for raxibacumab for the treatment of inhalation anthrax in May 2009. We received a Complete Response Letter in November 2009, and we will continue to work closely with the FDA to obtain approval. HGS will receive approximately $20.0 million from the U.S. Government upon FDA licensure of raxibacumab. Raxibacumab revenue accounted for 31% and 65% of our total revenue for 2010 and 2009, respectively.
 
ZALBINtm (albinterferon alfa-2b)
 
In April 2010, we announced that Novartis withdrew its MAA seeking authorization to market ZALBIN in Europe for the treatment of chronic hepatitis C. The decision was based on feedback from European regulatory authorities including questions regarding whether the therapeutic benefit of JOULFERON® (known in the U.S. as ZALBIN) was sufficient relative to risk. In October 2010, as expected, HGS received a Complete Response Letter from the FDA regarding the Company’s BLA for 900-mcg ZALBIN. HGS and Novartis have decided not to develop ZALBIN further.
 
Mid- and Early-Stage Pipeline
 
We are investing strategically to expand and advance our mid- and early-stage pipeline beyond potential additional indications for BENLYSTA, with a primary focus on immunology and oncology.
 
Mapatumumab
 
HGS has pioneered the development of highly targeted agonistic antibody therapies for cancer based on the TRAIL receptor apoptotic pathway. Mapatumumab is a human monoclonal antibody that specifically binds to TRAIL receptor 1 and causes it to induce apoptosis in cancer cells. The safety lead-in to a randomized Phase 2 trial of mapatumumab in combination with Nexavar (sorafenib) is ongoing in patients with advanced hepatocellular cancer, which accounts for 80%-90% of all liver cancers. We expect to initiate the randomization stage of this study in 2011.
 
The results of two Phase 2 trials of mapatumumab in combination with other therapeutic agents were announced in 2010. In March 2010, we announced the results of a randomized Phase 2 trial of mapatumumab in combination with paclitaxel and carboplatin as first-line therapy in advanced non-small cell lung cancer. In June 2010, we announced the results of a randomized Phase 2 trial of mapatumumab in combination with bortezomib (Velcade) in patients with advanced multiple myeloma. In both studies, the results showed no difference in disease response or progression-free survival for patients treated with the combination that included mapatumumab vs. the control group. Mapatumumab was well tolerated in both studies.


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The IAP inhibitors are a novel class of compounds that block the activity of IAP (inhibitor of apoptosis) proteins, allowing apoptosis to proceed and causing the cancer cells to die. When IAP proteins are over-expressed in cancer cells, they can help cancer cells resist apoptosis and resume growth and proliferation. Preclinical studies of HGS1029 in combination with mapatumumab demonstrated dramatic synergistic activity against a number of cancer types, including prostate, breast, esophageal, colorectal and non-small cell lung. HGS1029 has also shown significant anti-tumor activity alone and in combination with other agents in a broad range of cancers. We plan to develop mapatumumab and our IAP inhibitors in combination with one another and in combination with other therapeutic agents.
 
In November 2009, HGS announced the initiation of a Phase 1 study of our lead IAP inhibitor, HGS1029, as monotherapy in patients with advanced lymphoid tumors. The study’s primary objectives include evaluation of safety and tolerability, and dose selection for Phase 2 trials. HGS1029 as monotherapy is also being studied in an ongoing Phase 1 study in patients with advanced solid tumors. In 2011, we plan to initiate Phase 1b studies of HGS1029 in combination with mapatumumab and other agents; we also plan to complete the Phase 1 studies of HGS1029 as monotherapy.
 
CCR5 mAb
 
We plan to initiate a Phase 2 trial of our human monoclonal antibody to the CCR5 receptor for the treatment of ulcerative colitis in 2011. This receptor has been shown to play a key role in the immune system and the inflammation cascade associated with autoimmune and other diseases.
 
 
HGS has financial rights to certain products in the GSK clinical development pipeline (described below under “Lead Commercial Collaborations”). GSK has advanced two of these products, darapladib and albiglutide, to Phase 3 development.
 
 
Darapladib was discovered by GSK based on our technology. It is a small-molecule inhibitor of lipoprotein-associated phospholipase-A2 (Lp-PLA2), an enzyme associated with the formation of atherosclerotic plaques and identified in clinical trials as an independent risk factor for coronary heart disease and ischemic stroke. In two pivotal Phase 3 trials, GSK is evaluating whether darapladib can reduce the risk of adverse cardiovascular events, such as heart attack or stroke, in patients with chronic coronary heart disease and acute coronary syndrome, respectively. With a planned enrollment of more than 27,000 patients in the two trials, the Phase 3 clinical program for darapladib is among the largest ever conducted to evaluate the safety and efficacy of any cardiovascular medication. Darapladib was discovered by GSK based on HGS technology. HGS will receive 10% royalties on worldwide sales if darapladib is commercialized, and has a 20% co-promotion option in North America and Europe.
 
Albiglutide (formerly Syncria®)
 
Albiglutide is a biological product generated from the fusion of human albumin and modified human GLP-1 peptide, and is designed to act throughout the body to help maintain normal blood-sugar levels and to control appetite. GSK currently has eight Phase 3 trials in progress to evaluate the long-term efficacy, safety and tolerability of albiglutide as monotherapy and add-on therapy for patients with type 2 diabetes mellitus. Albiglutide was created by HGS using its proprietary albumin-fusion technology, and the product was licensed to GSK in 2004. We are entitled to fees and milestone payments that could amount to as much as $183.0 million — including $33.0 million received to date — in addition to single-digit royalties on worldwide sales if albiglutide is commercialized.
 
 
HGS has developed core competencies in the discovery and understanding of human genes and their biological functions, and in the discovery and development of human protein and antibody drugs. Research and development


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expenses were $196.4 million, $173.7 million and $243.3 million for 2010, 2009, and 2008, respectively. These expenses are net of amounts reimbursed by our collaboration partners.
 
 
We have acquired rights to a variety of human antibody technologies, have integrated these technologies into our research and development program, and continue to collaborate with certain antibody companies. Many medical conditions are the result of an excess of a specific protein in the body, and some antibody drugs can inactivate such proteins and bring therapeutic benefits to patients. These drugs are known as antagonistic antibodies. For example, BENLYSTA is an antagonistic human monoclonal antibody.
 
In certain medical conditions, it may be desirable to stimulate a specific biological activity. Antibodies that stimulate biological activity are known as agonistic antibodies. Mapatumumab is an agonistic antibody that binds to TRAIL receptor 1 and triggers programmed cell death in cancer cells. We believe it was the first human agonistic monoclonal antibody to enter clinical trials.
 
 
Our albumin-fusion technology allows us to create long-acting forms of protein drugs by fusing the gene that expresses human albumin to the gene that expresses a therapeutically active protein. Our partners are actively pursuing the development of albumin-fusion drugs based on known therapeutic proteins. For example, albiglutide was created through the fusion of human albumin and glucagon-like peptide-1 (GLP-1).
 
 
We have built a drug development organization that has the expertise necessary to design and implement well-focused, high-quality clinical trials of multiple compounds. We seek to gather, document and analyze clinical trial data in such a way that they can be submitted to regulatory authorities and used to support BLAs at the appropriate time. We have assembled experienced teams in key strategic areas of development, including:
 
  •  Clinical Research and Biostatistics.  The clinical research and biostatistics groups are responsible for the design, planning and analysis of clinical trials.
 
  •  Clinical Operations.  The clinical operations group executes clinical trials and is responsible for managing clinical trial sites and ensuring that all proper procedures are followed during the collection of clinical data. The group includes our data management team.
 
  •  Project Management.  Our project management team oversees the process of development of a drug from the earliest stages of research through the conduct of clinical development and regulatory filings.
 
  •  Regulatory Affairs.  The regulatory affairs group manages communications with and submissions to regulatory authorities.
 
  •  Drug Safety.  As our products advance in clinical testing, our drug safety group collects and analyzes information on drug experience and safety, and ensures that accurate medical information is distributed.
 
  •  Quality Assurance.  The quality assurance group ensures compliance with all regulatory requirements for the clinical development and manufacture of our products.
 
  •  Bioanalytical Sciences.  The bioanalytical sciences group develops and performs highly specialized assays that are used during monitoring of preclinical tests and clinical trials. Other assays help to ensure the quality and consistency of our products.
 
  •  Biopharmaceutical Development.  The biopharmaceutical development group develops robust manufacturing processes and product formulations to support clinical studies and future commercial supply.


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Strategic collaborations are a key aspect of our business strategy. We have co-development and commercialization agreements with GSK for BENLYSTA, and raxibacumab is being developed under a contract with the U.S. Government. Strategic collaborations are an important source of revenues and drug development cost-sharing. They also allow us to leverage our strengths and gain access to sales and marketing infrastructure, international distribution and complementary technologies.
 
Other potential collaborations may provide sources of new product opportunities for in-licensing. In addition, we have assets that may be a better fit for another company than for HGS, and therefore could be out-licensed. Each of these collaborative models is of interest to HGS, and we are committed to remaining alert to new opportunities.
 
Lead Commercial Collaborations
 
 
BENLYSTA.  In 2006, we entered into an agreement with GSK for the co-development and commercialization of BENLYSTA. GSK is a world leader that brings global pharmaceutical development and marketing capabilities to the BENLYSTA program. Under the BENLYSTA agreement, we and GSK share Phase 3 and 4 development costs, sales and marketing expenses, and profits equally. HGS has primary responsibility for bulk manufacturing. We have received an execution fee of $24.0 million under this agreement and have recognized this payment ratably over the development period. We recognized revenues of $3.4 million in 2010 and $4.7 million in 2009. The BENLYSTA agreement includes cost-sharing provisions under which we and GSK share clinical development costs. We recorded cost reimbursement from GSK under this provision of $62.0 million in 2010 and $43.1 million in 2009, which was reflected as a reduction in expenses. This agreement will expire three years after the later of (i) the expiration date of certain patent rights related to BENLYSTA and (ii) a period of 10 years after the first commercial sale of BENLYSTA. These certain patent rights are expected to expire by 2023, with the potential for later expiration that may result from any issuance of additional patent and/or patent term extensions. GSK may terminate the agreement if (i) upon the basis of competent scientific evidence or data regarding commercial potential, GSK determines BENLYSTA does not merit incurring additional development or marketing expenses or (ii) BENLYSTA is not approved by the FDA or EMA. In addition, either party may terminate if the other party commits a material breach of the agreement or if the other party is bankrupt or insolvent.
 
Darapladib.  In December 2008, GSK initiated Phase 3 development of darapladib, a small-molecule Lp-PLA2 inhibitor discovered by GSK based on HGS technology. We will receive a 10% royalty on worldwide sales of darapladib if it is commercialized, and we have a 20% co-promotion option in North America and Europe. We are also entitled to receive a milestone payment if darapladib moves through clinical development into registration.
 
Albiglutide.  In February 2009, GSK initiated a Phase 3 clinical trial program to evaluate the efficacy, safety and tolerability of albiglutide in the long-term treatment of type 2 diabetes mellitus. Albiglutide was created by HGS using its proprietary albumin-fusion technology, and the product was licensed to GSK in 2004. HGS is entitled to fees and milestone payments that could amount to as much as $183.0 million — including $33.0 million received to date. We are also entitled to single-digit royalties on worldwide sales if albiglutide is commercialized.
 
 
Raxibacumab.  In September 2005, we entered into a two-phase contract with BARDA to supply raxibacumab for inhalation anthrax. HHS is the lead agency for public health and medical response to man-made or natural disasters, including acts of bioterrorism. Under the first phase of the contract, we supplied 10 grams of raxibacumab to HHS for comparative in vitro and in vivo testing. In June 2006, under the second phase of the contract, the USG exercised its option to purchase raxibacumab and we agreed to manufacture and deliver 20,001 doses to the SNS. In 2009, we achieved our company’s first product sales by completing these deliveries and recognized $162.5 million in product sales and manufacturing and development services revenue. In July 2009, the USG exercised its option to purchase 45,000 additional doses of raxibacumab for the SNS for emergency use in treating inhalation anthrax, with delivery to be completed over a three-year period. HGS expects to receive


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approximately $142.0 million from this second order as deliveries are completed, including approximately $47.2 million and $17.7 million recognized as product sales revenue in 2010 and 2009, respectively. Also under our contract, HGS submitted a BLA to the FDA for raxibacumab for the treatment of inhalation anthrax in May 2009. We received a Complete Response Letter in November 2009, and we will continue to work closely with the FDA to obtain approval. HGS will receive approximately $20.0 million from the USG upon FDA licensure of raxibacumab. Our raxibacumab agreement can be terminated by the USG if it determines that a termination is in its interest.
 
 
ZALBIN.  In 2006, we entered into an exclusive worldwide agreement for the co-development and commercialization of albinterferon alfa-2b with Novartis, a global leader in the pharmaceutical industry. In October 2010, as expected, HGS received a Complete Response Letter from the FDA regarding the Company’s BLA for 900-mcg ZALBIN (albinterferon alfa-2b, known in Europe as JOULFERON) dosed every two weeks for the treatment of chronic hepatitis C. HGS and Novartis decided not to develop ZALBIN further. Based on this decision, in September 2010, HGS recognized all remaining deferred revenue relating to payments previously received under the ZALBIN agreement with Novartis, an amount totaling $34.1 million. There will, however, be certain additional costs incurred by both parties in the near future as activities are concluded.
 
 
Aegera Therapeutics.  In December 2007, we and Aegera Therapeutics, Inc. (“Aegera”) completed a licensing and collaboration agreement providing us with exclusive worldwide rights (excluding Japan) to develop and commercialize HGS1029 and other small-molecule inhibitors of IAP (inhibitor of apoptosis) proteins in oncology. Under the agreement, we made an upfront payment to Aegera of $20.0 million as a licensing fee and for an equity investment. Aegera is entitled to receive up to $295.0 million in additional development and commercial milestone payments, including a $5.0 million milestone paid in 2008 upon FDA clearance of an Investigational New Drug Application (“IND”). Aegera will receive low double-digit royalties on net sales in the HGS territory. In North America, Aegera will have the option to co-promote, under which it will share certain expenses and profits (30%) in lieu of its royalties. Aegera retains the non-oncology rights to its IAP inhibitors that are not selected for development under this agreement.
 
 
HGS has a rich heritage of scientific discovery that has produced a substantial intellectual property estate and a library of thousands of therapeutic and diagnostic targets. After careful review, we have selected targets for further research and potential development, with the goal of filing new INDs to develop the selected targets through co-development or research collaborations, as well as through our own internal research, including the application of antibody development technology from various collaborators.
 
 
Protein and antibody process development and manufacturing are core HGS competencies. We currently develop and produce several protein and antibody drugs in three state-of-the-art current good manufacturing practices (“cGMP”)-compliant process development and manufacturing facilities — totaling approximately 520,000 square feet. We are leveraging these capabilities to produce near-term revenue by entering into strategically appropriate process development and manufacturing alliances.
 
 
We seek U.S. and foreign patent protection for the genes, proteins and antibodies that we discover, as well as patents on therapeutic and diagnostic products and processes, screening and manufacturing technologies, and other inventions based on genes, proteins and antibodies. We also seek patent protection or rely upon trade secret rights to protect certain technologies which may be used to discover and characterize genes, proteins and antibodies and which may be used to develop novel therapeutic and diagnostic products and processes. We believe that in the


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aggregate, our patent applications, patents and licenses under patents owned by third parties are of material importance to our operations.
 
Important legal issues remain to be resolved as to the extent and scope of available patent protection for biotechnology products and processes in the U.S. and other important markets outside the U.S. We expect that litigation or administrative proceedings will likely be necessary to determine the validity and scope of certain of our and others’ proprietary rights. We are currently involved in a number of administrative proceedings and litigations relating to the scope of protection of our patents and those of others, and are likely to be involved in additional proceedings that may affect directly or indirectly patents and patent applications related to our products or the products of our partners. For example, we have been involved in contested proceedings related to products based on BLyS (such as BENLYSTA). Any such lawsuit or proceeding may result in a significant commitment of resources in the future. In addition, changes in, or different interpretations of, patent laws in the U.S. and other countries may result in patent laws that allow others to use our discoveries or develop and commercialize our products. We cannot assure you that the patents we obtain or the unpatented technology we hold will afford us significant commercial protection.
 
We have filed U.S. patent applications with respect to many human genes and their corresponding proteins. We also have filed U.S. patent applications with respect to all or portions of the genomes of several infectious and non-infectious microorganisms. We have hundreds of U.S. patents covering genes, proteins, antibodies and proprietary technologies. Our remaining applications may not result in the issuance of any patents. Our applications may not be sufficient to meet the statutory requirements for patentability in all cases. In certain instances, we will be dependent upon our collaborators to file and prosecute patent applications.
 
Other companies or institutions have filed, and may in the future file, patent applications that attempt to patent genes similar to those covered in our patent applications, including applications based on our potential products. Any patent application filed by a third party may prevail over our patent applications, in which event the third party may require us to stop pursuing a potential product or to negotiate a royalty arrangement to pursue the potential product.
 
We also are aware that others, including universities and companies working in the biotechnology and pharmaceutical fields, have filed patent applications and have been granted patents in the U.S. and in other countries that cover subject matter potentially useful or necessary to our business. Some of these patents and patent applications claim only specific products or methods of making products, while others claim more general processes or techniques useful in the discovery and manufacture of a variety of products. The risk of additional patents and patent applications will continue to increase as the biotechnology industry progresses. We cannot predict the ultimate scope and validity of existing patents and patents that have been or may be granted to third parties, nor can we predict the extent to which we may wish or be required to obtain licenses to such patents, or the availability and cost of acquiring such licenses. To the extent licenses are required, the owners of the patents could bring legal actions against us to claim damages or to stop our manufacturing and marketing of the affected products.
 
Issued patents may not provide commercially meaningful protection against competitors and may not provide us with competitive advantages. Other parties may challenge our patents or design around our issued patents or develop products providing effects similar to our products. Furthermore, patents are issued for a limited time period and may expire before the useful life of the covered product. In addition, others may discover uses for genes, proteins or antibodies other than those uses covered in our patents, and these other uses may be separately patentable. The holder of a patent covering the use of a gene, protein or antibody for which we have a patent claim could exclude us from selling a product for a use covered by its patent.
 
We rely on trade secret protection to protect our confidential and proprietary information. We believe we have developed proprietary procedures for making libraries of DNA sequences and genes. We have not sought patent protection for these procedures. We have developed a substantial database concerning genes we have identified. We have taken security measures to protect our data and continue to explore ways to further enhance the security for our data. However, we may not be able to meaningfully protect our trade secrets. While we have entered into confidentiality agreements with employees and collaborators, we may not be able to prevent their disclosure of these data or materials. Others may independently develop substantially equivalent information and techniques.


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General.  We face intense competition from a wide range of pharmaceutical, biotechnology and diagnostic companies, as well as academic and research institutions and government agencies. Some of these competitors have substantially greater financial, marketing, research and development and human resources. Most large pharmaceutical companies have considerably more experience in undertaking clinical trials and in obtaining regulatory approval to market pharmaceutical products.
 
Basis of Competition.  Principal competitive factors in our industry include:
 
  •  the quality and breadth of an organization’s technology;
 
  •  the skill of an organization’s employees and ability to recruit and retain skilled employees;
 
  •  an organization’s intellectual property estate;
 
  •  the range of capabilities, from target identification and validation to drug discovery and development to manufacturing and marketing; and
 
  •  the availability of substantial capital resources to fund discovery, development, manufacturing and commercialization activities.
 
We believe that the quality and breadth of our technology platform, the skill of our employees and our ability to recruit and retain skilled employees, our patent portfolio, our capabilities for research and drug development, and our capital resources are competitive strengths. However, many large pharmaceutical and biotechnology companies have significantly larger intellectual property estates than we do, more substantial capital resources than we have, and greater capabilities and experience than we do in preclinical and clinical development, sales, marketing, manufacturing and regulatory affairs.
 
Products.  We are aware of products in research or development by our competitors that address all of the diseases we are targeting. Any of these products may compete with our product candidates. Our competitors may succeed in developing their products before we do, obtaining approvals from the FDA or other regulatory agencies for their products more rapidly than we do, or developing products that are more effective than our products. These products or technologies might render our technology obsolete or noncompetitive. In addition, our albumin fusion protein products are designed to be long-acting versions of existing products. While we believe our albumin fusion protein products may be a more attractive alternative to the existing products, the existing product in some cases has an established market that may make the introduction of our product more difficult. Competition is based primarily on product efficacy, safety, timing and scope of regulatory approvals, availability of supply, marketing and sales capability, reimbursement coverage, price and patent position.
 
 
Regulations in the U.S. and other countries have a significant impact on our research, product development and manufacturing activities and will be a significant factor in the marketing of our products. All of our products require regulatory approval prior to commercialization. In particular, our products are subject to rigorous preclinical and clinical testing and other premarket approval requirements by the FDA and similar regulatory authorities in other regions. Various statutes and regulations also govern or influence the manufacturing, safety, labeling, storage, record keeping and marketing of our products. The lengthy process of seeking these approvals, and the subsequent compliance with applicable statutes and regulations, require the expenditure of substantial resources. Any failure by us to obtain, or any delay in obtaining, regulatory approvals could materially adversely affect our ability to commercialize our products in a timely manner, or at all.
 
Preclinical Testing.  Before a drug may be clinically tested in the U.S., it must be the subject of rigorous preclinical testing. Preclinical tests include laboratory evaluation of product chemistry and animal studies to assess the potential safety and efficacy of the product and its formulations. The results of these studies must be submitted to the FDA as part of an IND, which is reviewed by the FDA before clinical testing in humans can begin.


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Clinical Testing.  Typically, clinical testing involves a three-phase process, which generally lasts four to seven years, and sometimes longer:
 
  •  Phase 1 clinical trials are conducted with a small number of subjects to determine the early safety profile and the pattern of drug distribution and metabolism.
 
  •  Phase 2 clinical trials are conducted with groups of patients afflicted with a specified disease in order to provide enough data to evaluate preliminary efficacy and optimal dosages statistically and to expand evidence of safety.
 
  •  Phase 3 clinical trials are large-scale, multi-center, comparative trials, which are designed to gather additional information for proper dosage and labeling of the drug and to demonstrate its overall safety and efficacy.
 
The FDA monitors the progress of each phase of testing, and may require the modification, suspension or termination of a trial if it is determined to present excessive risks to patients. The clinical trial process may be accompanied by substantial delay and expense and there can be no assurance that the data generated in these studies will ultimately be sufficient for marketing approval by the FDA.
 
Marketing Approvals.  Before a product can be marketed and sold, the results of the preclinical and clinical testing must be submitted to the FDA for approval. This submission will be either a new drug application or a biologics license application, depending on the type of drug. In responding to a new drug application or a biologics license application, the FDA may grant marketing approval, request additional information or deny the application if it determines that the application does not provide an adequate basis for approval. We cannot assure you that any approval required by the FDA will be obtained on a timely basis, or at all.
 
In addition, the FDA may condition marketing approval on the conduct of specific post-marketing studies to further evaluate safety and efficacy (such as Phase 4 trials). Rigorous and extensive FDA regulation of pharmaceutical products continues after approval, particularly with respect to compliance with cGMPs, reporting of adverse effects, advertising, promotion and marketing. Discovery of previously unknown problems or failure to comply with the applicable regulatory requirements may result in restrictions on the marketing of a product or withdrawal of the product from the market as well as possible civil or criminal sanctions, any of which could materially adversely affect our business.
 
