We are a biotechnology company focused on the research, development and commercialization of innovative therapies in pulmonology and orphan fibrotic diseases. In pulmonology, we are is focused on therapies for the treatment of idiopathic pulmonary fibrosis (IPF), a progressive, irreversible, unpredictable and ultimately fatal lung disease. Pirfenidone, the only medicine approved for IPF anywhere in the world, is approved for marketing by
InterMunein all 28 member countries of the European Union(EU) and Canada. Pirfenidone is not approved for sale in the United Statesbut is currently in a Phase 3 clinical trial to support regulatory registration in the United States. Our research programs are focused on the discovery of targeted, small-molecule therapeutics and biomarkers to treat and monitor serious pulmonary and fibrotic diseases. For information relating to our business and our product development programs, please see the discussion in "Item 1. Business." Esbriet ® (pirfenidone) Pirfenidone is an orally active, small molecule compound that has been developed for the treatment of idiopathic pulmonary fibrosis. In September 2011, we launched commercial sales of pirfenidone in Germanyunder the trade name Esbriet, and Esbriet is now also commercially available in various European countries, including key markets such as France, Italyand the UK. In addition, we launched in Canadain January 2013. We continue to prepare for the commercial launch of Esbriet in other countries in Europeand, if approved by the FDA, in the United States. At the end of 2013, Esbriet had been reimbursed and launched in 13 of our original 15 priority countries in Europe, as well as Canada, compared with seven countries at the end of 2012. With respect to Spain and the Netherlands, the remaining two priority European countries in which Esbriet is not yet launched, the continuing economic conditions in Spain and health care system changes in the Netherlandshave caused delay and have made it challenging to predict the date by which a company can expect to obtain pricing and reimbursement for a new product.
Concurrent Public Offerings and Note Repurchases
January 2013, we completed a registered underwritten public offering of 15,525,000 shares of our common stock and a concurrent registered underwritten public offering of $120.8 millionaggregate principal amount of 2.50% convertible senior notes due 2017. The resulting aggregate net proceeds from the common stock offering were approximately $145.7 million, after deducting underwriting discounts and expenses. The resulting aggregate net proceeds from the convertible note offering were approximately $116.8 million, after deducting underwriting discounts and expenses. In January 2013, we used a portion of the net proceeds from the convertible note offering to repurchase approximately $66.6 millionof our outstanding 5.00% convertible senior notes due 2015 for proceeds of $72.2 million. In November 2013, we completed a registered underwritten public offering of 7,475,000 shares of our common stock. The resulting aggregate net proceeds from the common stock offering were approximately $91.5 million. 50
Significant Licenses and Agreements
We are highly dependent on technology that we have licensed or acquired from third parties. Effective
November 2007, we entered into asset purchase agreements with Marnac and KDL whereby we effectively terminated our prior license agreement with them by purchasing, among other things, the pirfenidone-related assets covered by such prior license agreement and as a result no longer have milestone or royalty obligations thereunder to Marnac and KDL. Under the terms of the asset purchase agreements, we are required to make future milestone payments in connection with the continued development and regulatory approval of pirfenidone in certain countries. The majority of our clinical development pipeline is also based on technology that we have licensed from third parties. Details of these agreements can be found elsewhere in this Report under "Item 1. Business - License, Collaboration and Other Agreements," Notes 4 and 5 of the Notes to Consolidated Financial Statements, and under the heading "Results of Operations" below. We may be required to make future contingent milestone payments to the owners of our licensed products or the suppliers of our drug compounds in accordance with our license, commercialization and collaboration agreements in the aggregate amount of $32.5 millionif all of the remaining milestones per the agreements are achieved. These milestones include development, regulatory approval, commercialization and sales milestones. Of the remaining $32.5 millionin aggregate milestone payments, $20.0 millionin contingent payments would be made by us only if positive Phase 3 data and product approval in the United Statesis achieved for pirfenidone. Included in the $32.5 millionin future aggregate milestone payments are aggregate milestone payments of $11.3 millionpayable to Array and Novartis, of which Roche has agreed to reimburse us in connection with our sale of danoprevir to Roche.
