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Description of business and basis of presentation (Policies)
6 Months Ended
Jun. 30, 2014
Business

Business — The Company is a biopharmaceutical company focused on the discovery and development of therapeutic products for diseases such as diabetes. The Company’s lead product, AFREZZA (insulin human) inhalation powder, is a rapid-acting inhaled insulin that was approved by the U.S. Food and Drug Administration (“FDA”) on June 27, 2014 to improve glycemic control in adult patients with diabetes.

Basis of Presentation

Basis of Presentation — The Company is considered to be in the development stage as its primary activities since incorporation have been establishing its facilities, recruiting personnel, conducting research and development, business development, business and financial planning, and raising capital. It is costly to develop therapeutic products and conduct clinical studies for these products. From its inception through June 30, 2014, the Company had accumulated net losses of $2.4 billion, which include a goodwill impairment charge of $151.4 million and cumulative negative cash flow from operations of $1.8 billion. At June 30, 2014, the Company’s capital resources consisted of cash and cash equivalents of $41.2 million. These factors raise substantial doubt about the Company’s ability to continue as a going concern. The financial statements do not include any adjustments that might result from the outcome of these uncertainties.

As of June 30, 2014, the Company had $30.1 million principal amount of available borrowings under its loan arrangement (the “Loan Arrangement”) with The Mann Group LLC (“The Mann Group”) although the Company anticipates using a portion of these available borrowings to capitalize accrued interest into principal as it becomes due and payable under the Loan Arrangement, upon mutual agreement of the parties. As of June 30, 2014, the Company had accrued $2.0 million of interest related to the Loan Arrangement.

On July 1, 2013, the Company entered into a facility agreement (the “Facility Agreement”) with Deerfield Private Design Fund II, L.P. (“Deerfield Private Design Fund”) and Deerfield Private Design International II, L.P. (collectively, “Deerfield”), providing for the sale of up to $160.0 million of Senior Convertible Notes due 2019 (the “2019 notes”) to Deerfield in four equal tranches of $40.0 million principal amount. As of June 30, 2014, Deerfield had purchased the first three tranches of 2019 notes in the aggregate principal amount of $120.0 million leaving $40.0 million of 2019 notes unsold. On February 28, 2014, the Company entered into a First Amendment to Facility Agreement and Registration Rights Agreement (the “Amendment”). The Amendment modified the terms of the Facility Agreement to provide for the issuance of an additional tranche of notes (the “Tranche B notes”) to Deerfield. Pursuant to the terms of the Amendment and the subsequent occurrence of certain events specified in the Amendment, the Company may issue to Deerfield up to $90.0 million aggregate principal amount of Tranche B notes, subject to the satisfaction of certain conditions. On May 6, 2014, Deerfield purchased $20.0 million aggregate principal amount of the potential $90.0 million Tranche B notes in accordance with the provisions of the Facility Agreement, as amended.

 

On July 18, 2014, Deerfield purchased the fourth and final tranche of 2019 notes in the aggregate principal amount of $40.0 million. Deerfield’s obligation to purchase the fourth tranche of 2019 notes was subject to (i) the Company’s receipt of marketing approval of AFREZZA from the FDA, which occurred June 27, 2014, and (ii) the shares of the Company’s common stock issuable upon conversion of all previously sold 2019 notes being freely tradable pursuant to an effective registration statement filed with the SEC or pursuant to Rule 144 under the Securities Act of 1933, as amended (the “Securities Act”). The Facility Agreement, as amended, contains a financial covenant that requires the Company’s cash and cash equivalents, which include available borrowings under the Loan Arrangement, on the last day of each fiscal quarter to not be less than $25.0 million. On August 11, 2014 the Company entered into a second amendment to the Facility Agreement to provide for a $175.0 million secured loan facility to be provided by an affiliate of Sanofi in connection the Sanofi License Agreement (as defined below).