Other Regulation.  We are also subject to various laws and regulations relating to safe working conditions, laboratory and manufacturing practices, the experimental use of animals and the use and disposal of hazardous or potentially hazardous substances used in connection with our research, including radioactive compounds and infectious disease agents. We also cannot accurately predict the extent of regulations that might result from any future legislative or administrative action.
 
In addition, ethical, social and legal concerns about genetic testing and genetic research could result in additional regulations restricting or prohibiting the processes we or our suppliers may use. Federal and state agencies, congressional committees and foreign governments have expressed interest in further regulating biotechnology. More restrictive regulations or claims that our products are unsafe or pose a hazard could prevent us from commercializing our products.
 
Foreign Regulation.  We must obtain regulatory approval by governmental agencies in other countries prior to commercialization of our products in those countries. Foreign regulatory systems may be just as rigorous, costly and uncertain as in the U.S.
 
Possible Pricing Restrictions.  The levels of revenues and profitability of biopharmaceutical companies like ours may be affected by the continuing efforts of government and third-party payers to contain or reduce the costs of health care through various means. For example, in certain foreign markets, pricing or profitability of therapeutic and other pharmaceutical products is subject to governmental control. In the U.S. there have been, and we expect that there will continue to be, a number of federal and state proposals to implement similar governmental control. While we cannot predict whether any legislative or regulatory proposals will be adopted, the adoption of such proposals could have a material adverse effect on our business, financial condition and profitability. In addition, in the U.S. and elsewhere, sales of therapeutic and other pharmaceutical products depend in part on the availability of


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reimbursement to the consumer from third-party payers, such as government and private insurance plans. Third-party payers are increasingly challenging the prices charged for medical products and services. We cannot assure you that any of our products will be considered cost effective or that reimbursement to the consumer will be available or will be sufficient to allow us to sell our products on a competitive and profitable basis.
 
 
Most raw materials and other supplies required in our business are generally available from various suppliers in quantities adequate to meet our needs. Certain materials and other supplies required for manufacturing are currently available only from single sources. As we prepare for commercialization of our products, we intend to identify alternative sources of supply wherever possible.
 
 
We are able to manufacture multiple protein and antibody drugs for use in research, clinical and commercial activities. We produce and purify these protein and antibody drugs in three process development and manufacturing facilities that total approximately 520,000 square feet and offer both small-scale and large-scale manufacturing capabilities. We do not currently manufacture any products approved for commercial use. We are, however, manufacturing raxibacumab for supply to the Strategic National Stockpile. We believe that we have sufficient manufacturing capacity to launch BENLYSTA, if it is approved by the FDA. We believe our HGS large-scale manufacturing facility has ample capacity to provide worldwide supply of BENLYSTA, if approved, for the first two or three years following launch. We currently have at least a year’s worth of BENLYSTA inventory on hand. In July 2010, HGS entered into an agreement with Lonza, a leader in biologics manufacturing, for the future commercial supply of BENLYSTA. This agreement will eventually triple our manufacturing capacity for BENLYSTA with production expected to come on-line for U.S. production by mid-2012.
 
Currently each of our lead products, BENLYSTA and raxibacumab, is produced at a single manufacturing site. BENLYSTA is produced at our large-scale manufacturing facility in Rockville, Maryland, and raxibacumab is produced in a separate part of our small-scale manufacturing facility, also in Rockville, Maryland. Each of these facilities is the sole source for these products. We cannot guarantee that one or more of these manufacturing plants will not encounter problems, including but not limited to loss of power, equipment failure or viral or microbial contamination, which could impact our ability to deliver adequate supply of one or more of these products to the market. We cannot assure you that we will be able in the future to consistently manufacture our products economically or in compliance with cGMPs and other regulatory requirements.
 
In the future, we may contract with additional third-party manufacturers or develop products with partners and use the partners’ manufacturing capabilities. When we use others to manufacture our products, we depend on those parties to comply with cGMPs and other regulatory requirements, and to deliver materials on a timely basis. These parties may not perform adequately. Any failures by these third parties may delay our development of products or the submission of these products for regulatory approval.
 
 
In preparation for the launch and commercialization of BENLYSTA assuming regulatory approval, HGS has hired and trained a specialized commercial team including sales, marketing and medical affairs. The combined HGS and GSK team, including a U.S. sales force of approximately 150, will work closely together following approval to communicate effectively and appropriately with rheumatologists and other stakeholders and work to ensure that appropriate patients with systemic lupus who need BENLYSTA will have access to it. HGS and GSK also plan to support patients with reimbursement and access programs.
 
HGS and GSK expect a decision on the European approval of BENLYSTA in the second half of 2011. GSK has also submitted regulatory applications in Canada, Australia, Switzerland, Russia, Brazil and The Philippines. Regulatory submissions in other countries are planned in 2011. HGS is building its own commercialization team to work alongside GSK in Europe, with HGS headquarters in Switzerland and local organizations in Germany, France and Spain. Elsewhere, GSK will lead local implementation, with HGS sharing costs and profits equally with GSK.


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GSK and others also have co-marketing rights with respect to certain of our other products. For any products that we market together with partners, we will rely, in whole or in part, on the marketing capabilities of those parties. We may also contract with third parties to market certain of our products. Ultimately, we and our partners may not be successful in marketing our products. The prices for our products may be impacted by various factors, including economic analyses of the burden of the applicable disease, the perceived value of the product and third-party reimbursement policies.
 
 
As of February 1, 2011, we had approximately 1,100 full-time employees. None of our U.S. employees is subject to collective bargaining agreements. Our employees located in certain non-U.S. countries are covered by collective bargaining agreements that are prescribed by local labor law. Additionally, substantially all of our employees in Europe are covered by national labor laws which establish the rights of employees, including the amount of wages and benefits paid and, in certain cases, severance and similar benefits. We consider relations with our employees to be good.


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ITEM 1A.   RISK FACTORS
 
There are a number of risk factors that could cause our actual results to differ materially from those that are indicated by forward-looking statements. Those factors include, without limitation, those listed below in addition to the other information in this Annual Report on Form 10-K. You should carefully consider these risk factors in evaluating our business because these risk factors may have a significant impact on our business, financial condition and results of operations. The risks described below are not the only risks we may face. Additional risks and uncertainties not presently apparent to us, or risks that we currently consider immaterial, could also negatively affect our business, financial condition and results of operations.
 
COMMERCIAL RISKS
 
Our near-term prospects are highly dependent on BENLYSTA, our lead product candidate. If we fail to obtain FDA and/or EMA approval for BENLYSTA or fail to successfully commercialize BENLYSTA, our results of operations and business will be materially and adversely affected and our stock price would likely decline.
 
Our most advanced product candidate is BENLYSTA. The development program for BENLYSTA involved two large-scale, multi-center Phase 3 clinical trials, in addition to earlier Phase 1 and Phase 2 clinical trials. In July 2009, we reported the results from the first of our two Phase 3 clinical trials for BENLYSTA. This trial was called BLISS-52. In BLISS-52, BENLYSTA met its primary efficacy endpoint. In November 2009, we reported the 52 week data from the second Phase 3 clinical trial for BENLYSTA. This trial was called BLISS-76. In BLISS-76, BENLYSTA at a dose of 10 mg/kg also met its primary efficacy endpoint. Although the primary efficacy endpoint of the BLISS-76 study was assessed after 52 weeks, we continued to collect additional data from this trial for an additional 24 weeks. In April 2010, we reported the results of the BLISS-76 trial for these additional weeks. At week 76 in the BLISS-76 trial, BENLYSTA plus standard of care showed higher response rates compared with placebo plus standard of care, but this difference was not statistically significant. We do not know what, if any, effect these 76-week results may have on our ability to obtain regulatory approval for BENLYSTA.
 
In June 2010, we filed a BLA for BENLYSTA in the United States and our collaboration partner GSK submitted an MAA for BENLYSTA with the EMA. The Arthritis Advisory Committee of the U.S. FDA met on November 16, 2010 to consider the BENLYSTA BLA and voted 13-2 to recommend FDA approval. On December 3, 2010, the FDA extended the PDUFA target date for its priority review of the BLA from December 9, 2010 to March 10, 2011 and requested some additional information. We currently expect a decision by the EMA in the second half of 2011. Despite our determination that the results from the two BENLYSTA trials were positive and the affirmative vote for approval by the FDA Advisory Committee, FDA and EMA approval of BENLYSTA depends, among other things, on regulatory authorities finding the data from our clinical trials, our manufacturing protocol and controls and the composition of the product sufficient to support approval. We cannot offer any assurances or predict with any certainty that the FDA or EMA will grant marketing approval for BENLYSTA, or on the expected timeframes. Furthermore, regulatory approvals, even if obtained, may be limited to specific indications, limit the type of patients in which the drug may be used, or otherwise require specific warning or labeling language, any of which might reduce the commercial potential of BENLYSTA. Regulatory authorities are likely to condition BENLYSTA marketing approval on the conduct of specific post-marketing studies to further evaluate safety and efficacy, in either particular patient populations or general patient populations or both. The results of these studies, the discovery of previously unknown issues involving safety or efficacy or the failure to comply with post-approval regulatory requirements, including requirements with respect to manufacturing practices, reporting of adverse effects, advertising, promotion and marketing, may result in restrictions on the marketing of BENLYSTA or the withdrawal of BENLYSTA from the market.
 
Even if we receive FDA or EMA approval, we might not be successful in commercializing BENLYSTA. Should we fail to obtain FDA and/or EMA approval for BENLYSTA or fail to successfully commercialize BENLYSTA upon approval, our business, financial condition and results of operations would be materially adversely affected and the price of our common stock would likely decline.


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If we are unable to commercialize BENLYSTA or other product candidates we develop, we may not be able to recover our investment in our research, product development, manufacturing and marketing efforts.
 
We have made and are continuing to make substantial expenditures in advance of commercializing BENLYSTA and our other product candidates. We have invested significant time and resources to isolate and study genes and determine their functions. We devote substantial resources to developing proteins, antibodies and small molecules for the treatment of human disease. Before we can commercialize a product, we must rigorously test the product in the laboratory and complete extensive animal and human clinical studies. We are also devoting substantial resources to enhancing our manufacturing capabilities and to building our commercial supply inventories of BENLYSTA to support potential commercialization. We have and expect to continue to devote substantial resources to establish and maintain a marketing capability for BENLYSTA and any of our other products that are approved by the FDA or other regulatory authorities. These costs have increased as we near the potential launch of BENLYSTA. If BENLYSTA or other products we develop are not approved for commercial sale, we may be unable to recover the large investment we have made in research, development, manufacturing and marketing efforts, and our business and financial condition could be materially adversely affected.
 
We may be unable to successfully establish commercial manufacturing capability and may be unable to obtain required quantities of our product candidates for commercial use.
 
We have not yet manufactured any products that have been approved for commercial use. Except for raxibacumab and quantities of BENLYSTA manufactured to build our commercial supply inventory of BENLYSTA in support of commercialization, we have limited experience in manufacturing materials suitable for commercial use. The FDA must determine that our facilities comply with cGMPrequirements for commercial production and license them accordingly. We may not successfully establish sufficient manufacturing capabilities or manufacture our products economically or in compliance with cGMPs and other regulatory requirements. For example, we believe that we have sufficient manufacturing capacity to launch BENLYSTA if it is approved by the FDA and/or EMA and to supply commercial quantities of BENLYSTA for the first two or three years following launch. In June 2010, we entered into a manufacturing agreement with Lonza Sales AG (“Lonza”) pursuant to which Lonza will manufacture additional commercial quantities of BENLYSTA. However, this additional manufacturing capacity may not be available for 18 months or longer, if ever, due, in part, to the time required to obtain regulatory approvals for the manufacture of BENLYSTA in Lonza’s facility. If Lonza’s facility fails to obtain regulatory approval in a timely manner or at all, we may not be able to build or procure additional capacity in the required timeframe to meet commercial demand, and our revenues may accordingly be limited from BENLYSTA. Our revenues from BENLYSTA also will be limited if the demand for BENLYSTA exceeds our capacity to supply BENLYSTA to patients.
 
BENLYSTA is solely produced at our large-scale manufacturing facility in Rockville, Maryland and raxibacumab is solely produced at our small-scale manufacturing facility, which is also in Rockville, Maryland. Furthermore, the filling, finishing and packaging for both BENLYSTA and raxibacumab are solely performed by a single third party manufacturer. We cannot guarantee that one or more of these plants will not encounter problems, including but not limited to loss of power, equipment failure or viral or microbial contamination, which could adversely affect our ability to deliver adequate supply of one or more of these products to patients or customers.
 
If we or our third-party manufacturers fail to comply in a significant way with regulatory requirements imposed on our manufacturing activities, it could have a material adverse effect on our business, financial condition and results of operations.
 
We have previously engaged third-party manufacturers or utilized our collaboration partners’ manufacturing capabilities to manufacture product candidates and we expect to continue to do so in the future. If we use others to manufacture our products, we will depend on those parties to comply with cGMPs and other regulatory requirements and to deliver materials on a timely basis. In addition, because regulatory approval to manufacture a drug is generally site-specific, the FDA and other regulatory authorities will repeatedly inspect our manufacturing facilities and our current and future third-party manufacturers’ facilities for compliance with cGMPs. If we or our third-party manufacturers fail to comply with applicable regulatory requirements, a regulatory agency may: issue warning letters; suspend or withdraw our regulatory approval for approved or in-market products; seize or detain products or recommend a product recall; refuse to approve pending applications or supplements to approved applications filed


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by us; suspend any of our ongoing clinical trials; impose restrictions or obligations on our operations, including costly new manufacturing requirements; close our facilities or those of our contract manufacturers; revoke previously granted drug approvals under certain circumstances; or impose civil or criminal penalties. Any of these actions could delay our development of products, the submission of these products for regulatory approval or result in insufficient product quantity to support commercial demand. As a result, our business, financial condition and results of operations could be seriously harmed.
 
Because we currently have only a limited marketing capability and in light of various factors, we may be unable to price or sell any of our products effectively.
 
We can provide no assurance as to the price at which we may be able to sell any of our products, or that we will be able to price any of our products at a level that is consistent with other similar products. The prices for our products may be affected by various factors that could adversely affect our sales and profit margins, including economic analyses of the burden of the applicable disease, the perceived value of the product and third party reimbursement policies.
 
We currently do not have any marketed products, although we have sold raxibacumab to the U.S. Government. If we receive approval for products that can be marketed, we intend to market the products either independently or together with collaborators or strategic partners. GSK and others have co-commercialization rights with respect to certain of our products. If we decide to market any products, either independently or together with partners, we will incur significant additional expenditures and commit significant additional management resources to establish sales forces. For any products that we market together with partners, we will rely, in whole or in part, on the marketing capabilities of those parties. We may also contract with third parties to market certain of our products. In building a sales force in anticipation of the approval and commercial launch of BENLYSTA, we may be unable to retain an adequate number of qualified sales representatives and may encounter difficulties in retaining third parties to provide sales, marketing or distribution resources. Ultimately, we and our partners may not be successful in marketing our products.
 
If any product candidate for which we receive regulatory approval does not achieve broad market acceptance (including as a result of failing to differentiate our products from competitor products or as a result of failing to obtain reimbursement rates for our products that are competitive from the healthcare provider’s perspective), the revenues we generate from sales will be limited and our business may not be profitable.
 
Our success will depend in substantial part on the extent to which our products for which we obtain marketing approval from the FDA and comparable foreign regulatory authorities are accepted by the medical community and reimbursed by third-party payors, including government payors. The degree of market acceptance will depend upon a number of factors, including, among other things:
 
  •  our product’s perceived advantages over existing treatment methods (including relative convenience and ease of administration and prevalence and severity of any adverse events, including any unexpected adverse events of which we become aware after marketing approval);
 
  •  claims, limitations, warnings or other information in our product’s approved labeling;
 
  •  reimbursement and coverage policies of government and other third-party payors;
 
  •  pricing and cost-effectiveness;
 
  •  in the United States, the ability of group purchasing organizations, or GPOs (including distributors and other network providers), to sell our products to their constituencies;
 
  •  the establishment and demonstration in the medical community of the safety and efficacy of our products and our ability to provide acceptable evidence of safety and efficacy;
 
  •  availability of alternative treatments; and
 
  •  the prevalence of off-label substitution of biologically equivalent products.


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We cannot predict whether physicians, patients, healthcare insurers or maintenance organizations, or the medical community in general, will accept or utilize any of our products. Our efforts to educate the medical community and third-party payors regarding the benefits of our products may require significant resources and may not be successful in achieving our objectives. If our products are approved but do not achieve an adequate level of acceptance by these parties, we may not generate sufficient revenues from these products to become or remain profitable.
 
Changes in the health care system or reimbursement policies may result in a decline in our potential sales and a reduction in our expected revenue from our potential products.
 
The levels of revenues and profitability of biopharmaceutical companies like ours may be affected by the continuing efforts of government and third-party payers to contain or reduce the costs of health care through various means. For example, in certain foreign markets pricing or profitability of therapeutic and other pharmaceutical products is subject to governmental control. In the United States, there have been, and we expect that there will continue to be, a number of federal and state proposals to implement similar governmental control. Recently enacted United States legislation, including implementing rules and regulations, instituted significant changes to the United States healthcare system that could have a material adverse effect on our business, financial condition and profitability. We cannot predict what effects, if any, this legislation might have on our company and our products as this legislation is implemented over the next few years, nor can we predict whether additional legislative or regulatory proposals may be adopted in the future.
 
In addition, in the United States and elsewhere, sales of therapeutic and other pharmaceutical products depend in part on the availability of reimbursement to the consumer from third-party payers, such as government and private insurance plans. Third-party payers are increasingly challenging the prices charged for medical products and services. Any reimbursement granted may not be maintained or limits on reimbursement available from third parties may reduce the demand for or negatively affect the price and profitability of those products. This would likely have a material adverse effect on our business, financial condition and results of operations. Our ability to successfully commercialize our products and product candidates and the demand for our products depend, in part, on the extent to which reimbursement is available from such third-party payers.
 
Uncertainty exists about the reimbursement status of newly approved biopharmaceutical products. Healthcare providers and third-party payers use coding systems to identify diagnoses, procedures, services, and treatments. Proper coding is an integral component to receiving appropriate reimbursement for the administration of BENLYSTA and related services. Most payors recognize the Healthcare Common Procedure Coding System (“HCPCS”) Level II national codes to identify and report drugs and the American Medical Association Current Procedural Terminology, or CPT, codes to report professional services (including drug administration). As a new drug, BENLYSTA has not been assigned a permanent, unique HCPCS code and there is a lack of clarity as to the appropriate CPT Code that should be used for its administration. We have applied for a permanent HCPCS code and intend to obtain guidance from The Centers for Medicare & Medicaid Services (“CMS”) regarding CPT Code usage. Until a permanent HCPCS code is assigned for BENLYSTA, physicians may bill using an unclassified (miscellaneous) code. Use of miscellaneous codes typically causes claims processing delays and may lead to lower payments to physicians or other providers and may cause physicians or other providers to delay use of BENLYSTA until a permanent code has been assigned.
 
Under Medicare Part B, reimbursement for BENLYSTA will currently be computed based on manufacturer’s Average Sales Price (“ASP”). The Patient Protection and Affordable Care Act (“PPACA”) made changes to the statutory definition of ASP and CMS is in the process of interpreting and implementing those changes, which could result in lower payments for physician-administered drugs. If government and other third-party payers do not provide adequate coverage and reimbursement levels for BENLYSTA, its market acceptance may be materially adversely affected.


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Because raxibacumab is a product whose current sole purchaser is the U.S. Government, the sale of raxibacumab faces risks in addition to the risks generally associated with the sale of biopharmaceutical products, including political considerations, government contracting requirements and government spending policies.
 
Raxibacumab, a human monoclonal antibody developed for use in the treatment of anthrax disease, presents risks in addition to those associated with our other products. Numerous other companies and governmental agencies are known to be developing biodefense pharmaceuticals and related products to combat anthrax disease. These competitors may have financial or other resources greater than ours, they may have easier or preferred access to the likely distribution channels for biodefense products or they may develop products judged to have greater efficacy for biodefense. In addition, since the primary purchaser of biodefense products is the U.S. Government and its agencies, the success of raxibacumab will depend on government spending priorities, policies and pricing restrictions. In the case of the U.S. Government, executive or legislative action could attempt to impose production and pricing requirements on us. In the event of extreme urgency, the government might seek to compel us or we might ourselves choose to reallocate our production in ways that may not be economically beneficial to the company.
 
We have entered into a two-phase contract to supply raxibacumab to the U.S. Government, which may be terminated by the U.S. Government at any time. Under the first phase of the contract, we supplied ten grams of raxibacumab to the HHS for comparative in vitro and in vivo testing. Under the second phase of the contract, the U.S. Government ordered 20,001 doses of raxibacumab for the U.S. Strategic National Stockpile (“SNS”) for use in the treatment of anthrax disease. We completed delivery of these doses and the U.S. Government accepted our deliveries. In July 2009, the U.S. Government agreed to purchase 45,000 additional doses. As of December 31, 2010, we have delivered approximately 20,000 doses of this second order. We, therefore, have future deliveries to make and ongoing obligations under the contract, including the obligation to seek FDA approval.
 
In November 2009, we received a Complete Response Letter from the FDA related to our BLA for raxibacumab. In this letter, the FDA determined that it would not approve our BLA for raxibacumab in its present form and requested additional studies and data. Although the government has accepted shipment of raxibacumab subsequent to the receipt of the FDA’s Complete Response Letter, we cannot assure you that the government will continue to accept future shipments or place additional orders.
 
We will continue to face risks related to the requirements of the contract. If we are unable to meet our obligations associated with this contract, the U.S. Government will not be required to make future payments related to that order. Although we have received U.S. Government approval for two orders of raxibacumab, we cannot assure you we will receive additional orders.
 
COMPETITIVE RISKS
 
Our competitors may develop and market products that are, or are perceived as, less expensive, more effective, safer, easier to administer or reach the market sooner. This may diminish or eliminate the commercial success of any products we may commercialize.
 
The development and commercialization of biopharmaceutical products is highly competitive and subject to rapid technological advances. We will face competition with respect to all products we may develop or commercialize in the future from pharmaceutical and biotechnology companies worldwide. We also expect to face increasing competition from governments, universities and other non-profit research organizations. These institutions carry out a significant amount of research and development in the field of biologic technologies, and they are increasingly aware of the commercial value of their findings. As a result, they are demanding greater patent and other proprietary rights, as well as licensing and future royalty revenues.
 
Many of our competitors have significantly greater financial, research and development, intellectual property estates, regulatory, manufacturing, marketing, sales and other resources than we do. As a result, our competitors may succeed in developing their products before we do and obtaining approvals from the FDA or other regulatory agencies for their products more rapidly than we do. They may be able to devote greater resources to the development, manufacture, marketing and sale of their products, initiate or withstand substantial price competition


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or otherwise more successfully market their products. These competing products or technologies might render our technology or product candidates under development noncompetitive, uneconomical or obsolete.
 
Key factors affecting the success of any approved product include its efficacy, safety profile, drug interactions, method and frequency of administration, pricing, reimbursement and level of promotional activity relative to those of competing products. Competing products may provide greater therapeutic convenience or clinical or other benefits for a specific indication than our products, or may offer comparable performance at a lower cost. The introduction of more efficacious, safer, cheaper, or more convenient alternatives to our products could reduce our revenues and the value of our product development efforts.
 