Critical Accounting Policies and Estimates
Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosure of contingent assets and liabilities. We base our estimates on historical experience and on various other assumptions that we believe are reasonable. These estimates are the basis for our judgments about the carrying values of assets and liabilities, which in turn may impact our reported revenue and expenses. We have discussed the development, selection and disclosure of these estimates with the Audit Committee of our Board of Directors. Actual results may differ from these estimates under different assumptions or conditions. An accounting policy is deemed to be critical if it requires an accounting estimate to be made based on assumptions about matters that are highly uncertain at the time the estimate is made, and if different estimates that reasonably could have been used, or changes in the accounting estimate that are reasonably likely to occur periodically, could materially change the financial statements. We believe that the following critical accounting policies affect our more significant judgments and estimates used in the preparation of our consolidated financial statements.
Basis of Presentation and Use of Estimates
The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in
the United States of America("GAAP"). The financial statements include all adjustments (consisting only of normal recurring adjustments) that we believe are necessary for a fair presentation of the periods presented. In preparing the financial statements, management must make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.
The consolidated financial statements include the accounts of
All tabular disclosures of dollar amounts are presented in thousands. All per share amounts are presented at their actual amounts. Percentages and amounts presented herein may not calculate or sum precisely due to rounding. 51
We determine the appropriate classification of investments at the time of purchase and evaluate such designation as of each balance sheet date. We classify all investments with maturities greater than three months at the time of purchase as short-term investments as they are subject to use within one year in current operations. We make investments based on specific guidelines approved by our Board of Directors with a view to liquidity and capital preservation and regularly review our investments for performance. As of December, 31, 2013, all our investments have been classified as available-for-sale and are carried on the balance sheet at fair value with unrealized gains and losses, if any, included in other comprehensive income within stockholders' equity. Any unrealized losses which are determined to be other than temporary will be included in earnings. Realized gains and losses are recognized on the specific identification method. The assessment of the fair value of the investments can be difficult and subjective. U.S. GAAP establishes three levels of inputs that may be used to measure fair value. Each level of input has different levels of subjectivity and difficulty involved in determining fair value. Valuation of Level 1 and 2 instruments generally do not require significant management judgment and the estimation is not difficult. Level 3 instruments include unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. The determination of fair value for Level 3 instruments requires the most management judgment and subjectivity. We do not currently hold any investments that would be classified as Level 3 investments. We periodically evaluate our investments for impairment. In the event that the carrying value of an investment exceeds its fair value and the decline in fair value is determined to be other than temporary, an impairment charge is recorded and a new cost basis for the investment is established. In order to determine whether a decline in value is other than temporary, we evaluate many factors, including the following: the duration and extent to which the fair value has been less than the carrying value; our financial condition and business outlook, including key operational and cash flow metrics, current market conditions and future trends in the industry; and our intent and ability to retain the investment for a period of time sufficient to allow for any anticipated recovery in fair value. Significant management judgment is required in determining whether an other-than-temporary decline in the fair value of an investment exists. Changes in our assessment of the valuation of our investments could materially impact our future operating results and financial position. Stock-Based Compensation We account for stock-based compensation in accordance with ASC Topic 718-10. Under the fair value recognition provisions, stock-based compensation cost is measured at the grant date based on the fair value of the award and is recognized as expense over the vesting period. In order to estimate the value of share-based awards, we use the Black-Scholes model, which requires the use of certain subjective assumptions. The most significant subjective assumptions are our estimates of the expected volatility and the expected term of the