Additional capital resources potentially available to the Company include proceeds from the exercise of warrants issued in its February 2012 public offering, the Company’s at-the-market issuance sales agreements, and up to $70.0 million of additional sales of Tranche B notes to Deerfield (see Note 11 – Facility financing agreement).

On August 11, 2014, the Company entered into a license and collaboration agreement (the “Sanofi License Agreement”) with Sanofi-Aventis Deutschland GmbH (“Sanofi”) pursuant to which the Company will receive a $150.0 million upfront fee and may earn up to an aggregate of $775.0 million upon the achievement of certain development, manufacturing, regulatory and sales milestones. Worldwide profits and losses will be shared 65% by Sanofi and 35% by the Company. Pursuant to a separate supply agreement, the Company will manufacture AFREZZA at its manufacturing facility in Danbury, Connecticut to supply Sanofi’s demand for the product. In addition, the Company received a commitment letter from an affiliate of Sanofi to provide the Company with a secured loan facility of up to $175.0 million to fund the Company’s share of net losses under the Sanofi License Agreement (the “Sanofi Loan Facility”).

Based on its current expectations, the Company believes that its existing capital resources, without considering payments under the collaboration with Sanofi, will enable it to continue planned operations at least into the first quarter of 2015. However, the Company cannot provide assurances that its plans will not change or that changed circumstances will not result in the depletion of its capital resources more rapidly than it currently anticipates. The Company may need to raise additional capital, whether through the sale of equity or debt securities, additional strategic business collaborations, the establishment of other funding facilities, licensing arrangements, asset sales or other means, in order to support its ongoing activities related to the commercialization of AFREZZA and the development of other product candidates. However, the Company cannot provide assurances that such additional capital will be available on favorable terms, or at all.

Fair Value of Financial Instruments

Fair Value of Financial Instruments — The carrying amounts reported in the accompanying financial statements for cash and cash equivalents, accounts payable and accrued liabilities approximate their fair value due to their relatively short maturities. The fair value of the cash equivalents, note payable to related party, senior convertible notes, and the Facility Agreement are discussed in Note 13, “Fair Value Measurements.”

Recently Issued Accounting Standards

Recently Issued Accounting Standards — In July 2013, the FASB issued ASU 2013-11, Income Taxes (Topic 740): Presentation of an Unrecognized Tax Benefit when a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists (a consensus of the FASB Emerging Issues Task Force). The amendments in this ASU provide guidance on the financial statements presentation of an unrecognized tax benefit when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists. An unrecognized tax benefit should be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward with certain exceptions, in which case such an unrecognized tax benefit should be presented in the financial statements as a liability. The amendments in this ASU do not require new recurring disclosures. The amendments in this ASU are effective for fiscal years, and interim periods within those years, beginning after December 15, 2013. The adoption of the new requirement did not have a significant impact on the Company’s consolidated financial statements.

In June 2014, the FASB issued ASU No. 2014-10, Development Stage Entities (Topic 915): Elimination of Certain Financial Reporting Requirements, Including an Amendment to Variable Interest Entities Guidance in Topic 810, Consolidation. The amendments in this ASU remove all incremental financial reporting requirements from U.S. GAAP for development stage entities, including the removal of Topic 915, Development Stage Entities, from the FASB Accounting Standards Codification. In addition, the ASU: (a) adds an example disclosure in Topic 275, Risks and Uncertainties, to illustrate one way that an entity that has not begun planned principal operations could provide information about the risks and uncertainties related to the company’s current activities; and (b) removes an exception provided to development stage entities in Topic 810, Consolidation, for determining whether an entity is a variable interest entity. The presentation and disclosure requirements in Topic 915 will no longer be required for the first annual period beginning after December 15, 2014. The revised consolidation standards are effective one year later, in annual periods beginning after December 15, 2015. Early adoption is permitted. The Company is evaluating the impact the adoption of ASU 2014-10 will have on its consolidated financial statements.