We are aware of existing products and products in research or development by others that address the diseases we are targeting. Any of these products may compete with our product candidates. For example, a number of pharmaceutical and biotechnology companies are currently developing products targeting the same types of indications that we are targeting with BENLYSTA, and some of these competitors’ products have entered clinical trials.
 
If we successfully develop products but those products do not achieve and maintain market acceptance, our business will not be successful. Any reduction in demand for our products as a result of a competing product could lead to reduced revenues, reduced margins, reduced levels of profitability, and loss of market share for our products. These competitive pressures could adversely affect our business and operating results.
 
If our products are approved and marketed, we may also face risks to our profitability and financial condition from generic drug or biosimilar manufacturers.
 
The United States has recently enacted legislation establishing a regulatory pathway for follow-on biologics, also known as biosimilars. This and similar regulatory and legislative activity in other countries may make it easier for generic drug manufacturers to manufacture and sell biological drugs similar or identical to BENLYSTA and raxibacumab which might affect the profitability or commercial viability of our products. An accelerated route to market for generic versions of small molecule drugs was established in the United States with the passage of the Hatch-Waxman Amendments in 1984, which also provides five years of exclusivity for small molecule drugs with additional exclusivity under certain circumstances. The passage of the Biologics Price Competition and Innovation Act (“BPCIA”) in March 2010 established a similar pathway for FDA approval of a follow-on biologic that provides twelve years of exclusivity for the original biologic and an additional six month exclusivity period if certain pediatric studies are conducted. The European Medicines Agency has issued guidelines for approving products through an abbreviated pathway under which more than ten biosimilars have been approved. European legislation provides ten years of exclusivity for original drugs, including biologics, and an additional one year of exclusivity for obtaining marketing approval for certain additional indications. If a generic or biosimilar version of one of our products were approved, it could have a material adverse effect on the sales and gross profits of the product and adversely affect our business and operating results.
 
 
Our product development efforts depend on new technologies, which may not prove successful.
 
Our development of new products depends on the use of cutting-edge, recently discovered technologies that may never have been successfully utilized in existing commercial products. As a result, our product development efforts involve risks of failure inherent in the use of innovative and unproven technologies and the risks associated with drug development generally. These risks include the possibility that:
 
  •  these technologies or any or all of the molecules based on these technologies may be ineffective or toxic and, therefore fail to receive or retain necessary regulatory clearances;
 
  •  the products, even if safe and effective, may be difficult to manufacture on a large scale or uneconomical to market;
 
  •  proprietary rights of third parties may prevent us or our collaborators from exploiting technologies or marketing products; and
 
  •  third parties may market superior or equivalent products.


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We have limited experience in developing and commercializing products, and we may be unsuccessful in our efforts to do so.
 
Although we are conducting human studies with respect to a number of products, we may not be successful in developing or commercializing these or other products. Our ability to develop and commercialize products based on proteins, antibodies and small molecules will depend on our abilities to:
 
  •  successfully complete laboratory testing and human studies;
 
  •  obtain and maintain necessary intellectual property rights to our products;
 
  •  obtain and maintain necessary regulatory approvals related to the efficacy and safety of our products;
 
  •  maintain production facilities meeting all regulatory requirements or enter into arrangements with third parties to manufacture our products on our behalf; and
 
  •  deploy sales and marketing resources appropriately, efficiently and effectively or enter into arrangements with third parties to provide these functions.
 
We are currently a late-stage development company, and we cannot assure you that we will be able to develop products that will become commercially successful or that we will achieve profitability from such products.
 
We will continue to incur substantial expenditures relating to research, development, clinical studies and manufacturing efforts. Depending on the stage of development, our products may require significant further research, development, testing and regulatory approvals. Even if regulatory approval is obtained for the commercial sale of a product, it could take considerable time following approval, if ever, before we are likely to receive continuing revenue from product sales or substantial royalty payments. Until such time, we expect to continue to incur losses and we cannot assure you that we will ever become profitable on a sustainable basis.
 
We are continually evaluating our business strategy and may modify this strategy in light of developments in our business and other factors.
 
Our ability to discover and develop new products will depend on our internal research capabilities and our ability to acquire products. Although we continue to conduct research and development activities on products and have increased our activities in this area, our limited resources may not be sufficient to discover and develop new drug candidates.
 
We continue to evaluate our business strategy and, as a result, may modify our strategy in the future. In this regard, we may, from time to time, focus our product development efforts on different products or may delay or halt the development of various products, as we did with ZALBIN in 2010. In addition, as a result of changes in our strategy, we may also change or refocus our existing drug discovery, development, commercialization and manufacturing activities. This could require changes in our facilities and personnel and the restructuring of various financial arrangements. We cannot assure you that any product development changes that we implement will be successful.
 
Clinical trials for our products are expensive and protracted and their outcome is uncertain, and we must invest substantial amounts of time and money that may not yield viable products.
 
Conducting clinical trials is a lengthy, time-consuming and expensive process. Before obtaining regulatory approvals for the commercial sale of any product we must demonstrate through laboratory, animal and human studies that the product is both effective and safe for use in humans. We will incur substantial expense and devote a significant amount of time to conducting ongoing trials and initiating new trials.
 
Before clinical testing in humans can begin, a drug must be subject to rigorous preclinical testing and documentation. This documentation must be reviewed by the FDA as part of an Investigational New Drug Application (“IND”). Data obtained from tests are susceptible to varying interpretations which may delay, limit or prevent regulatory approval. Furthermore, regulatory authorities may refuse or delay approval as a result of many factors, including changes in regulatory policy during the period of product development. Even if an IND is


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approved, preclinical studies do not predict clinical success. Many potential drugs have shown promising results in early testing but subsequently failed to obtain necessary regulatory approvals.
 
Completion of clinical trials may take many years. The time required varies substantially according to the type, complexity, novelty and intended use of the product candidate. The progress of clinical trials is monitored by both the FDA and independent data monitoring committees which may require the modification, suspension or termination of a trial if it is determined to present excessive risks to patients. Our rate of commencement and completion of clinical trials may be delayed by many factors, including:
 
  •  our inability to manufacture sufficient quantities of materials for use in clinical trials;
 
  •  unavailability or variability in the number and types of patients for each study;
 
  •  difficulty in maintaining contact with patients after treatment, resulting in incomplete data;
 
  •  safety issues or side effects;
 
  •  ineffectiveness of products during the clinical trials; or
 
  •  government or regulatory delays.
 
Data obtained from our clinical trials may not be sufficient to support an application for regulatory approval without further studies.
 
Studies conducted by us or by third parties on our behalf may not demonstrate sufficient effectiveness and safety to obtain the requisite regulatory approvals for these or any other potential products. For example, we have submitted BLAs to the FDA for raxibacumab, ZALBIN and BENLYSTA, but the studies we have conducted to date may not be sufficient to obtain FDA approval. For example, we had been developing ZALBIN for many years. In 2010, we and our collaboration partner Novartis decided to end further development of ZALBIN in anticipation of a Complete Response Letter from the FDA in which we expected the FDA to conclude that our existing ZALBIN data would not support approval of our BLA. Additionally, in November 2009, we received a Complete Response Letter from the FDA related to our BLA for raxibacumab. In this letter, the FDA determined that it could not approve the BLA in its present form and requested additional studies and data that would be needed prior to the FDA making a decision as to whether or not to approve the raxibacumab BLA. For raxibacumab, we may not be able to complete the requested studies or to generate the required data in a timely manner, if at all. If we do not complete the additional studies and generate the additional data within the time required by the FDA, we may be required to withdraw our existing BLA and resubmit our BLA after completion of such studies. This will start a new review cycle. Even if we can complete such studies and generate such data, the studies and data may not be sufficient for FDA approval.
 
For BENLYSTA, we have completed two large-scale, multi-center Phase 3 clinical trials, in addition to earlier Phase 1 and Phase 2 clinical trials. See our first risk factor under the heading “Commercial Risks” for additional discussion regarding the data from these trials. In June 2010, we filed a BLA in the United States and our collaboration partner GSK submitted a Marketing Authorization Application with the European Medicines Agency. The FDA has assigned a PDUFA target date of March 10, 2011 and requested some additional information. We currently expect a decision by the EMA in the second half of 2011. We may not be able to obtain FDA, EMA or other regulatory approval of BENLYSTA. Even if FDA, EMA or other regulatory approval is obtained, it may be limited to specific indications, limit the type of patients in which the drug may be used, or otherwise require specific warnings or labeling language, any of which might reduce the commercial potential of BENLYSTA.
 
We depend on third parties to conduct many of our clinical trials, and we may encounter delays in or lose some control over our efforts to develop products.
 
We are dependent on third-party research organizations to enroll qualified patients and conduct, supervise and monitor many of our clinical trials. Our reliance on these service providers does not relieve us of our regulatory responsibilities, including ensuring that our clinical trials are conducted in accordance with good clinical practice regulations and the plan and protocols contained in the relevant regulatory application. In addition, these


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organizations may not complete activities on schedule or may not conduct our preclinical studies or clinical trials in accordance with regulatory requirements or our trial design. If we are unable to obtain any necessary services on acceptable terms or if these service providers do not successfully carry out their contractual duties or meet expected deadlines, our efforts to obtain regulatory approvals for our product candidates may be delayed or prevented.
 
 
Our plan to use collaborations to leverage our capabilities may not be successful if we are unable to integrate our partners’ capabilities with our operations or if our partners’ capabilities do not meet our expectations.
 
As part of our strategy, we intend to continue to evaluate strategic partnership opportunities. In order for our future collaboration efforts to be successful, we must first identify partners whose capabilities complement and integrate well with ours. Technologies to which we gain access may prove ineffective or unsafe. Our current agreements that grant us access to such technology may expire and may not be renewable or could be terminated if we or our partners do not meet our obligations. These agreements are subject to differing interpretations and we and our partners may not agree on the appropriate interpretation of specific requirements. In addition, our partners, among other things, may prove difficult to work with, less skilled than we originally expected or unable to satisfy their financial commitments to us. Past collaborative successes are no assurance of potential future success.
 
We currently depend on our collaboration partners for substantial revenue. We may not become profitable on a sustainable basis if we cannot increase the revenue from our collaboration partners or other sources.
 
We have received substantial revenue from payments made under collaboration agreements with Novartis and GSK, and to a lesser extent, other agreements. Our agreement with Novartis has been terminated. The research term of our initial GSK collaboration agreement and many of our other collaboration agreements expired in 2001. None of the research terms of these collaboration agreements was renewed and we may not be able to enter into additional collaboration agreements. While our partners under our initial GSK collaboration agreement have informed us that they have been pursuing research programs involving different genes for the creation of small molecule, protein and antibody drugs, we cannot assure you that any of these programs will be continued or will result in any approved drugs. If our partners are unsuccessful in such research and development efforts, we will not receive any revenue from the development or commercialization of these assets.
 
Under our present collaboration agreements, we are entitled to certain development and commercialization payments based on our development of the applicable product or certain milestone and royalty payments based on our partners’ development of the applicable product. We may not receive payments under these agreements if we or our collaborators fail to:
 
  •  develop marketable products;
 
  •  obtain regulatory approvals for products; or
 
  •  successfully market products.
 
Further, circumstances could arise under which one or more of our collaboration partners may allege that we breached our agreement with them and, accordingly, seek to terminate our relationship with them. Our collaboration partners may also terminate these agreements without cause or if competent scientific evidence or safety risks do not justify moving the applicable product forward. If any one of these agreements terminates, this could adversely affect our ability to commercialize our products and harm our business.
 
If one of our collaborators pursues a product that competes with our products, there could be a conflict of interest and we may not receive expected milestone or royalty payments.
 
Each of our collaborators is developing a variety of products, some with other partners. Our collaborators may pursue existing or alternative technologies to develop drugs targeted at the same diseases instead of using our licensed technology to develop products in collaboration with us. Our collaborators may also develop products that


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are similar to or compete with products they are developing in collaboration with us. If our collaborators pursue these other products instead of our products, we may not receive milestone or royalty payments.
 
Our efforts to acquire other biotechnology companies or in-license and develop additional product candidates may not be successful, which could have a material adverse effect on our business, financial condition and results of operations.
 
Our business strategy includes the acquisition of other biotechnology companies or in-license of additional product candidates to complement and supplement our existing product pipeline, and we may acquire such companies and in-license additional product candidates that have demonstrated positive pre-clinical and/or clinical data. We have certain criteria by which we assess any acquisition or in-license and we may not be successful in identifying, effectively evaluating, acquiring or in-licensing, and developing additional product candidates, or on acceptable terms. In addition, product in-licensing involves inherent risks, including uncertainties due to matters that may affect the successful development or commercialization of the in-licensed product as well as the possibility of contractual disagreements with regard to terms such as patent rights, license scope or termination rights. Competition for attractive product opportunities is intense and may require us to devote substantial resources, both managerial and financial, to an opportunity that may not result in a successfully developed, or commercialized, product. Moreover, the cost of acquiring other companies or in-licensing product candidates could be substantial and in order to acquire companies or new products we may need to raise additional financing, which if it involves the issuance of additional shares of our common stock would dilute existing stockholders. If we are unsuccessful in our efforts to acquire other companies or in-license and develop additional product candidates, or if we acquire or license unproductive assets, it could have a material adverse effect on the growth of our business.
 
In order to achieve the anticipated benefits of an acquisition, we must integrate the acquired company’s business, technology and employees in an efficient and effective manner. The successful combination of companies in a rapidly changing biotechnology industry may be more difficult to accomplish than in other industries. The combination of two companies requires, among other things, integration of the companies’ respective technologies and research and development efforts. We cannot assure you that this integration will be accomplished smoothly or successfully. The difficulties of integration may be increased by any need to coordinate geographically separated organizations and address differences in corporate cultures and management philosophies. The integration of certain operations will require the dedication of management resources and, accordingly, may temporarily distract attention from the day-to-day operations of the combined companies. The business of the combined companies may also be disrupted by employee retention uncertainty and lack of focus during integration. The inability of management to integrate successfully the operations of the two companies, in particular, the integration and retention of key personnel, or the inability to integrate successfully two technology platforms, could have a material adverse effect on our business, results of operations and financial condition.
 
 
Because we are subject to extensive and changing government regulatory requirements, we may not be able to obtain regulatory approval of our products in a timely manner, if at all.
 
Regulations in the United States and other countries have a significant impact on our research, product development and manufacturing activities and will be a significant factor in the marketing of our products. All of our products require regulatory approval prior to commercialization. In particular, our products are subject to rigorous preclinical and clinical testing and other premarket approval requirements by the FDA and similar regulatory authorities in other regions, such as Europe and Asia. Various statutes and regulations also govern or influence the manufacturing, safety, labeling, storage, record keeping and marketing of our products. The lengthy process of seeking these approvals, and the subsequent compliance with applicable statutes and regulations, require the expenditure of substantial resources. Any failure by us to obtain, or any delay in obtaining, regulatory approvals could materially adversely affect our ability to commercialize our products in a timely manner, or at all.
 
United States Regulatory Approval.  Before a product can be marketed in the United States, the results of the preclinical and clinical testing must be submitted to the FDA for approval. This submission will be either a new drug application (“NDA”) or a biologics license application (“BLA”), depending on the type of drug. In responding to an application, the FDA may grant marketing approval, request additional information or deny the application if it


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determines that the application does not provide an adequate basis for approval. We cannot assure you that any approval required by the FDA will be obtained on a timely basis, or at all.
 
In June 2010 we filed a BLA with the FDA for BENLYSTA. The Arthritis Advisory Committee of the FDA met on November 16, 2010 to consider the BENLYSTA BLA and voted 13-2 to recommend FDA approval. On December 3, 2010, the FDA extended the PDUFA target date for its priority review of the BLA from December 9, 2010 to March 10, 2011 and requested some additional information. Even with the positive recommendation of the Advisory Committee, the FDA may determine that our BLA is insufficient to support marketing approval or may deny our BLA, either of which would materially adversely affect our results of operations and business. Furthermore, regulatory approvals, even if obtained, may be limited to specific indications, limit the type of patients in which the drug may be used, or otherwise require specific warning or labeling language, any of which might reduce the commercial potential of BENLYSTA and materially adversely affect our results of operations and business.
 
The FDA may condition marketing approval on the conduct of specific post-marketing studies to further evaluate safety and efficacy, including in particular patient populations. Rigorous and extensive FDA regulation of pharmaceutical products continues after approval, particularly with respect to compliance with cGMPs, reporting of adverse effects, advertising, promotion and marketing. Discovery of previously unknown problems or failure to comply with the applicable regulatory requirements may result in restrictions on the marketing of a product or withdrawal of the product from the market as well as possible civil or criminal sanctions, any of which could materially adversely affect our business. In addition, such post-marketing studies may be expensive, time-consuming and difficult to complete in a timely fashion, any of which may limit our ability to develop other indications of existing products as well as indications for new products.
 
Foreign Regulatory Approvals.  We must obtain regulatory approval by governmental agencies in other countries prior to commercialization of our products in those countries. Foreign regulatory systems may be rigorous, costly and uncertain. In June 2010, our collaboration partner GSK submitted an MAA for BENLYSTA with the European Medicines Agency. We currently expect a decision by the EMA in the second half of 2011, but can provide no assurance that the EMA will grant regulatory approval for BENLYSTA on such timeframe, if at all. In addition, regulatory approval, even if obtained, may be limited to specific indications, limit the type of patients in which the drug may be used, or otherwise require specific warning or labeling language, any of which might reduce the commercial potential of BENLYSTA.
 
To date, neither we nor any of our collaboration partners have received marketing approval for any product candidate resulting from our research and development efforts. Because we may never be able to obtain any such approval, it is possible that we may not be able to generate any product revenue other than with respect to raxibacumab.
 
Although we have active BLAs for two of our product candidates (raxibacumab and BENLYSTA), we cannot assure you that these products will receive marketing approval. It is possible that we will not receive FDA marketing approval for any of our products. All products being developed by our collaboration partners will also require additional research and development, preclinical studies and extensive clinical trials and regulatory approval prior to any commercial sales. In some cases, the length of time that it takes for our collaboration partners to achieve various regulatory approval milestones may affect the payments that we are eligible to receive under our collaboration agreements. We and our collaboration partners may need to successfully address a number of technical challenges in order to complete development of our products. Moreover, these products may not prove effective in treating any disease or may prove to have undesirable or unintended side effects, toxicities or other characteristics that may preclude obtaining regulatory approval or prevent or limit commercial use.
 
If we receive marketing approval for BENLYSTA but are unable to expand label usage of BENLYSTA, we may not recognize the full value of the product and there may be adverse effects on our expected financial and operating results.
 
BENLYSTA is a human monoclonal antibody that recognizes and inhibits the biological activity of B-lymphocyte stimulator, or BLyS, and is being developed as a potential treatment for SLE. If the FDA or other regulatory agencies approve BENLYSTA for the treatment of SLE, we and our partner intend to conduct new


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clinical trials for additional approved, or labeled uses, of BENLYSTA, such as vasculitis, post-renal transplant and other autoimmune indications and seek expansion of the labeled uses in the U.S. and in other countries. However, we may be unable to obtain approval for such label expansion, in full or in part. If we are not able to obtain approval for expansion of the labeled uses for BENLYSTA, sales of BENLYSTA may be limited.
 
We are subject to environmental, health and safety laws that may restrict us from conducting our business in the most economically advantageous manner.
 
We are subject to various laws and regulations relating to safe working conditions, laboratory and manufacturing practices, the experimental use of animals, emissions and wastewater discharges, and the use and disposal of hazardous or potentially hazardous substances used in connection with our research, including radioactive compounds and infectious disease agents. We also cannot accurately predict the extent that regulations that might result from any future legislative or administrative action might affect our business. Any of these laws or regulations could cause us to incur additional expense or restrict our operations.
 
 
If our patent applications do not result in issued patents or if patent laws or the interpretation of patent laws change, our competitors may be able to obtain rights to and commercialize our discoveries.
 
Our pending patent applications, including those covering full-length genes and their corresponding proteins, may not result in the issuance of any patents. Our applications may not be sufficient to meet the statutory requirements for patentability in all cases or may be subject to challenge if they do issue. Important legal issues remain to be resolved as to the extent and scope of available patent protection for biotechnology products and processes in the United States and other important markets outside the United States, such as Europe and Japan. For example, a recent U.S. district court decision involving Myriad Genetics expressed concerns regarding the patentability of isolated human genes and gene-based diagnostic methods; this case is on appeal to the U.S. Court of Appeals for the Federal Circuit. In addition, the United States Congress is considering significant changes to U.S. intellectual property laws that could affect the extent and scope of existing protections for biotechnology products and processes. Foreign markets may not provide the same level of patent protection as provided under the U.S. patent system. We expect that litigation or administrative proceedings will likely be necessary to determine the validity and scope of certain of our and others’ proprietary rights. We are currently involved in a number of litigation and administrative proceedings relating to the scope of protection of our patents and those of others in the United States and the rest of the world.
 
On January 25, 2011, HGS filed suit against Genentech, Inc., and City of Hope in the United States District Court for the District of Delaware seeking a ruling that US Patent No. 6,331,415 (the “Cabilly II Patent”) is invalid, unenforceable, and not infringed by BENLYSTA. In addition, in a paper filed with the United States District Court for the Central District of California on January 28, 2011, Genentech sought leave to add BENLYSTA to an ongoing litigation between GSK and Genentech in that court related to GSK’s product ARZERRAtm (ofatumumab).
 
We have also been involved in a number of interference proceedings brought by the United States Patent and Trademark Office (“PTO”) and may be involved in additional interference proceedings in the future. These proceedings determine the priority of inventions and, thus, the right to a patent for technology in the U.S.
 
We are also involved in proceedings in connection with foreign patent filings, including opposition and revocation proceedings, and may be involved in other such proceedings in the future. For example, we are involved in European opposition proceedings regarding an issued patent of Biogen Idec that HGS and GSK have licensed. In this opposition, the European Patent Office (“EPO”) found Biogen Idec’s claims to a method of treating autoimmune diseases using an antibody to BLyS (such as BENLYSTA), to be valid. Merck Serono SA has appealed this decision to an EPO Technical Board of Appeal. A hearing is expected in late 2011. We are also involved in a revocation proceeding brought by Eli Lilly and Company with respect to our United Kingdom (“UK”) patent related to BLyS compositions, including antibodies. Although an EPO Technical Board of Appeal held that the corresponding European patent was valid, the UK Court of Appeal disagreed and upheld a lower UK court’s ruling that the UK patent was invalid. The UK Supreme Court granted HGS permission to appeal this decision. The appeal is expected to be heard in July 2011.


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In addition, Genentech, Inc. opposed our European patent related to products based on TRAIL Receptor 1 (such as HGS-ETR1). On October 5, 2010, the Opposition Division of the EPO upheld our patent; no appeal was filed by the final deadline.
 
We cannot assure you that we will be successful in any of these proceedings. Moreover, any such litigation or proceeding may result in a significant commitment of resources in the future and could force us to do one or more of the following: cease selling or using any of our products that incorporate the challenged intellectual property, which would adversely affect our revenue; obtain a license from the holder of the intellectual property right alleged to have been infringed, which license may not be available on reasonable terms, if at all; and redesign our products to avoid infringing the intellectual property rights of third parties, which may be time-consuming or impossible to do. In addition, such litigation or proceeding may allow others to use our discoveries or develop or commercialize our products. Changes in, or different interpretations of, patent laws in the United States and other countries may result in patent laws that allow others to use our discoveries or develop and commercialize our products or prevent us from using or commercializing our discoveries and products. We cannot assure you that the patents we obtain or the unpatented technology we hold will afford us significant commercial protection.
 