award. In addition, judgment is also required in estimating the amount of share-based awards that are expected to be forfeited. If actual results differ significantly from any of these estimates, stock-based compensation expense and our results of operations could be materially impacted. Revenue Recognition Revenue is generated from product sales and recorded net of mandatory government rebates. We only ship product upon receipt of valid orders from customers, such as pharmacies and hospitals, which are in turn a result of actual patient prescriptions. Delivery is considered to have occurred when title passes to a credit-worthy customer. We include shipping and handling costs in cost of goods sold. Pursuant to terms and conditions of sale, our customers have no general right of product return but we permit returns if the product is damaged or defective when received by the customer. Such restriction on product returns is common practice in the markets in which we sell, and as a result, we have had no significant expenses related to product returns, damaged or expired goods. To date, all significant amounts recorded as estimates of items that reduce gross revenue related solely to mandatory government rebates, many of which were negotiated on a confidential basis with the respective government reimbursement agencies. Our estimation of these rebates requires only the application of pre-specified rates, determined as part of pre-launch pricing negotiations with the relevant government reimbursement agencies, to sales of our product as applicable. We recognize these mandatory government rebates as reductions of product sales and the recording of these rebates is substantially mechanical in nature and does not involve the application of significant judgment. Fluctuations in the amounts recorded for these rebates relate solely to increased sales or the eventual payment of amounts due to the various government agencies. To date, we have had no significant charges or credits related to prior period estimates. 52
Trade accounts receivable are recorded net of allowances for wholesaler chargebacks related to government rebate programs, cash discounts for prompt payment, sales returns and doubtful accounts. Estimates for wholesaler chargebacks for government rebates, cash discounts and sales returns are based on contractual payment terms, historical payment patterns of our customers and individual customer circumstances, an analysis of days sales outstanding by geographic region and a review of the local economic environment and its potential impact on government funding and reimbursement practices. Historically, the amounts of uncollectible accounts receivable that have been written off have been insignificant and consistent with management's expectation. Clinical Trial Accruals We accrue costs for clinical trial activities performed by contract research organizations based upon the estimated amount of work completed on each study. These estimates may or may not match the actual services performed by the organizations as determined by patient enrollment levels and related activities. We monitor patient enrollment levels and related activities to the extent possible through internal reviews, correspondence with contract research organizations and review of contractual terms. However, if we have incomplete or inaccurate information, we may overestimate or underestimate activity levels associated with various studies at a given point in time. In the event we underestimate, we could be required to record significant additional research and development expenses in future periods when the actual activity level becomes known. All such costs are charged to research and development expenses as incurred. Inventories Inventories are stated at the lower of cost or market. Cost is determined by the specific identification method which approximates first-in first-out. We enter into purchase obligations to purchase our inventory based upon sales forecasts to enable us to mitigate some of the risk associated with the long lead times required to manufacture our products. We periodically review the composition of our inventories in order to identify obsolete, slow-moving or otherwise unsaleable items. If unsaleable items are observed and there are no alternate uses for the inventory, we will record a write-down to net realizable value in the period that the impairment is first recognized. Results of Operations
Comparison of years ended
Revenue Year Ended December 31, Percentage Change (in thousands, except percentages) 2013 2012 2011 2013 vs 2012 2012 vs 2011 Esbriet product sales
$ 70,339 $ 26,174 $ 2,778169 % 842 % Revenue for the year ended December 31, 2013consists of Esbriet product sales in Europeand Canadanet of mandatory government rebates. Increase of 169% compared to December 31, 2012is attributed to continued year over year volume growth in previously existing markets and commercial launches of Esbriet in Belgium, Canada, Finland, Ireland, Italyand the UKduring 2013. Revenue for the year ended December 31, 2012and 2011 consists solely of Esbriet product sales, primarily in Germany, following the launch in that country in September 2011.
Cost of Goods Sold and Gross Margin
Year Ended December 31, Percentage Change (in thousands, except percentages) 2013 2012 2011 2013 vs 2012 2012 vs 2011 Cost of goods sold
$ 10,406 $ 8,916 $ 1,40617 % 534 % As a percentage of total revenue 15 % 34 % 51 % Gross margin $ 59,933 $ 17,258 $ 1,372247 % 1,158 % As a percentage of total revenue 85 % 66 % 49 % Cost of goods sold consists of both direct and indirect manufacturing costs, amortization of acquired product rights, royalties to Shionogi related to sales of Esbriet in the EU commencing on January 1, 2013and second source supplier start-up costs. Manufacturing costs include product costs, distribution, inventory write-downs and internal supply chain management costs. The following table summarizes the major components of cost of goods sold: 53
-------------------------------------------------------------------------------- Year Ended December 31, Percentage Change Major components of cost of goods sold 2013 2012 2011
2013 vs 2012 2012 vs 2011
(in thousands) Manufacturing costs
$ 6,728 $ 4,913 $ 65637 % 649 % Amortization of acquired product rights 1,000 1,000 750 - % 33 % Royalty expense 2,678 - - 100 % - % Second source supplier start-up costs - 3,003 - (100 )% 100 % Total COGS $ 10,406 $ 8,916 $ 1,40617 % 534 % Our gross margin increase from 2012 to 2013 was primarily the result of i) economies of scale derived from increased unit sales and ii) the absence of any second source supplier validation expenses in 2013, offset by royalty payments to Shionogi which were effective for the first time in 2013. The economies of scale were derived primarily from the absorption of fixed costs such as the amortization of our acquired product rights and other internal supply chain costs, over increased units produced. Cost of goods sold for the year ended December 31, 2012relates solely to Esbriet product sales, following the launch in September 2011. The increase in gross margin for the year ended December 31, 2012compared with the same period in 2011 is primarily due to economies of scale achieved from increased sales.
Research and Development Expenses
December 31, Percentage Change 2012 vs
(in thousands, except percentages) 2013 2012 2011
2013 vs 2012 2011 Research and development
$ 113,506 $ 106,571 $ 74,9737 % 42 % The increase in 2013 research and development expenses over 2012 is primarily related to completion activities of ASCEND clinical trials in the US, which were initiated in July 2011. We also initiated two clinical studies, namely PANORAMA and LOTUSS, in the third quarter of 2013, in order to research expanded uses of Esbriet as well as combined therapy with existing compounds.
The increase in 2012 R&D expenses over 2011 is primarily related to the ongoing ASCEND clinical trials in the US, which were initiated in
The following table lists our current product development programs and the research and development expenses recognized in connection with each program during the indicated periods. The category titled "Programs - Non-specific" is comprised of facilities and personnel costs that are not allocated to a specific development program or discontinued programs and
$3.8 million, $5.0 million, and $5.7 millionof stock-based compensation expense in 2013, 2012 and 2011, respectively. Our management reviews each of these program categories in evaluating our business. For a discussion of the risks and uncertainties associated with developing our products, as well as the risks and uncertainties associated with potential commercialization of our product candidates, see the specific sections under "Item 1A. Risk Factors" above. Year Ended December 31, Development Programs 2013 2012 2011 (in thousands) Pulmonology $ 91,655 $ 84,113 $ 50,077Hepatology(1) - - 2,432 Program - Non-Specific 21,851 22,458 22,464 Total $ 113,506 $ 106,571 $ 74,973
(1) Effective in 2011, we discontinued our HCV development program.