If others file patent applications or obtain patents similar to ours, then the United States Patent and Trademark Office may deny our patent applications, or others may restrict the use of our discoveries.
 
We are aware that others, including universities, government agencies and companies working in the biotechnology and pharmaceutical fields, have filed patent applications and have been granted patents in the United States and in other countries that cover subject matter potentially useful or necessary to our business. Some of these patents and patent applications claim only specific products or methods of making products, while others claim more general processes or techniques useful in the discovery and manufacture of a variety of products. The risk of third parties obtaining additional patents and filing patent applications will continue to increase as the biotechnology industry expands. We cannot predict the ultimate scope and validity of existing patents and patents that may be granted to third parties, nor can we predict the extent to which we may wish or be required to obtain licenses to such patents, or the availability and cost of acquiring such licenses. To the extent that licenses are required, the owners of the patents could bring legal actions against us to claim damages or to stop our manufacturing and marketing of the affected products. We believe that there will continue to be significant litigation in our industry regarding patent and other intellectual property rights. Such litigation could consume a substantial portion of our resources.
 
Because issued patents may not fully protect our discoveries, our competitors may be able to commercialize products similar to those covered by our issued patents.
 
Issued patents may not provide commercially meaningful protection against competitors and may not provide us with competitive advantages. Other parties may challenge our patents or design around our issued patents or develop products providing effects similar to our products. In addition, others may discover uses for genes, proteins or antibodies other than those uses covered in our patents, and these other uses may be separately patentable. The holder of a patent covering the use of a gene, protein or antibody for which we have a patent claim could exclude us from selling a product for a use covered by its patent.
 
We rely on our collaboration partners to seek patent protection for the products they develop based on our research.
 
A significant portion of our future revenue may be derived from royalty payments from our collaboration partners. These partners face patent protection issues similar to those that we and other biotechnology or pharmaceutical companies face. As a result, we cannot assure you that any product developed by our collaboration partners will be patentable, and therefore, revenue from any such product may be limited, which would reduce the amount of any royalty payments. We also rely on our collaboration partners to effectively prosecute their patent applications. Their failure to obtain or protect necessary patents could also result in a loss of royalty revenue to us.


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If we are unable to protect our trade secrets, others may be able to use our secrets to compete more effectively.
 
We may not be able to meaningfully protect our trade secrets. We rely on trade secret protection to protect our confidential and proprietary information. We believe we have acquired or developed proprietary procedures and materials for the production of proteins and antibodies. We have not sought patent protection for these procedures. While we have entered into confidentiality agreements with employees and collaborators, we may not be able to prevent their disclosure of these data or materials. Others may independently develop substantially equivalent information and processes.
 
Other parties may seek to cancel or revoke our trademarks and/or restrict the use of our trademarks.
 
Our trademarks, including BENLYSTA, are important to us and are generally covered by trademark applications or registrations in the United States and in other countries. Trademark protection varies in accordance with local law, and continues in some countries for as long as the mark is used and in other countries for as long as the mark is registered. Trademark registrations are generally for fixed but renewable terms.
 
Our trademark applications may not be sufficient to meet the statutory requirements for registration in all cases or may be subject to challenge if they are registered. Other parties may seek to cancel or revoke our trademarks and/or restrict the use of our trademarks through litigation or administrative proceedings in both the United States and in the rest of the world. We cannot assure you that we will be successful in any such proceedings. Moreover, any such litigation or proceeding may require us to modify our trademarks or rebrand our products to avoid infringing the trademark rights of third parties This may be time-consuming and could adversely affect our revenue.
 
 
Because of our substantial indebtedness and lease obligations, we may be unable to adjust our strategy to meet changing conditions in the future.
 
As of December 31, 2010, we had convertible subordinated debt of $372.9 million ($403.8 million on a face value basis) and a long-term lease financing for our large-scale manufacturing facility of $250.5 million. During the fiscal year ended December 31, 2010 we made cash interest payments on our convertible subordinated debt of $9.1 million. During the fiscal year ended December 31, 2010 we made cash payments on our long-term lease financing of $24.5 million. In addition, we have operating leases, primarily our long-term operating lease for our headquarters, for which we made cash payments of $20.9 million during the fiscal year ended December 31, 2010. Our substantial debt and long-term lease obligations will have several important consequences for our future operations. For instance:
 
  •  payments of interest on, and principal of, our indebtedness and our long-term lease obligations will be substantial and may exceed then current income and available cash;
 
  •  we may be unable to obtain additional future financing for marketing efforts, continued clinical trials, capital expenditures, acquisitions or general corporate purposes;
 
  •  we may be unable to withstand changing competitive pressures, economic conditions and governmental regulations; and
 
  •  we may be unable to make acquisitions or otherwise take advantage of significant business opportunities that may arise.
 
We may not have adequate financial resources available to repay our Convertible Subordinated Notes due 2011 (“2011 Notes”) and our Convertible Subordinated Notes due 2012 (“2012 Notes”) at maturity.
 
As of December 31, 2010, we had $403.8 million in face value of convertible subordinated debt outstanding, with $197.1 million and $206.7 million due in 2011 and 2012, respectively. Those notes are convertible into our common stock at conversion prices of approximately $15.55 and $17.78 per share, respectively. If our stock price does not exceed the applicable conversion price of those notes, upon maturity, we may need to pay the note holders in cash or restructure some or all of the debt. Our recent stock price has been above the conversion price and we believe we currently have sufficient unrestricted cash should note holders seek cash payment upon maturity.


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However, since there are other potential uses for these funds and it may be one or more years, if ever, before we are likely to generate significant positive cash flow from operations, we may not have enough cash, cash equivalents, short-term investments and marketable securities available to repay our debt upon maturity.
 
To become a successful biopharmaceutical company, we may need additional funding. If we do not obtain this funding on acceptable terms, we may not be able to generate sufficient revenue to repay our debt, to continue our research and development efforts or to launch and successfully market our products.
 
We continue to expend substantial funds on our research and development programs and human studies on current and future product candidates. We also expect to expend significant funds to support pre-launch and commercial marketing activities, to acquire other biotechnology companies or in-license and develop additional product candidates, and to enhance our manufacturing capacity. We may need additional financing to fund these activities. We may not be able to obtain additional financing on acceptable terms, if at all. If we raise additional funds by issuing equity securities, equity-linked securities or debt securities, the new equity securities may dilute the interests of our existing stockholders and the new debt securities may contain restrictive financial covenants.
 
Our need for additional funding will depend on many factors, including, without limitation:
 
  •  the amount of revenue or cost sharing, if any, that we are able to obtain from our collaborations, any approved products, and the time and costs required to achieve those revenues;
 
  •  the timing, scope and results of preclinical studies and clinical trials;
 
  •  the size and complexity of our development programs;
 
  •  the timing and costs involved in obtaining regulatory approvals;
 
  •  the timing and costs of increasing our manufacturing capacity;
 
  •  the costs of commercializing our products, including marketing, promotional and sales costs;
 
  •  the commercial success of our products;
 
  •  our stock price;
 
  •  our ability to establish and maintain collaboration partnerships;
 
  •  competing technological and market developments;
 
  •  the costs involved in filing, prosecuting, enforcing and defending patent claims;
 
  •  the costs involved in bringing and defending against litigation; and
 
  •  scientific progress in our research and development programs.
 
If we are unable to raise additional funds, we may, among other things:
 
  •  delay, scale back or eliminate some or all of our research and development programs;
 
  •  delay, scale back or eliminate some or all of our commercialization activities;
 
  •  lose rights under existing licenses;
 
  •  relinquish more of, or all of, our rights to product candidates on less favorable terms than we would otherwise seek; and
 
  •  be unable to operate as a going concern.
 
Our short-term investments, marketable securities and restricted investments are subject to certain risks that could materially adversely affect our overall financial position.
 
We invest our cash in accordance with an established internal policy and customarily in instruments which historically have been highly liquid and carried relatively low risk. However, the capital and credit markets have experienced extreme volatility and disruption. Over the past several years, the volatility and disruption reached unprecedented levels. We maintain a significant portfolio of investments in short-term investments, marketable debt


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securities and restricted investments, which are recorded at fair value. Certain of these transactions expose us to credit risk in the event of default by the issuer. To seek to minimize our exposure to credit risk, we invest in securities with strong credit ratings and have established guidelines relative to diversification and maturity with the objective of maintaining safety of principal and liquidity. We do not invest in derivative financial instruments or auction rate securities, and we generally hold our investments in debt securities until maturity. In recent years, certain financial instruments, including some of the securities in which we have invested, have sustained downgrades in credit ratings and some high quality short-term investment securities have suffered illiquidity or events of default. Deterioration in the credit market may have an adverse effect on the fair value of our investment portfolio. Should any of our short-term investments, marketable securities or restricted investments lose significant value or have their liquidity impaired, it could materially and adversely affect our overall financial position by imperiling our ability to fund our operations and forcing us to seek additional financing sooner than we would otherwise. Such financing may not be available on commercially attractive terms, or at all.
 
We have only a limited amount of insurance that protects us only from certain business risks, which could leave us exposed to significant, uninsured liabilities.
 
We do not carry insurance for all categories of risk that our business may encounter. We currently maintain general liability, property, auto, workers’ compensation, product liability, fiduciary and directors’ and officers’ insurance policies. Potential risks and liabilities may not be covered by our insurance policies, insurers may dispute coverage, or the amount of insurance may not be enough to cover claims and liabilities. We may be unable to maintain existing insurance, obtain new coverage, or increase limits in the future, and may be unable to do so on favorable terms. Any significant uninsured liability may require us to pay substantial amounts, which would adversely affect our cash position and results of operations.
 
We may be subject to product liability or other litigation that could result in a diminution or inefficient allocation of our critical resources, delay the implementation of our business strategy, affect our reputation and, if successful, materially and adversely harm our business and financial condition.
 
We face an inherent risk of product liability claims in the event that the use of our products caused, or is alleged to have caused, adverse side effects (including death) or drug interactions. It may be that we will not understand these risks until the drug has been administered to patients for some time. We may be subject to product liability claims that can be costly to defend and may result in large judgments or settlements against us. Any insurance we obtain may not provide adequate coverage against any such asserted claims and we may therefore be exposed to significant litigation costs and liabilities, which could exceed our total assets and our ability to pay. In addition, negative publicity associated with any claims, regardless of their merit, may decrease the future demand for our products.
 
We may from time to time become involved in various lawsuits and legal proceedings that arise in the ordinary course of our business. Any litigation to which we are subject could require significant involvement of our senior management and may divert management’s attention from our business and operations. Litigation costs or an adverse result in any litigation that may arise from time to time may materially adversely impact our business, operating results and financial condition.
 
OTHER BUSINESS RISKS
 
Our success is dependent on our continued ability to attract, motivate and retain key personnel. If we lose or are unable to attract key management or other personnel, it could have a material adverse effect on our business, financial condition and results of operations.
 
Much of our progress to date has resulted from the particular scientific, technical and management skills of personnel available to us. Competition for qualified employees is intense among pharmaceutical and biotechnology companies. Part of being able to attract, motivate and retain key personnel is our ability to offer a competitive compensation package, including cash bonus and equity incentive awards. Our ability to offer attractive equity incentive awards in the future may be limited or nonexistent if we are unable to increase the number of shares available under our stock incentive plan. If we are unable to provide a compensation package that is competitive within our industry, or otherwise successfully compete to attract, motivate and retain qualified management and


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other highly skilled employees, this could materially adversely affect the implementation of our business strategy, delay the commercialization of our products or prevent us from becoming profitable.
 
We may be unable to fulfill the terms of our contract manufacturing agreements with our customers for manufacturing process development and supply of selected biopharmaceutical products.
 
To more fully utilize our existing manufacturing capacity, we have entered into agreements with customers pursuant to which we have agreed to develop manufacturing processes for, and manufacture clinical and commercial supplies of, certain biopharmaceutical products, and may enter into similar agreements with other potential customers in the future. Our receipt of revenue under these agreements is dependent on our ability to successfully manufacture such products. If we are unable to develop a validated manufacturing process for such products or are otherwise unable to deliver product that meets the manufacturing specifications, we may not receive any additional payments under such agreements. Even if successful, we may not be able to enter into additional agreements with other customers. Any current or future customers may decide to discontinue the products contemplated under these agreements, and therefore we may not receive revenue from these agreements.
 
RISKS RELATED TO OWNERSHIP OF OUR COMMON STOCK
 
The market price of our common stock may be lower or more volatile than you expected.
 
Our stock price, like the stock prices of many other biotechnology companies, has been highly volatile. During the preceding twelve months, the closing price of our common stock has been as low as $21.84 per share and as high as $33.30 per share. These broad market fluctuations may cause the market price of our common stock to be lower or more volatile than you expected.
 
The price and volume fluctuations in our stock may often be unrelated to our operating performance. The market price of our common stock could fluctuate widely because of:
 
  •  future announcements about our company or our competitors, including the results of testing, clinical trials, technological innovations or new commercial products;
 
  •  regulatory actions with respect to our potential products or regulatory approvals with respect to our competitors’ products;
 
  •  changes in government regulations;
 
  •  developments in our relationships with our collaboration partners;
 
  •  developments affecting our collaboration partners;
 
  •  announcements relating to health care reform and reimbursement levels for new drugs;
 
  •  our failure to acquire or maintain proprietary rights to the gene sequences we discover or the products we develop;
 
  •  litigation;
 
  •  public concern as to the safety of our products; and
 
  •  political and economic factors affecting market prices generally or our market segment or our company particularly.
 
The issuance and sale of shares underlying our outstanding convertible debt securities and options, as well as the sale of additional equity or equity-linked securities would dilute the holdings of our existing stockholders and may materially and adversely affect the price of our common stock.
 
Sales of substantial amounts of shares of our common stock or securities convertible into or exchangeable for our common stock in the public market, or the perception that those sales may occur, could cause the market price of our common stock to decline. We have used and may continue to use our common stock or securities convertible into or exchangeable for our common stock to acquire technology, product rights or businesses, or for other purposes. Our authorized capital stock consists of 400,000,000 shares of common stock, par value $0.01 per share.


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As of December 31, 2010, we had 188,980,748 shares of common stock outstanding. In addition, an aggregate of approximately 24,302,742 shares of our common stock are issuable upon conversion of our outstanding 2011 Notes and outstanding 2012 Notes at an applicable conversion price of $15.55 and $17.78 per share, respectively; 24,028,688 shares of our common stock are issuable upon the exercise of options outstanding as of December 31, 2010, having a weighted-average exercise price of $14.55 per share, including 5,309,761 stock options granted during the fiscal year ended December 31, 2010 with a weighted-average grant date fair value of $17.31 per share; and 203,782 shares of our common stock are issuable upon the vesting of restricted stock unit awards outstanding as of December 31, 2010. If we issue additional equity securities, including in exchange for our outstanding convertible debt or in connection with the exercise or vesting of equity awards, the price of our common stock may be materially and adversely affected and the holdings of our existing stockholders would be diluted.
 
Our certificate of incorporation and bylaws could discourage acquisition proposals, delay a change in control or prevent transactions that may be in your best interests.
 
Provisions of our certificate of incorporation and bylaws, as well as Section 203 of the Delaware General Corporation Law, may discourage, delay or prevent a change in control of our company that you as a stockholder may consider favorable and may be in your best interest. Our certificate of incorporation and bylaws contain provisions that:
 
  •  authorize the issuance of up to 20,000,000 shares of “blank check” preferred stock that could be issued by our board of directors to increase the number of outstanding shares and discourage a takeover attempt;
 
  •  limit who may call special meetings of stockholders; and
 
  •  establish advance notice requirements for nomination of candidates for election to the board of directors or for proposing matters that can be acted upon by stockholders at stockholders’ meetings.


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ITEM 1B.   UNRESOLVED STAFF COMMENTS
 
None.
 
ITEM 2.   PROPERTIES
 
We currently lease and occupy approximately 1,020,000 square feet of laboratory, manufacturing and office space in Rockville, Maryland. Our space includes approximately 200,000 square feet of laboratory space, approximately 520,000 square feet of manufacturing and manufacturing support space and approximately 300,000 square feet of office space. This excludes a portion of our headquarters facility under lease which is not being utilized.
 
We anticipate that existing commercial real estate or the available land located at our laboratory and office campus will enable us to continue to expand our operations in close proximity to one another. We believe that our properties are generally in good condition, well maintained, suitable and adequate to carry on our business.
 
ITEM 3.   LEGAL PROCEEDINGS
 
In the ordinary course of business, we are involved in various legal proceedings, including, among others, patent oppositions, patent infringement litigation and other matters incidental to our business. While it is not possible to accurately predict or determine the eventual outcome of these matters or estimate a range of loss, one or more of these matters currently pending could have a material adverse effect on our financial condition, results of operations or cash flows.
 
ITEM 4.   (REMOVED AND RESERVED)


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ITEM 5.   MARKET FOR REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
 
Our common stock is traded on the NASDAQ Global Market under the symbol HGSI. The following table presents the quarterly high and low closing prices as quoted by NASDAQ.
 
                 
    High   Low
 
2010
               
First Quarter
  $ 32.68     $ 25.76  
Second Quarter
  $ 33.30     $ 22.46  
Third Quarter
  $ 30.18     $ 21.84  
Fourth Quarter
  $ 29.79     $ 23.60  
2009
               
First Quarter
  $ 2.78     $ 0.48  
Second Quarter
  $ 3.19     $ 0.82  
Third Quarter
  $ 20.50     $ 2.39  
Fourth Quarter
  $ 31.15     $ 17.96  
 
As of January 31, 2011, there were 592 holders of record of our common stock. We have never declared or paid any cash dividends. We do not anticipate declaring or paying cash dividends for the foreseeable future, in part because existing contractual agreements prohibit such dividends. Instead, we will retain our earnings, if any, for the future operation and expansion of our business.
 
The following graph compares the performance of our Common Stock for the periods indicated with the performance of the NASDAQ U.S. Stock Market Total Return Index (the “TRI”) and the NASDAQ Pharmaceutical Index (the “NPI”). The comparison assumes $100 was invested on December 31, 2005 in our Common Stock and in each of the foregoing indices and assumes the reinvestment of dividends, if any.
 
Comparison of 5 Year Cumulative Total Return
 
(PERFORMANCE GRAPH)
 
The performance graph and related information shall not be deemed “soliciting material” or be “filed” with the Securities and Exchange Commission, nor shall such information be incorporated by reference into any future filing under the Securities Act or the Exchange Act, except to the extent that the Company specifically incorporates it by reference into such filing.


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ITEM 6.   SELECTED CONSOLIDATED FINANCIAL DATA
 
We present below our selected consolidated financial data for the years ended December 31, 2010, 2009 and 2008, and as of December 31, 2010 and 2009, which have been derived from the audited consolidated financial statements included elsewhere herein and should be read in conjunction with such consolidated financial statements and the accompanying notes. We present below our selected financial data for the years ended December 31, 2007 and 2006, and as of December 31, 2008, 2007 and 2006, which have been derived from audited financial statements not included herein. The results of operations of prior periods are not necessarily indicative of results that may be expected for any other period. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Business.”
 
                                         
    Year Ended December 31,  
    2010     2009     2008     2007     2006  
    (In thousands, except per share and ratio data)  
 
Statement of Operations Data:
                                       
Revenue:
                                       
Product sales
  $ 47,159     $ 154,074     $     $     $  
Manufacturing and development services
    22,695       50,653                    
Research and development collaborative agreements
    87,497       71,022       48,422       41,851       25,755  
                                         
Total revenue
    157,351       275,749       48,422       41,851       25,755  
                                         
Costs and expenses:
                                       
Cost of product sales
    29,941       15,805                    
Cost of manufacturing and development services
    15,016       18,215                    
Research and development expenses
    196,370       173,709       243,257       246,293       209,515  
General and administrative expenses
    106,797       61,073       60,865       55,874       53,101  
Facility-related exit charges (credits)
          759             (3,673 )     29,510  
                                         
Total costs and expenses
    348,124       269,561       304,122       298,494       292,126  
                                         
Income (loss) from operations
    (190,773 )     6,188       (255,700 )     (256,643 )     (266,371 )
Investment income
    16,966       12,727       23,487       32,988       27,131  
Interest expense
    (59,500 )     (58,424 )     (62,912 )     (60,716 )     (39,606 )
Gain on extinguishment of debt
          38,873                    
Gain on sale of long-term equity investment
          5,259       32,518             14,759  
Other income (expense)
    76       (238 )     (6,284 )            
                                         
Income (loss) before taxes
    (233,231 )     4,385       (268,891 )     (284,371 )     (264,087 )
Income tax benefit
          1,274                    
                                         
Net income (loss)
  $ (233,231 )   $ 5,659     $ (268,891 )   $ (284,371 )   $ (264,087 )
                                         
Net income (loss) per share, basic and diluted
  $ (1.24 )   $ 0.04     $ (1.99 )   $ (2.12 )   $ (2.00 )
                                         
Other Data:
                                       
Ratio of earnings to fixed charges
          1.06                    
Coverage deficiency
  $ (233,231 )   $     $ (268,891 )   $ (284,371 )   $ (264,087 )


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ITEM 6.   SELECTED CONSOLIDATED FINANCIAL DATA, CONTINUED
 
                                         
    As of December 31,
    2010   2009   2008   2007   2006
    (In thousands)
 
Balance Sheet Data:
                                       
Cash, cash equivalents, short-term investments, marketable securities and restricted investments(1)
  $ 933,382     $ 1,191,660     $ 372,939     $ 603,840     $ 763,084  
Total assets(1)
    1,315,029       1,530,630       686,832       961,566       1,161,922  
Total debt and lease financing(2)
    623,367       598,435       664,074       637,513       612,811  
Accumulated deficit
    (2,419,897 )     (2,186,666 )     (2,192,325 )     (1,923,434 )     (1,639,063 )
Total stockholders’ equity (deficit)
    585,763       755,415       (136,304 )     117,145       364,892  
 
 
(1) “Cash, cash equivalents, short-term investments, marketable securities and restricted investments” and “Total assets” for 2010, 2009, 2008, 2007 and 2006 include $79,510, $88,437, $69,360, $70,931 and $61,165 respectively, of restricted investments relating to certain leases.
 
(2) “Total debt and lease financing” for 2010, 2009, 2008, 2007 and 2006 does not include any operating lease obligations under various facility and equipment lease arrangements. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources” for additional discussion.


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ITEM 7.   MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
 
Human Genome Sciences, Inc. (“HGS”) is a biopharmaceutical company that exists to place new therapies into the hands of those battling serious disease. Our lead products in development are BENLYSTA® (belimumab) for systemic lupus erythematosus (“SLE”) and raxibacumab for inhalation anthrax.
 
BENLYSTA continues to progress toward commercialization. On November 16, 2010, the U.S. Food and Drug Administration (“FDA”) Arthritis Advisory Committee voted 13-2 to recommend that the FDA approve BENLYSTA for the treatment of autoantibody-positive patients with active SLE who are receiving standard therapy. The Advisory Committee provides non-binding recommendations for consideration by the FDA, which then makes the final decision on approval. In December 2010, the FDA extended the Prescription Drug User Fee Act (“PDUFA”) target date for its priority review of BENLYSTA from December 9, 2010 to March 10, 2011.
 