Historically, a large component of our total operating expense was our ongoing investment in research and development and, in particular, the clinical development of our product pipeline. For the periods presented, the largest component of our research and development expense relates to our ASCEND trial and the associated long-term rollover safety study, RECAP, to support approval of pirfenidone for the treatment IPF in
the United Statesfor which targeted enrollment is complete. In addition, we consider, and in the future may be required to complete, additional clinical studies with regard to pirfenidone in isolation or in combination with other treatment alternatives. We do not currently have any other product candidates in clinical development; however, we maintain a pre-clinical program and research development pipeline. 54 -------------------------------------------------------------------------------- The process of conducting the clinical research necessary to obtain FDAapproval is costly and time consuming. Current FDArequirements for a new human drug to be marketed in the United Statesinclude:
· the successful conclusion of preclinical laboratory and animal tests, if
appropriate, to gain preliminary information on the product's safety;
· the submission of an IND with the
· the successful completion of adequate and well-controlled human clinical
investigations to establish the safety and efficacy of the product for its
recommended use; and
· the submission by a company and acceptance and approval by the
or BLA for a drug product to allow commercial distribution of the drug. The actual probability of success for each candidate and clinical program may be impacted by a variety of factors, including, among others, the quality of the candidate, the validity of the target and disease indication, early clinical data, investment in the program, competition, manufacturing capability and overall safety and efficacy profile as ultimately decided upon by the
FDA. Due to these factors, we believe it is difficult to give accurate guidance on the anticipated proportion of our research and development investments or the future cash inflows from these programs. In addition, due to these same factors and others, we are unable to reasonably estimate the efforts needed and, therefore, the costs we will incur to complete any of our projects or the estimated time to complete such projects.
Milestone Payments to Third Parties
We made no third-party payments in 2013, 2012 or 2011 related to contractual milestone obligations that were charged directly to expense. In 2011, we received authorization to market Esbriet in the EU and made a milestone payment of
$20.0 millionin the aggregate to Marnac and KDL and have capitalized such payment as acquired product rights. This asset is being amortized to cost of goods sold over the estimated useful life of Esbriet and we incurred approximately $1.0 million, $1.0 millionand $0.8 millionof amortization expense in 2013, 2012 and 2011, respectively.
Selling, General and Administrative Expenses
December 31, Percentage Change
(in thousands, except percentages) 2013 2012 2011
2013 vs 2012 2012 vs 2011 Selling, general and administrative
$ 145,051 $ 105,295 $ 89,46338 % 18 % The increase in selling, general and administrative expenses for the year ended December 31, 2013compared with the previous year is attributed to the expansion of our European and Canadian infrastructure including, but not limited to, additional headcount and increased market research activities. Additionally, we have incurred costs as we invest in pre-launch activities of pirfenidone for the United Statesmarket including hiring a commercial team and engaging in market research activities. The increased spending for the year ended December 31, 2012compared with the previous year is attributed to building our European infrastructure and investments in the pre-launch and commercial launch of Esbriet in Europe, including but not limited to additional headcount. The increase for the year ended December 31, 2012was partially offset by a decrease in legal costs in connection with the global prosecution of our intellectual property portfolio, other regulatory and corporate matters, as well as expenses in connection with indemnification obligations to our former CEO. Interest Income Year Ended December 31, Percentage Change 2012 vs (in thousands, except percentages) 2013 2012 2011 2013 vs 2012 2011 Interest income $ 427 $ 586 $ 556(27 )% 5 %
The slight differences in year to year interest income reflect the modest yields on our cash and short-term investments resulting from our conservative investment portfolio.
Interest Expense Year Ended
December 31, Percentage Change
(in thousands, except percentages) 2013 2012 2011
2013 vs 2012 2012 vs 2011 Interest expense
$ (14,602 ) $ (8,927 ) $ (6,408 )64 % 39 % 55
-------------------------------------------------------------------------------- The increase for the year ended
December 31, 2013compared to the same period in 2012 was the result of our issuance in January 2013of $120.8 millionaggregate principal 2.50% 2017 Notes offset by the $66.6 millionpay down of 2015 Notes. Additional interest expense was recognized due to the accretion of our debt discount recorded in connection with the issuance of our 2017 Notes. Refer to Note 11 to our consolidated financial statements for further discussion of our 2017 Notes. The increase for the year ended December 31, 2012over 2011 was the result of our issuance in September 2011of $155.3 millionaggregate principal of 2.50% convertible senior notes due 2018.
Fair Value of Embedded Conversion Derivative
Year Ended December 31, Percentage Change (in thousands, except percentages) 2013 2012 2011 2013 vs 2012 2012 vs 2011 Change in value of embedded conversion derivative
$ 2,422$ - $ - 100 % - % The embedded conversion derivative in the 2017 Notes was initially recorded at $36.9 millionbased on our fair value measurement at the January 2013debt issuance date. On May 30, 2013, upon obtaining stockholder approval of additional authorized shares of our common stock, the derivative liability was marked to fair value and reclassified to stockholders' equity. The expense of $2.4 millionrecorded in the year ended December 31, 2013primarily resulted from a decrease in our stock price during the period. The estimated fair value of the embedded conversion derivative was $34.5 millionimmediately prior to its reclassification to stockholders' equity. Refer to Note 12 to our audited consolidated financial statements for further discussion of the embedded conversion derivative in the 2017 Notes.
Loss on Extinguishment of Debt
Year Ended December 31, Percentage Change (in thousands, except percentages) 2013 2012 2011 2013 vs 2012 2012 vs 2011 Loss on extinguishment of notes
$ (7,900 )$ - $ - 100 % - %
This loss is attributed to the extinguishment of the portion of our 2015 Notes repaid in connection with the issuance of our 2017 Notes in
Other Year Ended December 31, Percentage Change (in thousands, except percentages) 2013 2012 2011 2013 vs 2012 2012 vs 2011 Other
$ (1,610 ) $ (373 ) $ (658 )332 % (43 )% Other expense for the years presented consisted primarily of foreign currency losses related to the unhedged portion of our non-dollar denominated balance sheet exposures. The increased loss in 2013 compared to the same period in 2012 is in connection with our expansion in Europeand Canada.
Income Tax Provision (Benefit) Allocated to Continuing Operations
Year Ended December 31, Percentage Change (in thousands, except percentages) 2013 2012 2011 2013 vs 2012 2012 vs 2011 Income tax provision (benefit)
$ 890 $ (18,633 ) $ (4,594 )(105 )% 306 % In 2013, we recorded a tax provision of approximately $1.5 millionrelated to taxes payable to various foreign jurisdictions in which we sell our Esbriet product. We expect our tax burden to continue to increase in these, and other, jurisdictions as we continue to expand our product sales into new territories. The $1.5 millionprovision was offset by a $0.6 millioncredit in the U.S. related to the Actimmune sale as discussed below. The change in our income tax provision (benefit) during the years 2013, 2012 and 2011 was largely driven by two factors: i) the profitability of certain of our subsidiaries in various foreign jurisdictions, and ii) the impact of the sale of our Actimmune operations on June 19, 2012(see "Income Tax Provision Allocated to Discontinued Operations" below). In 2012 and 2011 substantially all of our tax provision (benefit) was derived from the effect of the Actimmune sale. 56
Income Tax Provision Allocated to Discontinued Operations
Year Ended December 31, Percentage Change (in thousands, except percentages) 2013 2012 2011 2013 vs 2012 2012 vs 2011 Income tax provision (benefit)
$ 626 $ 19,585 $ 4,616(97 )% 324 % On June 19, 2012we sold our Actimmune business and classified Actimmune operations as discontinued. Intra-period tax allocation rules require that we allocate our tax provision between continuing operations and other categories of earnings, in this case, discontinued operations. Although we were able to utilize U.S. net operating loss carryforwards to offset potential taxes payable on the gain on sale of Actimmune we were required under the intra-period tax allocation rules to record a tax provision for the estimated taxes related to the discontinued Actimmune business, and to also record an associated benefit in our continuing operations. Accordingly, we recorded provisions for income tax of $0.6 million, $19.6 millionand $4.6 millionin the years ended December 31, 2013, 2012 and 2011, respectively. Amounts recorded in 2013 relate to ongoing post-sale royalties payable to us by Actimmune, which are due to end in 2014. Additionally, we recorded offsetting tax benefits to our income tax provision (benefit) related to continuing operations in each of 2013, 2012 and 2011.