In June 2010, GlaxoSmithKline (“GSK”), our partner in the co-development and commercialization of BENLYSTA, submitted a Marketing Authorization Application (“MAA”) to the European Medicines Agency (“EMA”) for approval to market BENLYSTA in Europe. We expect to have the EMA decision in the second half of 2011. GSK has also submitted regulatory applications in Canada, Australia, Switzerland, Russia, Brazil and The Philippines. Regulatory submissions in other countries are planned in 2011.
 
In preparation for the anticipated launch and commercialization of BENLYSTA, we have hired and trained a specialized commercial team including sales, marketing and medical affairs. We are also building our own HGS commercial team to work alongside GSK in Europe. We believe we have produced sufficient BENLYSTA inventory to meet the anticipated global market need for at least one year, and are increasing our capacity to meet long-term demand.
 
We continue to deliver raxibacumab to the U.S. Strategic National Stockpile (“SNS”) for emergency use in treating inhalation anthrax. In 2009, we completed the delivery of 20,001 doses of raxibacumab to the SNS under an initial order and as a result recognized $162.5 million in product sales and manufacturing and development services revenue. In July 2009, the U.S. Government (“USG”) exercised its option to purchase 45,000 additional doses of raxibacumab, with delivery to be completed over a three-year period. HGS expects to receive approximately $142.0 million from this second order as deliveries are completed, $64.9 million of which has been recognized as revenue through December 31, 2010. In May 2009, we submitted a Biologics License Application (“BLA”) to the FDA for raxibacumab for the treatment of inhalation anthrax. We received a Complete Response Letter in November 2009, and we will continue to work closely with the FDA to obtain approval. HGS will receive approximately $20.0 million from the USG upon FDA licensure of raxibacumab.
 
In addition to these products in our internal pipeline, we have substantial financial rights to two novel drugs that GSK has advanced to late-stage development. The first of these is darapladib, which was discovered by GSK using HGS technology. In two pivotal Phase 3 trials, GSK is currently evaluating whether darapladib can reduce the risk of adverse cardiovascular events such as heart attack or stroke in patients with chronic coronary heart disease and acute coronary syndrome, respectively. With a planned enrollment of more than 27,000 patients in the two trials, the Phase 3 clinical program for darapladib is among the largest ever conducted to evaluate the safety and efficacy of any cardiovascular medication. The second is albiglutide. GSK currently has eight Phase 3 trials in progress to evaluate the long-term efficacy, safety and tolerability of albiglutide as monotherapy and add-on therapy for patients with type 2 diabetes mellitus. Albiglutide was created by HGS using its proprietary albumin-fusion technology, and the product was licensed to GSK in 2004.
 
We are also working to expand and advance our mid- and early-stage pipeline beyond potential additional indications for BENLYSTA, with a primary focus on immunology and oncology. We continue to develop our oncology portfolio around our expertise in the apoptosis, or programmed cell death, pathway and we plan to initiate Phase 2 development of our human monoclonal antibody to the CCR5 receptor for the treatment of ulcerative colitis.


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Overview (continued)
 
We and Novartis were developing ZALBINtm for the treatment of patients with chronic hepatitis C. In 2010 the FDA expressed concerns regarding the risk-benefit assessment of ZALBIN dosed at 900-mcg every two weeks. Based on the FDA and similar EMA feedback, we and Novartis decided to end further development of ZALBIN in 2010.
 
Strategic partnerships are an important driver of our commercial success. We have a co-development and commercialization agreement with GSK for BENLYSTA, and raxibacumab is being developed under a contract with the Biomedical Advanced Research and Development Authority of the Office of the Assistant Secretary for Preparedness and Response, U.S. Department of Health and Human Services. Our strategic partnerships with leading pharmaceutical and biotechnology companies allow us to leverage our strengths and gain access to sales and marketing infrastructure, as well as complementary technologies. Some of these partnerships provide us with licensing or other fees, clinical development cost-sharing, milestone payments and rights to royalty payments as products are developed and commercialized. In some cases, we are entitled to certain commercialization, co-promotion, revenue-sharing and other product rights.
 
Critical Accounting Policies and the Use of Estimates
 
A “critical accounting policy” is one that is both important to the portrayal of our financial condition and results of operations and that requires management’s most difficult, subjective or complex judgments. Such judgments are often the result of a need to make estimates about the effect of matters that are inherently uncertain. The preparation of our financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ materially from those estimates. See Note B, Summary of Significant Accounting Policies, of the Notes to the Consolidated Financial Statements for further discussion.
 
We currently believe the following accounting policies to be critical:
 
Investments.  We account for investments in accordance with the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“FASB ASC”) Topic 320, Investments — Debt and Equity Securities. We carry our investments at their respective fair values. We periodically evaluate the fair values of our investments to determine whether any declines in the fair value of investments represent an other-than-temporary impairment. This evaluation consists of a review of several factors, including but not limited to the length of time and extent that a security has been in an unrealized loss position, the existence of an event that would impair the issuer’s future repayment potential, the near term prospects for recovery of the market value of a security and our intent to hold the security until the market value recovers, which may be maturity. We also evaluate whether it is more likely than not that we will be required to sell the security before its anticipated recovery. If management determines that such an impairment exists we would recognize an impairment charge. Because we may determine that market or business conditions may lead us to sell a short-term investment or marketable security prior to maturity, we classify our short-term investments and marketable securities as “available-for-sale.” Investments in securities that are classified as available-for-sale and have readily determinable fair values are measured at fair market value in the balance sheets, and unrealized holding gains and losses for these investments are reported as a separate component of stockholders’ equity until realized, or an other-than-temporary impairment is recorded. We classify those marketable securities that may be used in operations within one year as short-term investments. Those marketable securities in which we have both the ability to hold until maturity and have a maturity date beyond one year from our most recent consolidated balance sheet date are classified as non-current marketable securities.
 
For investments carried at fair value, we disclose the level within the fair value hierarchy as prescribed by FASB ASC Topic 820, Fair Value Measurements and Disclosures. We evaluate the types of securities in our investment portfolio to determine the proper classification in the fair value hierarchy based on trading activity and the observability of market inputs. We generally obtain a single quote or price per instrument from independent third parties to help us determine the fair value of securities in Level 1 and Level 2 of the fair value hierarchy.


38


 

Critical Accounting Policies and the Use of Estimates (continued)
 
Inventories.  Inventories, which are recorded at the lower of cost or market, include materials, labor and other direct and indirect costs and are valued using the first-in, first-out method. The Company capitalizes inventories produced in preparation for product launches when the related product candidates are considered likely to receive regulatory approval and it is probable that the related costs will be recoverable through the commercialization of the product.
 
Leases.  We lease various real properties under operating leases that generally require us to pay taxes, insurance and maintenance. During 2006, we entered into a 20-year lease agreement with BioMed Realty Trust, Inc. (“BioMed”) for our Traville facility. We account for the Traville lease with BioMed as an operating lease.
 
During 2006 and as described further in Note F, Long-Term Debt, of the Notes to the Consolidated Financial Statements, we sold our large-scale manufacturing facility (“LSM”) and headquarters land to BioMed, and simultaneously agreed to lease such assets back over 20 years. We recorded the sale and leaseback of these assets as a financing transaction and accordingly recorded the allocated sale proceeds as outstanding debt on our balance sheet. We account for lease payments under the related lease agreements as principal and interest payments on this debt.
 
Impairments of long-lived assets.  Long-lived assets to be held and used are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets might not be recoverable. Conditions that would necessitate an impairment assessment include a significant decline in the observable market value of an asset, a significant change in the extent or manner in which an asset is used, or a significant adverse change that would indicate that the carrying amount of an asset or group of assets is not recoverable. Determination of recoverability is based on an estimate of undiscounted cash flows resulting from the use of the asset and its eventual disposition. In the event that such cash flows are not expected to be sufficient to recover the carrying amount the assets, the assets are written down to their estimated fair values. Long-lived assets to be sold are carried at fair value less costs to sell.
 
Product sales.  Revenue from product sales is recognized when persuasive evidence of an arrangement exists, title to product and associated risk of loss has passed to the customer, the price is fixed or determinable, collection from the customer is reasonably assured, and we have no further performance obligations.
 
Manufacturing and development services.  We have entered into agreements for manufacturing process development, clinical and commercial supply of certain biopharmaceutical products. Revenue under these agreements is recognized as services are performed or products delivered, depending on the nature of the work contracted, using a proportional performance method of accounting. Performance is assessed using output measures such as units-of-work performed to date as compared to total units-of-work contracted. Advance payments received in excess of amounts earned are classified as deferred revenue until earned.
 
Research and development collaborative agreements.  Our revenue recognition policies for all non-refundable up-front license fees and milestone arrangements are in accordance with the guidance provided in FASB ASC Topic 605, Revenue Recognition. FASB ASC Topic 605 provides guidance on when an arrangement that involves multiple revenue-generating activities or deliverables should be divided into separate units of accounting for revenue recognition purposes, and if this division is required, how the arrangement consideration should be allocated among the separate units of accounting. If the deliverables in a revenue arrangement constitute separate units of accounting according to FASB ASC Topic 605’s separation criteria, the revenue recognition policy must be determined for each identified unit. If the arrangement is a single unit of accounting, the revenue recognition policy must be determined for the entire arrangement. Under arrangements where the license fees and research and development activities cannot be accounted for as separate units of accounting, non-refundable up-front license fees are deferred and recognized as revenue on a straight-line basis over the expected term of our continued involvement in the research and development process. Revenues from the achievement of research and development milestones, if deemed substantive, are recognized as revenue when the milestones are achieved, and the milestone payments are due and collectible. If not deemed substantive, we would recognize such milestones as revenue on a straight-line basis over the remaining expected term of continued involvement in the research and development process. Milestones are considered substantive if all of the following conditions are met: (1) the milestone is non-refundable;


39


 

Critical Accounting Policies and the Use of Estimates (continued)
 
(2) achievement of the milestone was not reasonably assured at the inception of the arrangement; (3) substantive effort is involved to achieve the milestone; and, (4) the amount of the milestone appears reasonable in relation to the effort expended, the other milestones in the arrangement and the related risk associated with the achievement of the milestone and any ongoing research and development or other services are priced at fair value. Payments received in advance of work performed are recorded as deferred revenue.
 
The up-front license fee and expense reimbursement received in 2006 from Novartis in connection with ZALBIN along with subsequently received milestones were recognized ratably over the estimated four-year clinical development period ending in 2010. Our initial payment from GSK in connection with BENLYSTA was recognized ratably over the estimated four-year clinical development period ending in 2010. Our up-front license fee with GSK in connection with albiglutide is being recognized ratably over the estimated eight-year clinical development period ending in 2012. Our revenues from other research and development collaborative agreements in 2010, 2009 and 2008 have generally been recognized in full upon receipt, as we have met the criteria for recognition.
 
Research and Development.  Research and development expenses primarily include related salaries, outside services, materials and supplies and allocated facility costs. Such costs are charged to research and development expense as incurred. Our drug development expenses include accruals for clinical site and clinical research organization (“CRO”) costs. Estimates of the incurred to date but not yet received invoices must be made for clinical site and CRO costs in determining the accrued balance in any accounting period. Reimbursement of research and development expenses received in connection with collaborative cost-sharing agreements is recorded as a reduction of such expenses.
 
Stock Compensation.  We have a stock incentive plan (the “Incentive Plan”) under which options to purchase shares of our common stock may be granted to employees, consultants and directors at a price no less than the quoted market value on the date of grant. The Incentive Plan also provides for awards in the form of stock appreciation rights, restricted (non-vested) or unrestricted stock awards, stock-equivalent units or performance-based stock awards.
 
We account for share-based awards to employees and non-employee directors pursuant to FASB ASC Topic 718, Compensation — Stock Compensation, which requires that compensation cost resulting from share-based payment transactions be recognized in the financial statements at fair value over the service period. The amount of compensation expense recognized using the fair value method requires us to exercise judgment and make assumptions relating to the factors that determine the fair value of our stock option grants. We use the Black-Scholes-Merton model to estimate the fair value of our option grants. The fair value calculated by this model is a function of several factors, including grant price, the risk-free interest rate, the estimated term of the option and the estimated future volatility of the option. The estimated term and estimated future volatility of the options require our judgment.
 
Exit Accruals.  In 2006, we exited certain facilities, including certain headquarters space (“Wing C”), which required us to make significant estimates in several areas including the realizable values of assets deemed redundant or excess and the ability to generate sublease income. We evaluate these estimates on a quarterly basis and adjust the accrued exit expenses if there is a material change in the estimates used or if there is a material change in the facts and circumstances relating to the accrual.
 
Income taxes.  Deferred tax assets and liabilities are determined based on temporary differences between the financial reporting basis and the tax basis of assets and liabilities. These deferred tax assets and liabilities are measured using the enacted tax rates and laws that will be in effect when such amounts are expected to reverse or be utilized. The realization of total deferred tax assets is contingent upon the generation of future taxable income. A valuation allowance is provided to reduce such deferred tax assets to amounts more likely than not to be ultimately realized.
 
In determining the effective income tax rate, we analyze various factors, including projections of our annual earnings and taxing jurisdictions in which the earnings will be generated, the impact of state and local and foreign income taxes and our ability to use tax incentives. We file income tax returns in U.S. federal, state and foreign


40


 

Critical Accounting Policies and the Use of Estimates (continued)
 
jurisdictions. Our income taxes have not been subject to examination by any tax jurisdictions since its inception. Accordingly, all our filed income tax returns are subject to examination by the taxing jurisdictions.
 
Results of Operations
 
Years Ended December 31, 2010 and 2009
 
Revenues.  We had revenues of $157.4 million and $275.7 million for 2010 and 2009, respectively. Revenues for 2010 consisted primarily of $82.8 million recognized from Novartis primarily relating to recognition of all remaining unrecognized up-front license fees and milestones due to the decision to end further development of ZALBIN, as well as $47.2 million in raxibacumab product sales and $21.3 million from contract manufacturing services. Revenues for 2009 consisted primarily of $154.1 million in raxibacumab product sales, $54.2 million recognized from Novartis related to straight-line recognition of up-front license fees and milestones reached for ZALBIN, $26.1 million related to raxibacumab development services and $24.4 million from contract manufacturing services.
 
Cost of sales.  Cost of sales includes both cost of product sales of $29.9 million and cost of manufacturing and development services of $15.0 million for 2010. Cost of sales includes both cost of product sales of $15.8 million and cost of manufacturing and development services of $18.2 million for 2009. Cost of product sales for 2010 includes the cost of manufacturing raxibacumab and royalties whereas the cost of product sales for 2009 included only royalties, as the manufacturing costs had been previously expensed. Cost of product sales for 2010 also includes amounts expensed related to rejected or terminated production batches. Our manufacturing and development services costs include costs associated with contract manufacturing services and raxibacumab development services costs. The decrease in manufacturing and development services costs is primarily due to reduced contract manufacturing activities.
 
Expenses.  Research and development expenses were $196.4 million for 2010 as compared to $173.7 million for 2009. Our research and development expenses for 2010 are net of $61.6 million of costs primarily reimbursed by GSK and Novartis. Our research and development expenses for 2009 are net of $44.0 million of costs reimbursed by GSK and Novartis.
 
We track our research and development expenditures by type of cost incurred — research, pharmaceutical sciences, manufacturing and clinical development costs.
 
Our research costs amounted to $23.2 million for 2010 as compared to $19.0 million for 2009. This increase is primarily due to activity related to HGS1029 and new target development. Our research costs for 2010 and 2009 are net of $2.9 million and $3.2 million, respectively, of cost reimbursement primarily from GSK and Novartis under cost sharing provisions in our collaboration agreements.
 
Our pharmaceutical sciences costs, where we focus on improving formulation, process development and production methods, decreased to $27.8 million for 2010 from $31.4 million for 2009. This decrease is primarily due to decreased activity related to contract manufacturing services and ZALBIN, partially offset by increased BENLYSTA activity. Pharmaceutical sciences costs for 2010 include $0.6 million of net costs incurred by GSK and Novartis. Pharmaceutical sciences costs for 2009 are net of $0.5 million of cost reimbursement from GSK and Novartis under cost sharing provisions in our collaboration agreements.
 
Our manufacturing costs increased to $80.2 million for 2010 from $49.0 million for 2009. This increase is primarily due to increased BENLYSTA production partially offset by decreased ZALBIN activity and capitalization of raxibacumab manufacturing costs in 2010. Our manufacturing costs for 2010 and 2009 are net of $43.4 million and $9.7 million, respectively, of anticipated cost reimbursement from GSK and Novartis under the cost sharing provisions in our collaboration agreements. Manufacturing costs incurred to produce BENLYSTA prior to the FDA Advisory Committee vote to recommend approval were expensed as incurred.
 
Our clinical development costs decreased to $65.2 million for 2010 from $74.3 million for 2009. The decrease is primarily due to the completion of our first BENLYSTA Phase 3 clinical trial in 2009, completion of our second Phase 3 BENLYSTA clinical trial in March 2010 and decreased raxibacumab development activities. Our clinical


41


 

Results of Operations (continued)
 
Years Ended December 31, 2010 and 2009 (continued)
 
development costs for 2010 and 2009 are net of $15.9 million and $30.5 million, respectively, of cost reimbursement from GSK and Novartis under cost sharing provisions in our collaboration agreements.
 
The research and development expenditures noted above are categorized by functional area. We evaluate and prioritize our activities according to functional area, rather than on a per-project basis. For this reason, we do not maintain a formal accounting system that captures or allocates all costs, both direct and indirect, on a per-project basis. Therefore, we do not believe that our available project-by-project information would form a reasonable basis for disclosure to investors.
 
General and administrative expenses increased to $106.8 million for 2010 from $61.1 million for 2009. This increase is primarily due to increased commercial readiness activities, such as market research and additional personnel including our sales force, which was hired in late 2010. General and administrative expenses in future periods are likely to increase as the level of commercial activities rises.
 
Facility-related exit charges of $0.8 million for 2009 relate to an adjustment to our exit reserve for Wing C. See Note J, Facility-Related Exit Charges, of the Notes to the Consolidated Financial Statements for additional discussion.
 
Investment income increased to $17.0 million for 2010 from $12.7 million for 2009. The increase is primarily due to higher average investment balances partially offset by lower yields on our portfolio. Investment income also includes realized net losses on our short-term investments, marketable securities and restricted investments of $0.3 million for 2010 as compared to net losses of $0.8 million for 2009. The yield on our investments was approximately 1.6% for 2010, as compared to approximately 2.5% for 2009. A general decline in interest rates may adversely affect the interest earned from our portfolio as securities mature and may be replaced with securities having a lower interest rate.
 
Interest expense increased to $59.5 million for 2010 compared to $58.4 million for 2009. Interest expense includes non-cash interest expense related to amortization of debt discount of $23.1 million and $21.9 million for 2010 and 2009, respectively, as a result of the adoption of FASB ASC 470 which requires that the liability and equity components of convertible debt instruments that may be settled in cash upon conversion (including partial cash settlement) be separately accounted for in a manner that reflects an issuer’s non-convertible debt borrowing rate.
 
The gain on extinguishment of debt of $38.9 million for 2009 relates to the repurchase of convertible subordinated debt due in 2011 and 2012 with a face value of approximately $106.2 million for an aggregate cost of approximately $50.0 million plus accrued interest. The gain on extinguishment of debt is net of write-offs of related debt discount of $16.4 million and deferred financing charges of $0.9 million.
 
The gain on sale of long-term equity investment for 2009 of $5.3 million relates to the 2008 sale of our investment in CoGenesys, Inc. (“CoGenesys”). The agreement between CoGenesys and Teva Pharmaceutical Industries Ltd. (“Teva”) provided for an escrow of a portion of the purchase price. We received the final payment for our equity investment during 2009 and recorded a gain of $5.3 million with respect to this escrow.
 
We recorded other income of $0.1 million for 2010, and other expense of $0.2 million for 2009.
 
Income Tax Benefit.  Income tax benefit of $1.3 million for 2009 represents a credit received in 2009 of $0.5 million for 2008 and an accrued income tax benefit of $0.8 million for 2009. We elected to accelerate recognition of research and development tax credits by electing out of bonus depreciation pursuant to regulations passed in 2008.
 
Net Income (Loss).  We recorded a net loss of $233.2 million, or $1.24 per basic and diluted share, for 2010, compared to net income of $5.7 million, or $0.04 per share, for 2009. The change from net income to net loss is primarily due to lower product sales and manufacturing and development services revenue in 2010 versus 2009 and


42


 

Results of Operations (continued)
 
Years Ended December 31, 2010 and 2009 (continued)
 
the gain on extinguishment of debt in 2009, partially offset by increased revenue recognized from the Novartis agreement in 2010.
 
Years Ended December 31, 2009 and 2008
 
Revenues.  We had revenues of $275.7 million and $48.4 million for 2009 and 2008, respectively. Revenues for 2009 consisted primarily of $154.1 million in raxibacumab product sales, $26.1 million related to raxibacumab development services, $24.4 million from contract manufacturing services and $54.2 million recognized from Novartis related to straight-line recognition of up-front license fees and milestones reached for ZALBIN. Revenues for 2008 consisted primarily of $35.4 million recognized from Novartis related to straight-line recognition of up-front license fees and milestones reached for ZALBIN and $6.5 million recognized from GSK related to straight-line recognition of an up-front fee for BENLYSTA. Revenue recognized from Novartis increased in 2009 due to receipt of a $75.0 million milestone which was being recognized over the remaining development period, ending in the fall of 2010.
 
Cost of sales.  Cost of sales includes both cost of product sales of $15.8 million and cost of manufacturing and development services of $18.2 million for 2009. No cost of sales were incurred in 2008 as we had no revenue from product sales or manufacturing and development services. With respect to the initial 2006 order for raxibacumab, we incurred substantially all of the product and service costs prior to 2009, and expensed these costs as incurred. We incurred royalty costs associated with the initial order during 2009, which are included in cost of product sales. In addition, we have recorded as cost of product sales the expenses associated with manufacturing additional raxibacumab incurred prior to receiving the follow-on order in July 2009. Our manufacturing and development service costs include raxibacumab development service costs incurred in 2009 and costs associated with contract manufacturing services. After approval of a product, inventoriable costs are capitalized into inventory and will be expensed as the inventory is sold.
 
Expenses.  Research and development expenses were $173.7 million for 2009 as compared to $243.3 million for 2008. Our research and development expenses for 2009 are net of $0.9 million and $43.1 million of costs reimbursed by Novartis and GSK, respectively. Our research and development expenses for 2008 are net of $36.1 million and $51.8 million of costs reimbursed by Novartis and GSK, respectively.
 
We track our research and development expenditures by type of cost incurred — research, pharmaceutical sciences, manufacturing and clinical development costs.
 
Our research costs amounted to $19.0 million for 2009 as compared to $25.6 million for 2008. This decrease is primarily due to the conclusion of animal studies being conducted for raxibacumab in 2008, and a $5.0 million milestone payment made to Aegera Therapeutics, Inc. (“Aegera”) in 2008. Our research costs for 2009 and 2008 are net of $3.2 million and $2.4 million, respectively, of cost reimbursement from Novartis and GSK under cost sharing provisions in our collaboration agreements.
 
Our pharmaceutical sciences costs, where we focus on improving formulation, process development and production methods, decreased to $31.4 million for 2009 from $35.9 million for 2008. This decrease is primarily due to decreased activity related to raxibacumab and ZALBIN, partially offset by increased activity related to contract manufacturing services. Pharmaceutical sciences costs for 2009 and 2008 are net of $0.5 million and $1.2 million, respectively, of cost reimbursement from Novartis and GSK under cost sharing provisions in our collaboration agreements.
 
Our manufacturing costs decreased to $49.0 million for 2009 from $77.1 million for 2008. This decrease is primarily due to capitalizing raxibacumab production costs beginning in 2009 and decreased production of raxibacumab, ZALBIN and BENLYSTA, partially offset by increased manufacturing services activities. Our manufacturing costs for 2009 and 2008 are net of $9.7 million and $19.9 million, respectively, of anticipated cost reimbursement from Novartis and GSK under the commercial cost sharing provisions in our collaboration agreements.


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Results of Operations (continued)
 
Years Ended December 31, 2009 and 2008 (continued)
 
Our clinical development costs decreased to $74.3 million for 2009 from $104.7 million for 2008. This decrease is primarily due to the substantial completion of our ZALBIN Phase 3 clinical trials in late 2008, completion of the first Phase 3 BENLYSTA clinical trial and wind down of the second Phase 3 BENLYSTA clinical trial during 2009 and decreased HGS-ETR1 clinical trial costs. Our clinical development costs for 2009 and 2008 are net of $30.5 million and $64.4 million, respectively, of cost reimbursement from Novartis and GSK under cost sharing provisions in our collaboration agreements.
 
The research and development expenditures noted above are categorized by functional area. We evaluate and prioritize our activities according to functional area, rather than on a per-project basis. For this reason, we do not maintain a formal accounting system that captures or allocates all costs, both direct and indirect, on a per-project basis. Therefore, we do not believe that our available project-by-project information would form a reasonable basis for disclosure to investors.
 
General and administrative expenses increased to $61.1 million for 2009 from $60.9 million for 2008. This increase is primarily due to increased pre-commercial launch activities, partially offset by decreased legal expenses associated with our patents.
 
Facility-related exit charges of $0.8 million for 2009 relate to an adjustment to our exit reserve for Wing C. Our Wing C subtenant terminated its lease during 2009, which resulted in an exit charge of $11.4 million during the second quarter of 2009. During the fourth quarter of 2009, we decided to resume production activities in most of Wing C and accordingly, reversed $10.6 million of the $11.4 million charge, resulting in a net exit charge of $0.8 million for the full year. During 2008, we did not incur any facility-related exit charges. See Note J, Facility-Related Exit Charges, of the Notes to the Consolidated Financial Statements for additional discussion.
 
Investment income decreased to $12.7 million for 2009 from $23.5 million for 2008. The decrease is primarily due to lower yields in 2009 as compared to 2008, partially offset by higher average investment balances. Investment income also includes realized net losses on our short-term investments, marketable securities and restricted investments of $0.8 million for 2009 as compared to net gains of $0.9 million for 2008. The yield on our investments was approximately 2.5% for 2009, as compared to approximately 4.6% for 2008.
 
Interest expense decreased to $58.4 million for 2009 compared to $62.9 million for 2008. Interest expense includes non-cash interest expense related to amortization of debt discount of $21.9 million and $24.2 million for 2009 and 2008, respectively, as a result of the adoption of FASB ASC Topic 470 which requires that the liability and equity components of convertible debt instruments that may be settled in cash upon conversion (including partial cash settlement) be separately accounted for in a manner that reflects an issuer’s non-convertible debt borrowing rate. The decrease in interest expense is primarily due to the February 2009 repurchase of convertible subordinated debt due in 2011 and 2012.
 
The gain on extinguishment of debt of $38.9 million for 2009 relates to the repurchase of convertible subordinated debt due in 2011 and 2012 with a face value of approximately $106.2 million for an aggregate cost of approximately $50.0 million plus accrued interest. The gain on extinguishment of debt is net of write-offs of related debt discount of $16.4 million and deferred financing charges of $0.9 million.
 
The gain on sale of long-term equity investment for 2009 and 2008 of $5.3 million and $32.5 million respectively, relates to the 2008 sale of our investment in CoGenesys. We received initial proceeds in 2008 of $47.3 million. Our cost basis in this investment was $14.8 million, resulting in a gain of $32.5 million. The agreement between CoGenesys and Teva provided for an escrow of a portion of the purchase price. We received the final payment for our equity investment during 2009 and recorded an additional gain of $5.3 million.
 
Other expense of $0.2 million for 2009 primarily represents unrealized, non-cash foreign currency translation losses related to our investment in Aegera, which is denominated in Canadian dollars. Other expense of $6.3 million for 2008 was due to an other-than-temporary impairment of our investment in debt securities issued by Lehman


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Results of Operations (continued)
 
Years Ended December 31, 2009 and 2008 (continued)
 
Brothers Holdings, Inc. (“LBHI”). During 2008, LBHI experienced a significant deterioration in its credit worthiness and filed a petition under Chapter 11 of the U.S. Bankruptcy Code.
 
Income Tax Benefit.  Income tax benefit of $1.3 million represents a credit received in 2009 of $0.5 million for 2008 and an accrued income tax benefit of $0.8 million for 2009. We elected to accelerate recognition of research and development tax credits by electing out of bonus depreciation pursuant to regulations passed in 2008.
 
Net Income (Loss).  We recorded net income of $5.7 million, or $0.04 per basic and diluted share, for 2009, compared to a net loss of $268.9 million, or $1.99 per share, for 2008. The improvement to net income from a net loss is primarily due to 2009 activity including revenue from raxibacumab, gain on extinguishment of debt and reduced research and development expenses.
 
Liquidity and Capital Resources
 
We had working capital of $250.2 million as of December 31, 2010 compared to working capital of $616.6 million as of December 31, 2009. The decrease in our working capital is primarily due to the use of working capital to fund our operations and the classification of $188.6 million of our 21/4% Convertible Subordinated Notes due 2011 as a current liability as of December 31, 2010 compared to non-current as of December 31, 2009.
 
We expect to continue to incur substantial expenses relating to our research and development efforts, as we focus on clinical trials and manufacturing required for the development of our active product candidates. We will also continue to incur costs related to our pre- and post-commercial launch activities, and will incur significant sales and marketing costs if BENLYSTA is approved. In the event our working capital needs exceed our available working capital, we can utilize our non-current marketable securities, which are classified as “available-for-sale”. In 2009, the USG agreed to purchase 45,000 additional doses of raxibacumab for the SNS, to be delivered over a three-year period, which began in 2009. We expect to receive a total of approximately $142.0 million from this order as deliveries are completed, $64.9 million of which was recognized as revenue through 2010. We may also receive payments under collaboration agreements, to the extent milestones are met, which would further improve our working capital position. We continue to evaluate our working capital position on an ongoing basis.
 
To minimize our exposure to credit risk, we invest in securities with strong credit ratings and have established guidelines relative to diversification and maturity with the objectives of maintaining safety of principal and liquidity. We do not invest in derivative financial instruments or auction rate securities, and we generally hold our investments in debt securities until maturity.
 
The amounts of expenditures that will be needed to carry out our business plan are subject to numerous uncertainties, which may adversely affect our liquidity and capital resources. We have completed our fourth Phase 3 trial and have several ongoing Phase 1 and Phase 2 trials and expect to initiate additional trials in the future. The duration and cost of our clinical trials are a function of numerous factors such as the number of patients to be enrolled in the trial, the amount of time it takes to enroll them, the length of time they must be treated and observed, and the number of clinical sites and countries for the trial. However, the duration of these phases may vary considerably according to the type, complexity, novelty and intended use of the drug candidate. Some trials may take considerably longer to complete.


45


 

Liquidity and Capital Resources (continued)
 
Our clinical development expenses are impacted by the clinical phase of our drug candidates. Our expenses increase as our drug candidates move to later phases of clinical development. The status of our clinical projects is as follows:
 
                 
        Clinical Trial Status
        as of December 31,(2)
Product Candidate (1)
 
Indication
  2010   2009   2008
 
BENLYSTA
  Systemic Lupus Erythematosus   Phase 3(3)   Phase 3   Phase 3
BENLYSTA
  Rheumatoid Arthritis   (4)   Phase 2   Phase 2
Raxibacumab
  Anthrax   (5)   (5)   (5)
HGS1029
  Cancer   Phase 1   Phase 1   Phase 1
HGS-ETR1
  Cancer   Phase 2   Phase 2   Phase 2
ZALBIN
  Hepatitis C   (6)   Phase 3   Phase 3
HGS-ETR2
  Cancer   (7)   (7)   Phase 1
 
 
(1) Includes only those candidates for which an Investigational New Drug Application (“IND”) has been filed with the FDA.
 
(2) Clinical Trial Status defined as when patients are being dosed.
 
(3) Results from two Phase 3 clinical trials reported; MAA and BLA filed in June 2010; BLA PDUFA target date of March 10, 2011.
 
(4) Phase 2 trial completed; treatment IND ongoing.
 
(5) BLA filed in 2009; Complete Response Letter received from FDA; additional work ongoing.
 
(6) Further development discontinued.
 
(7) Ongoing Phase 1 trial by National Institutes of Health; further development not anticipated.
 
We identify our drug candidates by conducting numerous preclinical studies. We may conduct multiple clinical trials to cover a variety of indications for each drug candidate. Based upon the results from our trials, we may elect to discontinue clinical trials for certain indications or certain drugs in order to concentrate our resources on more promising drug candidates.
 
We are advancing a number of drug candidates, including antibodies, and a small molecule, in part to diversify the risks associated with our research and development spending. In addition, our manufacturing plants have been designed to enable multi-product manufacturing capability.
 
We must receive regulatory clearance to advance each of our products into and through each phase of clinical testing. Moreover, we must receive regulatory approval to launch any of our products commercially. In order to receive such approval, the appropriate regulatory agency must conclude that our clinical data establish safety and efficacy and that our products and the manufacturing facilities meet all applicable regulatory requirements. We cannot be certain that we will establish sufficient safety and efficacy data to receive regulatory approval for any of our drugs or that our drugs and the manufacturing facilities will meet all applicable regulatory requirements.
 
Part of our business plan includes collaborating with others. For example, we entered into a collaboration agreement with GSK in 2006 with respect to BENLYSTA and received a payment of $24.0 million. We and GSK share Phase 3 and 4 development costs, and share sales and marketing expenses and profits of any product that is commercialized in accordance with the collaboration agreement. We also entered into a collaboration agreement with Novartis in 2006. During 2010, we recorded approximately $61.6 million due primarily from GSK and Novartis with respect to our cost sharing agreements as a reduction of research and development expenses. We recognized the up-front fees and milestones received from GSK and Novartis as revenue ratably over the estimated remaining development periods. Based on the decision in September 2010 to end further development of ZALBIN, all remaining deferred revenue related to the payments received from Novartis was recognized. Furthermore, we will not be receiving any of the remaining $300.0 million in milestone payments from Novartis with respect to ZALBIN.


46


 

Liquidity and Capital Resources (continued)
 
We have collaborators who have sole responsibility for product development. For example, GSK is developing other products under separate agreements as part of our overall relationship with them. We have no control over the progress of GSK’s development plans. We cannot forecast with any degree of certainty whether any of our current or future collaborations will affect our drug development.
 
Because of the uncertainties discussed above, the costs to advance our research and development projects are difficult to estimate and may vary significantly. Our long-term strategy includes the acquisition of other biotechnology companies or in-license of additional product candidates to complement and supplement our existing product pipeline, and we may acquire such companies and in-license additional product candidates that have demonstrated positive pre-clinical and/or clinical data. Any such acquisition or in-license agreement could include consideration in the form of cash, which would have an adverse effect on our liquidity. We expect that our existing funds, payments received under the raxibacumab contract and other agreements and investment income will be sufficient to fund our operations for at least the next twelve months.
 
Our future capital requirements and the adequacy of our available funds will depend on many factors, primarily including the scope and costs of our clinical development programs, the scope and costs of our manufacturing and process development activities, the magnitude of our discovery and preclinical development programs and the level of our pre- and post-commercial launch activities. There can be no assurance that any additional financing required in the future will be available on acceptable terms, if at all.
 
Depending upon market and interest rate conditions, we may take actions to strengthen further our financial position. We may undertake financings and may repurchase or restructure some or all of our outstanding convertible debt instruments in the future depending upon market and other conditions. During 2009 we repurchased approximately $106.2 million of our convertible subordinated debt due in 2011 and 2012 at a cost of approximately $50.0 million plus accrued interest. In August and December 2009 we completed public offerings of our common stock, resulting in net cash proceeds of approximately $812.9 million.
 
We have certain contractual obligations that may have a future effect on our financial condition, changes in financial condition, results of operations, liquidity, capital expenditures or capital resources. Our operating leases, along with our unconditional purchase obligations, are not recorded on our balance sheets. Debt associated with the 2006 sale of our LSM to BioMed and accompanying leaseback is recorded on our balance sheet as of December 31, 2010 and 2009. We have an option to purchase the Traville facility in 2016 for $303.0 million. This is not reflected in the contractual obligations table below because we are not obligated to exercise this option.


47


 

Liquidity and Capital Resources (continued)
 
Our contractual obligations as of December 31, 2010 are summarized as follows:
 
                                         
    Payments Due by Period  
          One Year
    Two to
    Four to
    After
 
    Total     or Less     Three Years     Five Years     Five Years  
    (dollars in millions)  
 
Contractual Obligations
                                       
Long-term debt — convertible notes(1)
  $ 417.6     $ 206.2     $ 211.4     $     $  
Long-term lease commitment — BioMed(2)
    446.5       25.0       51.5       53.6       316.4  
Operating leases(3)
    346.6       20.9       42.8       44.4       238.5  
Manufacturing source of supply(4)
    25.9       25.9                    
Raxibacumab royalties(5)
    4.8       2.9       1.9              
Other long-term liabilities reflected on our balance sheets(6)
                             
                                         
Total contractual cash obligations(7)
  $ 1,241.4     $ 280.9     $ 307.6     $ 98.0     $ 554.9  
                                         
 
 
(1) Contractual interest obligations related to our convertible subordinated notes included above total $13.7 million as of December 31, 2010. Contractual interest obligations of $9.1 million, $4.6 million are due in one year or less and two to three years, respectively.
 
(2) Contractual interest obligations related to BioMed are included above and aggregate $393.5 million as of December 31, 2010. Contractual interest obligations of $25.0 million, $51.5 million, $53.6 million and $263.4 million are due in one year or less, two to three years, four to five years and after five years, respectively.
 
(3) Includes Traville headquarters operating lease with BioMed with aggregate payments of $325.5 million. Lease payments of $18.2 million, $37.6 million, $39.1 million and $230.6 million are due in one year or less, two to three years, four to five years and after five years, respectively.
 
(4) Amounts relate to supply commitments with respect to BENLYSTA. Under the terms of the contract we could be obligated to pay at least an additional $88.0 million, however the contract includes termination clauses and therefore these amounts have been excluded from the table above.
 
(5) Includes royalties associated with the delivery of raxibacumab to the U.S. Strategic National Stockpile.
 
(6) In the event we reach certain development milestones for BENLYSTA or raxibacumab such as regulatory approval, we would be obligated to make payments of up to $9.0 million over the next five years. In the event we reach certain development milestones related to HGS1029, we would be obligated to pay up to $204.0 million. Our other products are in either Phase 1 or Phase 2 and would also obligate us to make certain milestone payments should they reach Phase 3 or regulatory approval. These other payments could result in aggregate milestone payments of $14.5 million. Because we cannot forecast with any degree of certainty whether any of these products will reach these milestones, we have excluded these amounts and any royalty payments, except for those royalty payments related to raxibacumab sales under the current order from the USG, from the above table.
 
(7) For additional discussion of our debt obligations and lease commitments, see Note F, Long-Term Debt and Note G, Commitments and Other Matters, of the Notes to the Consolidated Financial Statements.
 
As of December 31, 2010, we had net operating loss carryforwards (“NOLs”) for federal income tax purposes of approximately $1.8 billion, excluding approximately $0.3 billion of stock-based compensation NOLs, which expire, if unused, through December 31, 2030. We also have available research and development tax credit and other tax credit carryforwards of approximately $35.0 million, the majority of which will expire, if unused, through December 31, 2030.
 
Our unrestricted and restricted funds may be invested in U.S. Treasury securities, government agency obligations, high grade corporate debt securities and various money market instruments rated “A−” or better.


48


 

Liquidity and Capital Resources (continued)
 
Such investments reflect our policy regarding the investment of liquid assets, which is to seek a reasonable rate of return consistent with an emphasis on safety, liquidity and preservation of capital.
 
 
During 1997 and 1999, we entered into two long-term leases with the Maryland Economic Development Corporation (“MEDCO”) expiring January 1, 2019 for a small-scale manufacturing facility aggregating 127,000 square feet and built to our specifications. We have accounted for these leases as operating leases. The facility was financed primarily through a combination of bonds issued by MEDCO (“MEDCO Bonds”) and loans issued to MEDCO by certain State of Maryland agencies. We have no equity interest in MEDCO.
 
Rent is based upon MEDCO’s debt service obligations and annual base rent under the leases is currently approximately $2.6 million. The MEDCO Bonds are secured by letters of credit issued for the account of MEDCO which were renewed in December 2009. We are required to have restricted investments of approximately $34.3 million which serve as security for the MEDCO letters of credit reimbursement obligation. Upon default or early lease termination, the MEDCO Bond indenture trustee can draw upon the letters of credit to pay the MEDCO Bonds as they are tendered. In such an event, we could lose part or all of our restricted investments and could record a charge to earnings for a corresponding amount. Alternatively, we have an option through the end of the lease term to purchase this facility for an aggregate amount that declines from approximately $36.0 million in 2011 to approximately $21.0 million in 2019.


49


 

 
Certain statements contained in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” are 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. The forward-looking statements are based on our current intent, belief and expectations. These statements are not guarantees of future performance and are subject to certain risks and uncertainties that are difficult to predict. Actual results may differ materially from these forward-looking statements because of our unproven business model, our dependence on new technologies, the uncertainty and timing of clinical trials, our ability to develop and commercialize products, our dependence on collaborators for services and revenue, our substantial indebtedness and lease obligations, our changing requirements and costs associated with facilities, intense competition, the uncertainty of patent and intellectual property protection, our dependence on key management and key suppliers, the uncertainty of regulation of products, the impact of future alliances or transactions and other risks described in this filing and our other filings with the Securities and Exchange Commission. Existing and prospective investors are cautioned not to place undue reliance on these forward-looking statements, which speak only as of today’s date. We undertake no obligation to update or revise the information contained in this Annual Report on Form 10-K whether as a result of new information, future events or circumstances or otherwise.


50


 

 
ITEM 7A.   QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 
We do not currently have operations of a material nature that are subject to risks of foreign currency fluctuations. We do not use derivative financial instruments in our operations or investment portfolio. Our investment portfolio may be comprised of low-risk U.S. Treasuries, government-sponsored enterprise securities, high-grade debt having at least an “A−” rating at time of purchase and various money market instruments. The short-term nature of these securities, which currently have an average term of approximately 13 months, decreases the risk of a material loss caused by a market change related to interest rates.
 
We believe that a hypothetical 100 basis point adverse move (increase) in interest rates along the entire interest rate yield curve would adversely affect the fair value of our cash, cash equivalents, short-term investments, marketable securities and restricted investments by approximately $10.2 million, or approximately 1.1% of the aggregate fair value of $933.4 million, as of December 31, 2010. For these reasons, and because these securities are generally held to maturity, we believe we do not have significant exposure to market risks associated with changes in interest rates related to our debt securities held as of December 31, 2010. We believe that any interest rate change related to our investment securities held as of December 31, 2010 is not material to our consolidated financial statements. As of December 31, 2010, the yield on comparable one-year investments was approximately 0.3%, as compared to our current portfolio yield of approximately 1.7%. However, given the short-term nature of these securities, a general decline in interest rates may adversely affect the interest earned from our portfolio as securities mature and may be replaced with securities having a lower interest rate.
 
To minimize our exposure to credit risk, we invest in securities with strong credit ratings and have established guidelines relative to diversification and maturity with the objectives of maintaining safety of principal and liquidity. We do not invest in derivative financial instruments, auction rate securities, loans held for sale or mortgage-backed securities backed by sub-prime or Alt-A collateral, and we generally hold our investments in debt securities until maturity. However, adverse changes in the credit markets relating to credit risks would adversely affect the fair value of our cash, cash equivalents, short-term investments, marketable securities and restricted investments.
 
Our facility leases for our Traville headquarters and LSM require us to maintain minimum levels of restricted investments of approximately $39.8 million, or $39.5 million if in the form of cash, as collateral for these facilities. Together with the requirement to maintain approximately $34.3 million in restricted investments with respect to our small-scale manufacturing facility leases, our overall level of restricted investments is currently required to be approximately $74.1 million. Although the market value for these investments may rise or fall as a result of changes in interest rates, we will be required to maintain this level of restricted investments in either a rising or declining interest rate environment.
 
Our convertible subordinated notes bear interest at fixed rates. As a result, our interest expense on these notes is not affected by changes in interest rates.
 
Our wholly-owned subsidiary, Human Genome Sciences Europe GmbH (“HGS Europe”) assists in our clinical trials and clinical research collaborations in European countries. Although HGS Europe’s activities are denominated primarily in euros, we believe the foreign currency fluctuation risks to be immaterial to our operations as a whole. Our wholly-owned subsidiary, Human Genome Sciences Pacific Pty Ltd. (“HGS Pacific”) sponsors some of our clinical trials in the Asia/Pacific region. We currently do not anticipate HGS Pacific to have any operational activity and therefore we do not believe we will have any foreign currency fluctuation risks with respect to HGS Pacific. During 2010 we formed additional European subsidiaries in preparation for commercial activity in that region. The formation of these subsidiaries slightly increases our exposure to foreign currency fluctuation risks, as they are predominantly denominated in euros. We do not believe the risk of foreign currency gains or losses to be material to our overall operations.


51


 

 
ITEM 8.   FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
 
The information required by this item is set forth on pages F-1 — F-37.
 
ITEM 9.   CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
 
None.
 
ITEM 9A.   CONTROLS AND PROCEDURES
 
 
Our management, including our principal executive and principal financial officers, has evaluated the effectiveness of our disclosure controls and procedures as of December 31, 2010. Our disclosure controls and procedures are designed to provide reasonable assurance that the information required to be disclosed in this annual report on Form 10-K has been appropriately recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to our management, including our principal executive and principal financial officers, to allow timely decisions regarding required disclosure. Based on that evaluation, our principal executive and principal financial officers have concluded that our disclosure controls and procedures are effective at the reasonable assurance level.
 
 
Our management, including our principal executive and principal financial officers, has evaluated any changes in our internal control over financial reporting that occurred during the quarterly period ended December 31, 2010, and has concluded that there was no change that occurred during the quarterly period ended December 31, 2010 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
 
 
The management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is defined in Rule 13a-15(f) or 15d-15(f) promulgated under the Securities Exchange Act of 1934, as amended, as a process designed by, or under the supervision of, the Company’s principal executive and principal financial officers and effected by the Company’s board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles and includes those policies and procedures that:
 
  •  pertain to the management of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the Company;
 
  •  provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and
 
  •  provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements.
 