Liquidity and Capital Resources
Our principal sources of liquidity are our existing cash, cash equivalents and available for sale securities, cash generated from operations and proceeds from our convertible note and equity financings in
June 2008, September 2011, January 2013and November 2013. At December 31, 2013, our capital resources consisted of cash, cash equivalents and available for sale securities of $387.0 million. Based on our current expectations, we believe our existing cash, cash equivalents and available for sale securities will be sufficient to meet our planned operations through at least the next 12 months. Our future capital requirements will depend on many factors including our rate of revenue growth, the timing and extent of spending to support our development and clinical efforts and strategic initiatives, the expansion of sales, marketing and administrative activities, the timing of introduction of our product into new markets and the continuing market acceptance of our products. In particular, in order to continue to grow our commercial operations successfully, we may need to continue to increase the number of our managerial, operational, financial and other employees in the EEA, and if Esbriet is approved for sale in the United Stateswe will need to do so in the United States, as well. Establishing a commercial infrastructure in the United Statesfor Esbriet, if approved, will require significant capital expenditures, which may require us to raise additional capital. Certain of our available cash and cash equivalents are held in accounts managed by third-party financial institutions and consist of invested cash and cash in our core operating accounts. The invested cash is invested in interest bearing funds managed by third-party financial institutions. We can provide no assurances that access to our invested cash and cash equivalents will not be impacted by adverse conditions in the financial markets. In addition, at any point in time we could have balances that exceed the Federal Deposit Insurance Corporationinsurance limits. While we monitor the cash balances in our operating accounts on a regular basis, these cash balances could be impacted and we may be unable to access our cash if the underlying financial institutions fail or if we become subject to other adverse conditions in the financial markets. To date we have not experienced a lack of access to cash in any of our third-party financial institution accounts. The primary objective of our investment activities is to preserve principal while at the same time maximizing yields without significantly increasing risk. To achieve this objective, we invest our excess cash in debt instruments of the U.S. federal and state governments and their agencies and high-quality corporate issuers, and, by policy, restrict our exposure by imposing concentration limits and credit worthiness requirements for all corporate issuers.
Cash Flows from Operating Activities
Cash used in operating activities was approximately
$203.9 millionduring the year ended December 31, 2013, comprised primarily of a net loss of $219.6 million, as shown on the consolidated statement of operations, as well as changes to our working capital. Significant changes in working capital consisted of increases in accounts receivable and product inventory principally related to the launch of Esbriet in several new European countries. Additionally, accounts payable, accrued compensation and other accrued liabilities increased as a result of significant increases in headcount in Europeand the continued work on the ASCEND clinical trial which launched in the U.S. in mid-2011.
Cash Flows from Investing Activities
Cash used in investing activities was
Cash Flows from Financing Activities
Cash provided by financing activities of approximately
$285.1 millionfor the year ended December 31, 2013was due to the issuance of common stock, convertible senior notes and stock to our employees under our employee benefit plans. Also see above "Concurrent Public Offerings and Note Repurchases" for information related to our concurrent registered underwritten public offering completed in January 2013of common stock and 2.50% convertible senior notes due 2017 and our registered public offering completed in November 2013of common stock. The resulting aggregate net proceeds from the January 2013common stock offering were approximately $145.7 million, after deducting underwriting discounts and expenses. The resulting aggregate net proceeds from the January 2013convertible note offering were approximately $116.7 million, after deducting underwriting discounts and expenses. The resulting aggregate net proceeds from the November 2013common stock offering were approximately $91.5 million, after deducting underwriting discounts and expenses. We expect to incur net losses in the near term as we continue our commercialization and commercial launch activities of Esbriet in the European Union, continue the development of pirfenidone for approval in the United Stateswith the ongoing ASCEND study, continue our research in the area of orphan fibrotic diseases, and continue to grow our operational capabilities. This forward-looking statement involves risks and uncertainties, and actual results could vary as a result of a number of factors, including the factors discussed under "Item 1A. Risk Factors." This forward-looking statement is also based upon our current plans and assumptions, which may change, and our capital requirements, which may increase in future periods. Our future capital requirements will depend on many factors, including, but not limited to:
· capital requirements related to our commercialization and commercial launch
activities of Esbriet for the
establishment of a commercial infrastructure in
the expansion of our commercial infrastructure and related personnel and
· the timing and financial requirements of the ongoing Phase 3 clinical study
of pirfenidone in the U.S. (ASCEND);
· sales of Esbriet or any of our product candidates in development that receive
· pricing and reimbursement from third-party payors for Esbriet;
· our ability to partner our programs or products or enter into collaborative
and/or strategic relationships with other companies;
· the progress of our research and development efforts;
· the scope and results of preclinical studies and clinical trials, including
our ongoing PANORAMA and LOTUSS trials;
· the costs, timing and outcome of regulatory reviews;
· determinations as to the commercial potential of our product candidates in
· the costs, timing and outcome of any current or future legal proceedings;
· the pace of expansion of administrative expenses;
· the status of competitive products and competitive barriers to entry;
· the establishment and maintenance of manufacturing capacity through
third-party manufacturing agreements;
· the payments of annual interest on our long-term debt; and
· the timing and size of payments we may receive from potential collaboration
agreements. As a result, we may require substantial additional capital and may attempt to raise additional funds through equity or debt financings, collaborative arrangements with corporate partners or from other sources. We have no commitments for such fund raising activities at this time. Furthermore, additional funding may not be available to finance our operations when needed or, if available, the terms for obtaining such funds may not be favorable or may result in dilution to our stockholders.
Off-Balance Sheet Arrangements
Contractual obligations represent future cash commitments and liabilities under agreements with third parties, and exclude contingent liabilities, such as milestone payments, for which we cannot reasonably predict future payments. The following chart represents our contractual obligations as of
December 31, 2013, aggregated by type: 2018 and (in millions) Total 2014 2015 2016 2017 Beyond Long-term note obligations(1) $ 327.2 $ 7.8 $ 25.7 $ 6.9 $ 127.7 $ 159.1Operating leases 14.1 5.0 4.3 2.4 1.1 1.3 Non-cancellable purchase obligations - Other(2) 16.5 7.4 3.6 5.5 - - Research and development commitments(3) 25.2 20.6 2.3 2.3 - -
Total contractual cash obligations(4)
$ 17.1 $ 128.8 $ 160.4
(1) These amounts include accrued interest and principal amounts of our 5.00% convertible senior notes due 2015, 2.50% convertible notes due 2017 and the 2.50% convertible senior notes due 2018. See Note 11 of the consolidated financial statements.
(2) These amounts consist of clinical related obligations and inventory purchase commitments.
(3) These amounts consist of clinical, process development and other related obligations and are cancelable upon discontinuation of the trial.
(4) We may also be required to make contingent milestone payments in the aggregate of up to
$32.5 millionto the licensors of certain of our licensed products or the suppliers of our drug compounds in accordance with the specific license, commercialization and collaboration agreements if all of the milestones per the agreements are achieved, which include development and regulatory approval milestones. These amounts are not included in the above table. Included in the $32.5 millionin future aggregate milestone payments are aggregate milestone payments of $11.3 millionpayable to Array and Novartis, of which Roche has agreed to reimburse us in connection with our sale of danoprevir to Roche and $20 millionin contingent payments to Marnac, payable upon positive Phase 3 data and product approval for pirfenidone in the United States. The operating leases for our facilities require letters of credit secured by a restricted cash balance with our bank. The amount of each letter of credit approximates six to twelve months of operating rent payable to the landlord of each facility.
Recent Accounting Pronouncements
See "Note 2: Summary of Significant Accounting Policies" of the Financial Statements in Part II, Item 8 of this report.