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.
 
The Company’s management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2010. In making this assessment, the Company’s management used the criteria set


52


 

ITEM 9A.   CONTROLS AND PROCEDURES (continued)
 
forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework.
 
Based on our assessment, management believes that, as of December 31, 2010, the Company’s internal control over financial reporting is effective based on those criteria.
 
The Company’s independent auditors have issued an audit report on internal control over financial reporting which follows herein.
 
ITEM 9B.   OTHER INFORMATION
 
None.


53


 

 
 
Board of Directors and Stockholders of
Human Genome Sciences, Inc.
Rockville, Maryland
 
We have audited Human Genome Sciences Inc.’s internal control over financial reporting as of December 31, 2010, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). Human Genome Sciences, Inc.’s management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying “Management Report on Internal Control over Financial Reporting.” Our responsibility is to express an opinion on the company’s internal control over financial reporting based on our audit.
 
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
 
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
 
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
 
In our opinion, Human Genome Sciences, Inc. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2010, based on the COSO criteria.
 
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Human Genome Sciences, Inc. as of December 31, 2010 and 2009, and the related consolidated statements of operations, stockholders’ equity (deficit), and cash flows for each of the three years in the period ended December 31, 2010 and our report dated February 24, 2011 expressed an unqualified opinion thereon.
 
/s/  Ernst & Young LLP
 
Baltimore, Maryland
February 24, 2011


54


 

 
 
ITEM 10.   DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
 
We incorporate herein by reference the relevant information concerning directors, executive officers and corporate governance to be included in our definitive proxy statement for the 2011 annual meeting of stockholders (the “2011 Proxy Statement”).
 
ITEM 11.   EXECUTIVE COMPENSATION
 
We incorporate herein by reference the relevant information concerning executive compensation to be included in the 2011 Proxy Statement.
 
ITEM 12.   SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
 
We incorporate herein by reference the relevant information concerning security ownership of certain beneficial owners and management to be included in the 2011 Proxy Statement.
 
ITEM 13.   CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
 
We incorporate herein by reference the relevant information concerning certain other relationships and related transactions to be included in the 2011 Proxy Statement.
 
ITEM 14.   PRINCIPAL ACCOUNTING FEES AND SERVICES
 
We incorporate herein by reference the relevant information concerning principal accounting fees and services to be included in the 2011 Proxy Statement.


55


 

 
 
ITEM 15.   EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
 
(a) The following documents are filed as part of this Annual Report:
 
(1) Index to Consolidated Financial Statements
         
    Page
    Number
 
    F-2  
    F-3  
    F-4  
    F-5  
    F-6  
    F-8  
 
(2) Financial Statement Schedules
 
Financial statement schedules are omitted because they are not required.
 
(3) Exhibits
 
     
Exhibit No.
 
Description
 
3.1
  Certificate of Incorporation (incorporated by reference to Exhibit 3.1 to the Company’s Annual Report on Form 10-K, filed on March 31, 1994; Exhibit 3.3 to the Company’s Annual Report on Form 10-K/A, filed on April 3, 1998; Exhibit 3.1 to the Company’s Current Report on Form 8-K, filed on December 16, 1999; Exhibit 3.1 to the Company’s Quarterly Report on Form 10-Q, filed on July 31, 2001; Exhibit 3.1 to the Company’s Current Report on Form 8-K, filed on May 8, 2008; and Exhibit 3.2 to the Company’s Current Report on Form 8-K, filed on May 24, 2010).
3.2
  Amended and Restated By-laws (incorporated by reference to Exhibit 3 to the Company’s Current Report on Form 8-K, filed on October 6, 2010).
4.1
  Form of Common Stock Certificate (incorporated by reference to Exhibit 4.2 to the Company’s Registration Statement on Form S-3 (Registration No. 333-45272), filed on September 6, 2000).
4.2
  Indenture, dated as of October 4, 2004, between the Company and The Bank of New York, as trustee, including the form of 21/4% Convertible Subordinated Note due 2011 (incorporated by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K, filed on October 4, 2004).
4.3
  Indenture, dated as of August 9, 2005, between the Company and The Bank of New York, as trustee, including the form of 21/4% Convertible Subordinated Note due 2012 (incorporated by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K, filed on August 9, 2005).
10.1†
  Co-development and Commercialization Agreement, dated as of August 1, 2006, between Glaxo Group Limited and the Company (incorporated by reference to Exhibit 10.25 to the Company’s Annual Report on Form 10-K, filed on February 26, 2009).
10.2†*
  Amendment No. 1, dated as of November 25, 2009, to Co-development and Commercialization Agreement between Glaxo Group Limited and the Company.
10.3†*
  Amendment No. 2, dated as of October 5, 2010, to Co-development and Commercialization Agreement between Glaxo Group Limited and the Company.
10.4
  Lease Agreement, dated as of December 1, 1997, between Maryland Economic Development Corporation and the Company (incorporated by reference to Exhibit 10.67 to the Company’s Annual Report on Form 10-K, filed on March 31, 1998).
10.5
  Amendment No. 1, dated as of December 1, 2009, to Lease Agreement between Maryland Economic Development Corporation and the Company (incorporated by reference to Exhibit 10.10 to the Company’s Annual Report on Form 10-K, filed on March 2, 2010).


56


 

     
Exhibit No.
 
Description
 
10.6
  Amended and Restated Lease Agreement, dated as of December 1, 2009, between Maryland Economic Development Corporation and the Company (incorporated by reference to Exhibit 10.12 to the Company’s Annual Report on Form 10-K, filed on March 2, 2010).
10.7
  Purchase and Sale Agreement, dated as of May 2, 2006, between BioMed Realty, L.P. and the Company (incorporated by reference to Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q, filed on August 9, 2006).
10.8
  Lease Agreement, dated as of May 24, 2006, between BMR-Belward Campus Drive LSM LLC and the Company (incorporated by reference to Exhibit 10.3 to the Company’s Quarterly Report on Form 10-Q, filed on August 9, 2006).
10.9
  Lease Agreement, dated as of May 24, 2006, between BMR-Shady Grove Road HQ LLC and the Company (incorporated by reference to Exhibit 10.4 to the Company’s Quarterly Report on Form 10-Q, filed on August 9, 2006).
10.10
  Collateral Pledge Agreement, dated as of December 1, 2009, among the Company, as Pledgor, Manufacturers and Traders Trust Company, as Pledgee, and Manufacturers and Traders Trust Company, as the Collateral Agent (incorporated by reference to Exhibit 10.14 to the Company’s Annual Report on Form 10-K, filed on March 2, 2010).
10.11
  Reimbursement Agreement, dated as of December 1, 2009, between the Company and Manufacturers and Traders Trust Company, relating to 1997 Series Revenue Bonds (incorporated by reference to Exhibit 10.11 to the Company’s Annual Report on Form 10-K, filed on March 2, 2010).
10.12
  Reimbursement Agreement, dated as of December 1, 2009, between the Company and Manufacturers and Traders Trust Company, relating to Series 1999 A and B Revenue Bonds (incorporated by reference to Exhibit 10.13 to the Company’s Annual Report on Form 10-K, filed on March 2, 2010).
10.13†
  Solicitation (as amended) and Modification of Contract, dated June 24, 2006, awarded by the U.S. Department of Health and Human Services, Biomedical Advanced Research and Development Authority to the Company (incorporated by reference to Exhibit 10.5 to the Company’s Quarterly Report on Form 10-Q/A, filed on September 27, 2007).
10.14†
  Amendment of Solicitation/Modification of Contract, dated July 17, 2009, awarded by the U.S. Department of Health and Human Services, Biomedical Advanced Research and Development Authority to the Company (incorporated by reference to Exhibit 10.1 to the Company’s Form 10-Q, filed on October 29, 2009).
C 10.15
  Form of Indemnification Agreement entered into with directors and officers (incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q, filed on July 22, 2010).
C 10.16
  Employment Agreement, dated as of November 21, 2004, between the Company and H. Thomas Watkins (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K, filed on November 23, 2004).
C 10.17
  First Amendment, dated as of January 1, 2008, to Employment Agreement between the Company and H. Thomas Watkins (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K, filed on December 20, 2007).
C 10.18
  Second Amendment, dated as of January 1, 2009, to Employment Agreement between the Company and H. Thomas Watkins (incorporated by reference to Exhibit 10.26 to the Company’s Annual Report on Form 10-K, filed on February 26, 2009).
C 10.19
  Form of Executive Agreement (incorporated by reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K, filed on December 20, 2007).
C 10.20
  Form of First Amendment to Executive Agreement (incorporated by reference to Exhibit 10.27 to the Company’s Annual Report on Form 10-K, filed on February 26, 2009).
C 10.21
  Second Amended and Restated Key Executive Severance Plan (incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K, filed on December 20, 2007).
C 10. 22
  Form of First Amendment to Second Amended and Restated Key Executive Severance Plan (incorporated by reference to Exhibit 10.28 to the Company’s Annual Report on Form 10-K, filed on February 26, 2009).


57


 

     
Exhibit No.
 
Description
 
C 10.23
  Human Genome Sciences, Inc. Discretionary Bonus Policy (incorporated by reference to Exhibit 10.4 to the Company’s Current Report on Form 8-K, filed on December 20, 2007).
C 10.24
  Human Genome Sciences, Inc. Amended and Restated Stock Incentive Plan (incorporated by reference to Annex A to the Company’s Definitive Proxy Statement on Schedule 14A, filed on March 24, 2009).
C 10.25
  Form of Restricted Stock Agreement (incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q, filed on August 1, 2005).
C 10.26
  Form of Stock Option Agreement (incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K, filed on September 20, 2004).
C 10.27
  Form of Stock Unit Grant Agreement under the Non-Employee Director Equity Compensation Plan (incorporated by reference to Exhibit 10.5 to the Company’s Current Report on Form 8-K, filed on December 20, 2007).
12.1*
  Ratio of Earnings to Fixed Charges.
21.1*
  Subsidiaries.
23.1*
  Consent of Ernst & Young LLP, Independent Registered Public Accounting Firm.
31.1*
  Rule 13a-14(a) Certification of Principal Executive Officer.
31.2*
  Rule 13a-14(a) Certification of Principal Financial Officer.
32.1*
  Section 1350 Certification of Chief Executive Officer.
32.2*
  Section 1350 Certification of Chief Financial Officer.
 
 
* Filed herewith.
 
Confidential treatment requested for certain portions of this Exhibit pursuant to Rule 24b-2 under the Securities Exchange Act of 1934, as amended, which portions are omitted and filed separately with the Securities and Exchange Commission.
 
C Management contract or compensatory plan or arrangement.


58


 

 
Pursuant to the requirements of Section 13 or 15(d) 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.
 
HUMAN GENOME SCIENCES, INC.
 
    BY: 
/s/  H. Thomas Watkins
H. Thomas Watkins
President and Chief Executive Officer
 
Dated: February 24, 2011
 
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and the dates indicated:
 
             
Signature
 
Title
 
Date
 
         
/s/  H. Thomas Watkins

H. Thomas Watkins
  President, Chief Executive Officer and Director
(Principal Executive Officer)
  February 24, 2011
         
/s/  David P. Southwell

David P. Southwell
  Executive Vice President and
Chief Financial Officer
(Principal Financial Officer and Principal Accounting Officer)
  February 24, 2011
         
/s/  Argeris N. Karabelas, Ph.D.

Argeris N. Karabelas, Ph.D.
  Chairman of the Board   February 24, 2011
         
/s/  Richard J. Danzig

Richard J. Danzig
  Director   February 24, 2011
         
/s/  Jürgen Drews, M.D.

Jürgen Drews, M.D.
  Director   February 24, 2011
         
/s/  Colin Goddard, Ph.D.

Colin Goddard, Ph.D.
  Director   February 24, 2011
         
/s/  Maxine Gowen, Ph.D.

Maxine Gowen, Ph.D.
  Director   February 24, 2011
         
/s/  Tuan Ha-Ngoc

Tuan Ha-Ngoc
  Director   February 24, 2011
         
/s/  John LaMattina, Ph.D.

John LaMattina, Ph.D.
  Director   February 24, 2011
         
/s/  Augustine Lawlor

Augustine Lawlor
  Director   February 24, 2011
         
/s/  Gregory Norden

Gregory Norden
  Director   February 24, 2011
         
/s/  Robert C. Young, M.D.

Robert C. Young, M.D.
  Director   February 24, 2011


59


 


 

 
 
Board of Directors and Stockholders of
Human Genome Sciences, Inc.
Rockville, Maryland
 
We have audited the accompanying consolidated balance sheets of Human Genome Sciences, Inc. as of December 31, 2010 and 2009, and the related consolidated statements of operations, stockholders’ equity (deficit) and cash flows for each of the three years in the period ended December 31, 2010. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
 
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
 
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Human Genome Sciences, Inc. at December 31, 2010 and 2009, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2010, in conformity with U.S. generally accepted accounting principles.
 
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Human Genome Sciences, Inc.’s internal control over financial reporting as of December 31, 2010, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 24, 2011 expressed an unqualified opinion thereon.
 
/s/  Ernst & Young LLP
 
Baltimore, Maryland
February 24, 2011


F-2


 

HUMAN GENOME SCIENCES, INC.
 
 
                 
    December 31,  
    2010     2009  
    (in thousands)  
 
ASSETS
               
Current assets:
               
Cash and cash equivalents
  $ 155,691     $ 567,667  
Short-term investments
    282,016       151,528  
Accounts receivable
    25,958       23,892  
Collaboration receivables
    18,856       10,356  
Inventory
    43,091       20,149  
Prepaid expenses and other current assets
    5,569       7,176  
                 
Total current assets
    531,181       780,768  
Marketable securities
    416,165       384,028  
Property, plant and equipment (net of accumulated depreciation)
    253,122       263,123  
Restricted investments
    79,510       88,437  
Collaboration receivables, non-current
    29,225       6,920  
Long-term equity investments
    3,241       3,016  
Other assets
    2,585       4,338  
                 
TOTAL ASSETS
  $ 1,315,029     $ 1,530,630  
                 
LIABILITIES AND STOCKHOLDERS’ EQUITY
               
Current liabilities:
               
Accounts payable and accrued expenses
  $ 41,798     $ 38,369  
Accrued payroll and related taxes
    30,157       30,997  
Convertible subordinated debt
    188,620        
Collaboration payable
    12,984       4,000  
Deferred revenues
    5,134       88,565  
Accrued exit expenses
    2,251       2,227  
                 
Total current liabilities
    280,944       164,158  
Convertible subordinated debt, non-current
    184,231       349,807  
Lease financing
    250,516       248,628  
Deferred rent
    10,358       8,665  
Deferred revenues, non-current
    2,517       1,978  
Accrued exit expenses, non-current
    700       1,979  
                 
Total liabilities
    729,266       775,215  
                 
Stockholders’ equity:
               
Preferred stock — $0.01 par value; 20,000,000 shares authorized; none outstanding
           
Common stock — $0.01 par value; 400,000,000 shares authorized; 188,980,748 and 185,254,660 shares issued and oustanding at December 31, 2010 and 2009, respectively
    1,890       1,853  
Additional paid-in capital
    2,996,645       2,932,863  
Accumulated other comprehensive income
    7,125       7,365  
Accumulated deficit
    (2,419,897 )     (2,186,666 )
                 
Total stockholders’ equity
    585,763       755,415  
                 
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
  $ 1,315,029     $ 1,530,630  
                 
 
The accompanying Notes to Consolidated Financial Statements are an integral part hereof.


F-3


 

HUMAN GENOME SCIENCES, INC.
 
 
                         
    Year Ended December 31,  
    2010     2009     2008  
    (in thousands, except share and per share amounts)  
 
Revenue:
                       
Product sales
  $ 47,159     $ 154,074     $  
Manufacturing and development services
    22,695       50,653        
Research and development collaborative agreements
    87,497       71,022       48,422  
                         
Total revenue
    157,351       275,749       48,422  
                         
Costs and expenses:
                       
Cost of product sales
    29,941       15,805        
Cost of manufacturing and development services
    15,016       18,215        
Research and development expenses
    196,370       173,709       243,257  
General and administrative expenses
    106,797       61,073       60,865  
Facility-related exit charges
          759        
                         
Total costs and expenses
    348,124       269,561       304,122  
                         
Income (loss) from operations
    (190,773 )     6,188       (255,700 )
Investment income
    16,966       12,727       23,487  
Interest expense
    (59,500 )     (58,424 )     (62,912 )
Gain on extinguishment of debt
          38,873        
Gain on sale of long-term equity investment
          5,259       32,518  
Other income (expense)
    76       (238 )     (6,284 )
                         
Income (loss) before taxes
    (233,231 )     4,385       (268,891 )
Income tax benefit
          1,274        
                         
Net income (loss)
  $ (233,231 )   $ 5,659     $ (268,891 )
                         
Basic net income (loss) per share
  $ (1.24 )   $ 0.04     $ (1.99 )
                         
Diluted net income (loss) per share
  $ (1.24 )   $ 0.04     $ (1.99 )
                         
Weighted average shares outstanding, basic
    187,791,437       149,334,426       135,406,642  
                         
Weighted average shares outstanding, diluted
    187,791,437       155,053,473       135,406,642  
                         
 
The accompanying Notes to Consolidated Financial Statements are an integral part hereof.


F-4


 

HUMAN GENOME SCIENCES, INC.
 
 
                                                 
                      Accumulated
             
                Additional
    Other
             
    Common Stock     Paid-In
    Comprehensive
    Accumulated
       
    Shares     Amount     Capital     Income (Loss)     Deficit     Total  
    (in thousands, except share amounts)  
 
Balance — December 31, 2007
    134,936,512     $ 1,349     $ 2,036,078     $ 3,152     $ (1,923,434 )   $ 117,145  
Comprehensive income (loss):
                                               
Net loss
                            (268,891 )     (268,891 )
Unrealized loss on investments
                      (7,052 )           (7,052 )
Cumulative translation adjustment
                      (590 )           (590 )
                                                 
Comprehensive loss
                                            (276,533 )
Shares of common stock issued pursuant to stock-based compensation plans
    803,466       8       4,589                   4,597  
Stock-based compensation expense
                18,487                   18,487  
                                                 
Balance — December 31, 2008
    135,739,978       1,357       2,059,154       (4,490 )     (2,192,325 )     (136,304 )
Comprehensive income (loss):
                                               
Net income
                            5,659       5,659  
Unrealized gain on investments
                      11,264             11,264  
Cumulative translation adjustment
                      591             591  
                                                 
Comprehensive income
                                            17,514  
Issuance of common stock pursuant to public offerings
    44,522,250       446       812,423                   812,869  
Shares of common stock issued pursuant to stock-based compensation plans
    4,992,432       50       48,762                   48,812  
Stock-based compensation expense
                12,524                   12,524  
                                                 
Balance — December 31, 2009
    185,254,660       1,853       2,932,863       7,365       (2,186,666 )     755,415  
Comprehensive income (loss):
                                               
Net loss
                            (233,231 )     (233,231 )
Unrealized loss on investments
                      (212 )           (212 )
Cumulative translation adjustment
                      (28 )           (28 )
                                                 
Comprehensive loss
                                            (233,471 )
Issuance of common stock pursuant to bond redemption
    562             8                   8  
Shares of common stock issued pursuant to stock-based compensation plans
    3,725,526       37       38,344                   38,381  
Stock-based compensation expense
                25,430                   25,430  
                                                 
Balance — December 31, 2010
    188,980,748     $ 1,890     $ 2,996,645     $ 7,125     $ (2,419,897 )   $ 585,763  
                                                 
 
The accompanying Notes to Consolidated Financial Statements are an integral part hereof.


F-5


 

HUMAN GENOME SCIENCES, INC.
 
 
                         
    Year Ended December 31,  
    2010     2009     2008  
    (in thousands)  
 
Cash flows from operating activities:
                       
Net income (loss)
  $ (233,231 )   $ 5,659     $ (268,891 )
Adjustments to reconcile net income (loss) to net cash used in operating activities:
                       
Stock-based compensation expense
    25,430       12,524       18,593  
Depreciation and amortization
    21,305       21,255       21,143  
Amortization of debt discount
    23,052       21,936       24,183  
Facility-related exit charges
          759        
Accrued interest on short-term investments, marketable securities and restricted investments
    5,552       (493 )     581  
Gain on extinguishment of long-term debt
          (38,873 )      
Gain on sale of long-term equity investment
          (5,259 )     (32,518 )
Non-cash expenses and other
    2,177       3,759       8,265  
Changes in operating assets and liabilities:
                       
Accounts receivable
    (2,066 )     (21,021 )      
Collaboration receivables
    (30,805 )     4,800       13,792  
Inventory
    (22,942 )     (20,149 )      
Prepaid expenses and other assets
    2,110       (1,640 )     2,760  
Accounts payable and accrued expenses
    3,444       (9,152 )     (7,247 )
Accrued payroll and related taxes
    (840 )     12,423       4,126  
Collaboration payable
    8,984       (4,000 )      
Deferred revenues
    (82,892 )     17,234       (44,959 )
Accrued exit expenses
    (1,533 )     (1,953 )     (2,083 )
Deferred rent
    1,566       1,859       1,992  
                         
Net cash used in operating activities
    (280,689 )     (332 )     (260,263 )
                         
Cash flows from investing activities:
                       
Purchase of short-term investments and marketable securities
    (840,145 )     (625,041 )     (15,065 )
Proceeds from sale and maturities of short-term investments and marketable securities
    681,687       388,277       211,722  
Capital expenditures — property, plant, and equipment
    (9,782 )     (10,019 )     (9,724 )
Proceeds from sale of long-term equity investment
          5,259       47,336  
Release of restricted investments
    300       3,291       4,877  
                         
Net cash provided by (used in) investing activities
    (167,940 )     (238,233 )     239,146  
                         
Cash flows from financing activities:
                       
Purchase of restricted investments
    (31,672 )     (47,002 )     (28,897 )
Proceeds from sale and maturities of restricted investments
    30,081       26,426       26,120  
Proceeds from issuance of common stock
    39,269       861,573       4,432  
Purchase of treasury stock
    (1,025 )     (15 )     (105 )
Extinguishment of long-term debt
          (49,998 )      
                         
Net cash provided by financing activities
    36,653       790,984       1,550  
                         
Net increase (decrease) in cash and cash equivalents
    (411,976 )     552,419       (19,567 )
Cash and cash equivalents — beginning of period
    567,667       15,248       34,815  
                         
Cash and cash equivalents — end of period
  $ 155,691     $ 567,667     $ 15,248  
                         


F-6


 

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION, NON-CASH OPERATING, INVESTING AND FINANCING ACTIVITIES
 
                         
    Year Ended December 31,
    2010   2009   2008
    (in thousands)
 
Cash paid (received) during the period for:
                       
Interest
  $ 33,169     $ 33,609     $ 34,729  
Income taxes
  $ (1,948 )   $ 809     $  
 
During 2010, the Company was able to reduce certain of its lease-related collateral obligations and transferred restricted investments of $9,014 into short-term investments.
 
During 2010, 2009 and 2008, the Company recorded non-cash accretion of $277, $1,384 and $466, respectively, related to its exit accrual for certain exited space.
 
During 2010, 2009 and 2008, lease financing increased as a result of non-cash accretion with respect to the Company’s 2006 leases with BioMed Realty Trust, Inc. (“BioMed”) by $1,889, $2,151 and $2,378 respectively. Because the lease payments are less than the amount of calculated interest expense for the first nine years of the leases, the lease balance will increase during this period.
 
The accompanying Notes to Consolidated Financial Statements are an integral part hereof.


F-7


 

HUMAN GENOME SCIENCES, INC.
 
(dollars in thousands, except per share data)
 
(NOTE A) — The Company
 
Human Genome Sciences, Inc. (the “Company”) is a biopharmaceutical company that exists to place new therapies into the hands of those battling serious disease. Its lead products in development are BENLYSTA® (belimumab) for systemic lupus erythematosus (“SLE”) and raxibacumab for inhalation anthrax.
 
BENLYSTA continues to progress toward commercialization. The Company is awaiting the U.S. Food and Drug Administration (“FDA”) decision, which is currently expected by March 10, 2011, regarding marketing approval of BENLYSTA. GlaxoSmithKline (“GSK”), the Company’s BENLYSTA partner, submitted a Marketing Authorization Application (“MAA”) to the European Medicines Agency (“EMA”) for approval to market BENLYSTA in Europe with an EMA decision expected in the second half of 2011. In preparation for the anticipated launch and commercialization of BENLYSTA, the Company has hired and trained a specialized commercial team including sales, marketing and medical affairs. The Company is also building its own commercial team to work alongside GSK in Europe.
 
The Company, which is located primarily in the United States, operates in a single business segment.
 
(NOTE B) — Summary of Significant Accounting Policies
 
Use of Estimates
 
The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Such estimates are based on historical experience and on various assumptions that the Company believes to be reasonable under the circumstances. Actual results could differ from these estimates under different assumptions or conditions.
 
Principles of Consolidation
 
The consolidated financial statements include the accounts of Human Genome Sciences, Inc. and its subsidiaries, all of which are wholly-owned. All significant intercompany accounts and transactions have been eliminated.
 
Cash Equivalents, Short-term Investments, Marketable Securities, Long-term Equity Investments and Restricted Investments
 
The Company considers all highly liquid investment instruments purchased with a maturity of three months or less to be cash equivalents.
 
The Company classifies its short-term investments, marketable securities and long-term equity investments with readily determinable fair values as “available-for-sale.” Investments in securities that are classified as available-for-sale are measured at fair market value in the balance sheets, and unrealized holding gains and losses on investments are reported as a separate component of stockholders’ equity until realized. Investments of less than 20% of privately-held companies are accounted for as cost-method investments. The Company reviews the carrying value of such investments on a periodic basis for indicators of impairment. Additionally, certain of the Company’s investments are held as restricted investments. Restricted investments with maturities less than three months are not classified as cash in the Company’s consolidated balance sheets. See Note C, Investments, for additional information.


F-8


 

HUMAN GENOME SCIENCES, INC.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share data)
 
(NOTE B) — Summary of Significant Accounting Policies (continued)
 
Investment Risk
 
The Company has invested its cash in obligations of the U.S. Government, government agencies and in high-grade debt securities and various money market instruments. The Company’s investment policy limits investments to certain types of instruments issued by institutions with credit ratings of “A−” or better, and places restrictions on maturities and concentrations in certain industries and by issuer. The Company does not hold auction rate securities, loans held for sale or mortgage-backed securities backed by sub-prime or Alt-A collateral.
 
Other-Than-Temporary Impairment of Investments
 
Periodically, the Company evaluates whether any investments have incurred an other-than-temporary impairment, based on the criteria under Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“FASB ASC”) Topic 320, Investments — Debt and Equity Securities. This evaluation consists of a review of several factors, including but not limited to the length of time and extent that a security has been in an unrealized loss position, the existence of an event that would impair the issuer’s future repayment potential, the near term prospects for recovery of the market value of a security and the intent of the Company to hold the security until the market value recovers and whether it is not more likely than not that the Company will be required to sell the security. If the Company determines that such impairment exists, the Company will recognize a charge in the consolidated statement of operations equal to the amount of such impairment. See Note C, Investments, for additional discussion.
 
Inventories
 
Inventories, which are recorded at the lower of cost or market, include materials, labor and other direct and indirect costs and are valued using the first-in, first-out method. The Company capitalizes inventories produced in preparation for product launches when the related product candidates are considered likely to receive regulatory approval and it is probable that the related costs will be recoverable through the commercialization of the product. In the case of raxibacumab, inventory costs were capitalized after the Company received a follow-on order from the U.S. Government (“USG”) in July 2009. BENLYSTA costs were capitalized after the FDA Advisory Committee vote in November 2010 to recommend approval of the product. See Note E, Other Financial Information and Cost of product sales discussion within this Note B, for additional information.
 
Depreciation
 
Depreciation is computed using the straight-line method over the estimated useful lives of the assets as follows:
 
     
Buildings
  30 years
Land improvements
  lesser of the lease term or the useful life
Production equipment
  5 - 10 years
Laboratory equipment
  3 - 10 years
Computer equipment and software
  3 - 5 years
Furniture and office equipment
  3 - 5 years
Leasehold improvements
  lesser of the lease term or the useful life
 
Impairment of Long-Lived Assets
 
Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable based on the criteria for accounting for the impairment or disposal of long-lived assets under FASB ASC Topic 360, Property, Plant and Equipment.


F-9


 

HUMAN GENOME SCIENCES, INC.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share data)
 
(NOTE B) — Summary of Significant Accounting Policies (continued)
 
Product sales
 
Revenue from product sales is recognized when persuasive evidence of an arrangement exists, title to product and associated risk of loss has passed to the customer, the price is fixed or determinable, collection from the customer is reasonably assured, and the Company has no further performance obligations.
 
Manufacturing and development services
 
As part of its raxibacumab contract with the USG and the Biomedical Advanced Research and Development Authority (“BARDA”), the Company performed a variety of drug development services primarily relating to the conduct of animal and human studies. Upon BARDA’s acceptance of the initial raxibacumab delivery, the Company billed the USG for the drug development work previously performed, and recorded this as manufacturing and development services revenue during 2009. The Company has been recording additional development revenue as services are performed. The Company has entered into agreements with certain commercial parties for manufacturing process development, clinical and commercial supply of certain biopharmaceutical products. Revenue under these agreements is recognized as services are performed or products delivered, depending on the nature of the work contracted, using the proportional performance method of accounting. Performance is assessed using output measures such as units-of-work performed to date as compared to total units-of-work contracted. Advance payments received in excess of amounts earned are classified as deferred revenue until earned.
 
Research and development collaborative agreements
 
Collaborative research and development agreements can provide for one or more of up-front license fees, research payments and milestone payments. Agreements with multiple components (“deliverables” or “items”) are evaluated to determine if the deliverables can be divided into more than one unit of accounting. An item can generally be considered a separate unit of accounting if all of the following criteria are met: (1) the delivered item(s) has value to the customer on a stand-alone basis; (2) there is objective and reliable evidence of the fair value of the undelivered item(s); and (3) if the arrangement includes a general right of return relative to the delivered item(s), delivery or performance of the undelivered item(s) is considered probable and substantially in control of the Company. Items that cannot be divided into separate units are combined with other units of accounting, as appropriate. Consideration received is allocated among the separate units based on their respective fair values or based on the residual value method and is recognized in full when the following criteria are met: (1) persuasive evidence of an arrangement exists; (2) delivery has occurred or services have been rendered; (3) the sales price is fixed or determinable; and (4) collectibility is probable. The Company deems service to have been rendered if no continuing obligation exists on the part of the Company.
 
Revenue associated with non-refundable up-front license fees under arrangements where the license fees and research and development activities cannot be accounted for as separate units of accounting are deferred and recognized as revenue on a straight-line basis over the expected term of the Company’s continued involvement in the research and development process. Revenues from the achievement of research and development milestones, if deemed substantive, are recognized as revenue when the milestones are achieved, and the milestone payments are due and collectible. If not deemed substantive, the Company would recognize such milestone as revenue on a straight-line basis over the remaining expected term of continued involvement in the research and development process. Milestones are considered substantive if all of the following conditions are met: (1) the milestone is non-refundable; (2) achievement of the milestone was not reasonably assured at the inception of the arrangement; (3) substantive effort is involved to achieve the milestone; and, (4) the amount of the milestone appears reasonable in relation to the effort expended, the other milestones in the arrangement and the related risk associated with the achievement of the milestone and any ongoing research and development or other services are priced at fair value. Payments received in advance of work performed are recorded as deferred revenue.


F-10


 

HUMAN GENOME SCIENCES, INC.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share data)
 
(NOTE B) — Summary of Significant Accounting Policies (continued)
 
Cost of product sales
 
The Company capitalizes inventories produced in preparation for product launches when the related product candidates are considered likely to receive regulatory approval and it is probable that the related costs will be recoverable through the commercialization of the product. Prior to capitalization, the cost of manufacturing drug product is recognized as research and development expense in the period that the cost is incurred. Therefore, manufacturing costs incurred prior to capitalization are not included in cost of product sales when revenue is recognized from the sale of that drug product.
 
Prior to receiving a follow-on order for raxibacumab from the USG in July 2009, the Company did not capitalize inventory costs related to this product. Although authorization to ship to the U.S. Strategic National Stockpile was received in January 2009, there continued to be uncertainty around future product orders. Beginning in July 2009, the cost of manufacturing raxibacumab is recognized as a cost of product sales (capitalized and then expensed when revenue is recognized), rather than research and development expenses in the period that the cost is incurred.
 
Cost of product sales also includes royalties paid or payable to third parties based on the sales levels of certain products.
 
Cost of manufacturing and development services
 
Cost of manufacturing and development services represents costs associated with the Company’s contract manufacturing arrangements and other development services. The costs associated with work previously performed to conduct animal and human studies for raxibacumab were recognized as research and development expenses in the period that the costs were incurred. Therefore, these pre-acceptance development costs are not included in cost of manufacturing and development services for 2009. The Company is recording additional raxibacumab development services costs as incurred.
 
Research and Development
 
Research and development costs are charged to expense as incurred, unless otherwise capitalized pursuant to FASB ASC Topic 730, Research and Development. Research and development costs include salaries and related benefits, outside services, licensing fees or milestones, materials and supplies, building costs and allocations of certain support costs. Research and development direct expenditures were $196,370, $173,709 and $243,257 for 2010, 2009 and 2008, respectively. Reimbursement of research and development expenses received in connection with collaborative cost-sharing agreements is recorded as a reduction of such expenses.
 
Leases
 
The Company accounts for its leases under FASB ASC Topic 840, Leases. The Company has a number of operating leases and has entered into sale-leaseback transactions for land and facilities. See Note G, Commitments and Other Matters, for additional discussion.
 
Stock-Based Compensation
 
The Company has a stock incentive plan (the “Incentive Plan”) under which options to purchase shares of the Company’s common stock may be granted to employees, consultants and directors with an exercise price no less than the quoted market value on the date of grant. The Incentive Plan also provides for the issuance of non-vested common stock (restricted stock) and other share-based compensation. The Company recognizes stock-based compensation expense related to employee stock options under FASB ASC Topic 718, Compensation — Stock Compensation. For income tax purposes, the Company follows the “with and without” method of accounting for the tax effect of excess tax benefits generated from stock-based compensation. See Note H, Stockholders’ Equity, for additional discussion.


F-11


 

HUMAN GENOME SCIENCES, INC.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share data)
 
(NOTE B) — Summary of Significant Accounting Policies (continued)
 
Financing Costs Related to Long-term Debt
 
Costs associated with obtaining long-term debt are deferred and amortized over the term of the related debt on a straight-line basis which approximates the effective interest method.
 
Patent Application Costs
 
Patent application costs are charged to expense as incurred.
 
Net Income (Loss) Per Share
 
The Company follows the provisions under FASB ASC Topic 260, Earnings Per Share, which requires the Company to present basic and diluted earnings per share. The Company’s basic and diluted income (loss) per share is calculated by dividing the net income (loss) by the weighted average number of shares of common stock outstanding during all periods presented. Shares issuable upon the conversion of the Company’s convertible subordinated debt are excluded from diluted earnings per share calculations for 2010, 2009 and 2008 because the effects are anti-dilutive.
 
Foreign Currency
 
Assets and liabilities of the Company’s international operations are translated into U.S. dollars at exchange rates that are in effect as of the balance sheet date, and equity accounts are translated at historical rates. Revenue and expenses are translated at average exchange rates that are in effect during the year. Translation adjustments are accumulated in other comprehensive income (loss) as a separate component of stockholders’ equity in the consolidated balance sheets. Transaction gains and losses are included in other income (expense) in the consolidated statements of operations.
 
Comprehensive Income (Loss)
 
FASB ASC Topic 220, Comprehensive Income, requires unrealized gains and losses on the Company’s available-for-sale short-term investments, marketable securities and long-term equity investments and the activity for the cumulative translation adjustment to be included in other comprehensive income.
 
The components of accumulated other comprehensive income are as follows:
 
                 
    December 31,  
    2010     2009  
 
Net unrealized gains on:
               
Short-term investments and marketable securities
  $ 6,313     $ 5,496  
Long-term equity investment in VIA Pharmaceuticals
    4       21  
Restricted investments
    805       1,816  
Foreign currency translation
    3       32  
                 
Accumulated other comprehensive income
  $ 7,125     $ 7,365  
                 
 
Accumulated other comprehensive income excludes net realized losses included in net loss of $303 for 2010. Accumulated other comprehensive income excludes net realized gains included in net income (loss) of $4,504 and $33,619 for 2009 and 2008, respectively. The effect of income taxes on items in other comprehensive income is $0 for all periods presented.


F-12


 

HUMAN GENOME SCIENCES, INC.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share data)
 
(NOTE B) — Summary of Significant Accounting Policies (continued)
 
Sources of Supply
 
The Company is currently able to obtain most of its raw materials, supplies and equipment from various sources, and generally has no dependence upon a single supplier. However, certain materials required for manufacturing are currently available only from single sources. As the Company proceeds with commercialization of its products, it intends to identify alternative sources of supply wherever possible.
 
Recent Accounting Pronouncements
 
In October 2009, the FASB issued new revenue recognition standards for arrangements with multiple deliverables. The new standards permit entities to initially use management’s best estimate of selling price to value individual deliverables when those deliverables do not have objective and reliable evidence of fair value. Additionally, these new standards modify the manner in which the transaction consideration is allocated across the separately identified deliverables. These new standards are effective for the Company as of January 1, 2011, however early adoption is permitted. The Company does not expect the adoption of these standards to have a material effect on its consolidated results of operations, financial position or liquidity.
 
In January 2010, the FASB issued Accounting Standards Update (“ASU”) 2010-06, Improving Disclosures about Fair Value Measurements (“ASU 2010-06”). ASU 2010-06 requires disclosing the amounts of significant transfers in and out of Level 1 and 2 fair value measurements and to describe the reasons for the transfers. The disclosures were effective for reporting periods beginning after December 15, 2009, and had no material impact on the Company’s financial statements for 2010. Additionally, disclosures of the gross purchases, sales, issuances and settlements activity in Level 3 fair value measurements will be required for fiscal years beginning after December 15, 2010. The Company does not expect the additional provisions of ASU 2010-06 to have a material effect on its consolidated results of operations, financial position or liquidity.
 
In April 2010, the FASB issued ASU 2010-17, Milestone Method of Revenue Recognition (“ASU 2010-17”), which provides guidance on defining a milestone and determining when it may be appropriate to apply the milestone method of revenue recognition for research or development transactions. Research or development arrangements frequently include payment provisions whereby a portion or all of the consideration is contingent upon milestone events such as successful completion of phases in a study or achieving a specific result from the research or development efforts. The amendments in this ASU provide guidance on the criteria that should be met for determining whether the milestone method of revenue recognition is appropriate. ASU 2010-17 is effective for fiscal years and interim periods within those years beginning on or after June 15, 2010, with early adoption permitted. This ASU is effective for the Company on January 1, 2011. The Company does not expect the adoption of ASU 2010-17 to have a material effect on its consolidated results of operations, financial position or liquidity.
 
In December 2010, the FASB issued ASU 2010-27, Fees Paid to the Federal Government by Pharmaceutical Manufacturers (“ASU 2010-27”), which specifies that the liability for the new fee mandated by the Patient Protection and Affordable Care Act of 2010, as amended by the Health Care and Education Reconciliation Act, should be estimated and recorded in full upon the first qualifying sale with a corresponding deferred cost that is amortized to expense using a straight-line method of allocation unless another method better allocates the fee over the calendar year that it is payable. The amendments in this update are effective for calendar years beginning after December 31, 2010. The Company is currently evaluating the impact ASU 2010-27 will have on its consolidated results of operations, financial position and liquidity.


F-13


 

HUMAN GENOME SCIENCES, INC.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share data)
 
(NOTE C) — Investments
 
Available for sale investments, including accrued interest, as of December 31, 2010 and 2009 were as follows:
 
                                 
    December 31, 2010  
          Gross
    Gross
       
    Amortized
    Unrealized
    Unrealized
    Fair
 
    Cost     Gains     Losses     Value  
 
Government-sponsored enterprise securities
  $ 140,849     $ 848     $ (13 )   $ 141,684  
Corporate debt securities
    138,691       1,660       (19 )     140,332  
                                 
Subtotal — Short-term investments
    279,540       2,508       (32 )     282,016  
                                 
Government-sponsored enterprise securities
    105,007       1,164       (140 )     106,031  
Corporate debt securities
    307,322       3,695       (883 )     310,134  
                                 
Subtotal — Marketable securities
    412,329       4,859       (1,023 )     416,165  
                                 
Restricted cash and cash equivalents
    7,455                   7,455  
U.S. Treasury and agencies
    1,302       10             1,312  
Government-sponsored enterprise securities
    19,605       200       (6 )     19,799  
Corporate debt securities
    50,343       630       (29 )     50,944  
                                 
Subtotal — Restricted investments
    78,705       840       (35 )     79,510  
                                 
Total
  $ 770,574     $ 8,207     $ (1,090 )   $ 777,691  
                                 
 
                                 
    December 31, 2009  
          Gross
    Gross
       
    Amortized
    Unrealized
    Unrealized
    Fair
 
    Cost     Gains     Losses     Value  
 
U.S. Treasury and agencies
  $ 7,997     $ 32     $     $ 8,029  
Government-sponsored enterprise securities
    34,667       672       (29 )     35,310  
Corporate debt securities
    107,283       1,099       (193 )     108,189  
                                 
Subtotal — Short-term investments
    149,947       1,803       (222 )     151,528  
                                 
Government-sponsored enterprise securities
    172,191       2,009       (673 )     173,527  
Corporate debt securities
    208,824       2,106       (429 )     210,501  
                                 
Subtotal — Marketable securities
    381,015       4,115       (1,102 )     384,028  
                                 
Restricted cash and cash equivalents
    6,693                   6,693  
Government-sponsored enterprise securities
    20,316       394       (17 )     20,693  
Corporate debt securities
    59,612       1,470       (31 )     61,051  
                                 
Subtotal — Restricted investments
    86,621       1,864       (48 )     88,437  
                                 
Total
  $ 617,583     $ 7,782     $ (1,372 )   $ 623,993  
                                 
 
The Company’s restricted investments with respect to its headquarters (“Traville”) lease serve as collateral for a letter of credit which serves as the security deposit for the duration of the lease, although the Company has the ability to reduce the restricted investments that are in the form of securities by substituting a cash security deposit in the amount of $19,750 to be maintained with the landlord. Presently, to secure the security deposit letter of credit, the Company is required to maintain margin value of the collateral of at least $19,750.


F-14


 

HUMAN GENOME SCIENCES, INC.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share data)
 
(NOTE C) — Investments (continued)
 
The Company’s restricted investments with respect to its large-scale manufacturing facility (“LSM”) lease, as amended, will serve as collateral in favor of the landlord in lieu of providing the landlord with either a cash deposit or a standby letter of credit. Under the LSM lease, the Company is required to pledge to the landlord a minimum of $20,000 in marketable securities or provide the landlord with a $19,750 cash security deposit.
 
In addition, the Company is also required to maintain $34,300 in restricted investments with respect to two leases with the Maryland Economic Development Corporation (“MEDCO”) for its small-scale manufacturing facility. The facility was financed primarily through a combination of bonds issued by MEDCO (“MEDCO Bonds”) and loans issued to MEDCO by certain State of Maryland agencies. The MEDCO Bonds are secured by letters of credit issued for the account of MEDCO which expire in December 2011. The Company is required to maintain restricted investments which serve as security for the MEDCO letters of credit reimbursement obligation.
 
Short-term investments, Marketable securities and Restricted investments — unrealized losses
 
The Company’s gross unrealized losses and fair value of investments with unrealized losses were as follows:
 
                                                 
    December 31, 2010  
    Loss Position
    Loss Position
       
    for Less Than
    for Greater Than
       
    Twelve Months     Twelve Months     Total  
    Fair
    Unrealized
    Fair
    Unrealized
    Fair
    Unrealized
 
    Value     Losses     Value     Losses     Value     Losses  
 
Government-sponsored enterprise securities
  $ 54,718     $ (13 )   $     $     $ 54,718     $ (13 )
Corporate debt securities
    38,718       (18 )     1,536       (1 )     40,254       (19 )
                                                 
Subtotal — Short-term investments
    93,436       (31 )     1,536       (1 )     94,972       (32 )
                                                 
Government-sponsored enterprise securities
    100,983       (140 )                 100,983       (140 )
Corporate debt securities
    65,392       (883 )                 65,392       (883 )
                                                 
Subtotal — Marketable securities
    166,375       (1,023 )                 166,375       (1,023 )
                                                 
Government-sponsored enterprise securities
    1,502       (6 )                 1,502       (6 )
Corporate debt securities
    7,110       (29 )                 7,110       (29 )
                                                 
Subtotal — Restricted investments
    8,612       (35 )                 8,612       (35 )
                                                 
Total
  $ 268,423     $ (1,089 )   $ 1,536     $ (1 )   $ 269,959     $ (1,090 )
                                                 
 


F-15


 

HUMAN GENOME SCIENCES, INC.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share data)
 
(NOTE C) — Investments (continued)
 

Short-term investments, Marketable securities and Restricted investments — unrealized losses (continued)
 
                                                 
    December 31, 2009  
    Loss Position
    Loss Position
       
    for Less Than
    for Greater Than
       
    Twelve Months     Twelve Months     Total  
    Fair
    Unrealized
    Fair
    Unrealized
    Fair
    Unrealized
 
    Value     Losses     Value     Losses     Value     Losses  
 
Government-sponsored enterprise securities
  $ 23,026     $ (29 )   $     $     $ 23,026     $ (29 )
Corporate debt securities
    24,751       (181 )     4,474       (12 )     29,225       (193 )
                                                 
Subtotal — Short-term investments
    47,777       (210 )     4,474       (12 )     52,251       (222 )
                                                 
Government-sponsored enterprise securities
    154,032       (673 )                 154,032       (673 )
Corporate debt securities
    76,595       (405 )     1,231       (24 )     77,826       (429 )
                                                 
Subtotal — Marketable securities
    230,627       (1,078 )     1,231       (24 )     231,858       (1,102 )
                                                 
Government-sponsored enterprise securities
    7,317       (17 )     14             7,331       (17 )
Corporate debt securities
    6,212       (31 )                 6,212       (31 )
                                                 
Subtotal — Restricted investments
    13,529       (48 )     14             13,543       (48 )
                                                 
Total
  $