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ARRAY BIOPHARMA INC - 10-K - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

August 15, 2014

Management's Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including statements about our expectations related to the progress, continuation, timing and success of drug discovery and development activities conducted by Array and by our partners, our ability to obtain additional capital to fund our operations, changes in our research and development spending, realizing new revenue streams and obtaining future out-licensing or collaboration agreements that include up-front, milestone and/or royalty payments, our ability to realize up-front milestone and royalty payments under our existing or any future agreements, future research and development spending and projections relating to the level of cash we expect to use in operations, our working capital requirements and our future headcount requirements. In some cases, forward-looking statements can be identified by the use of terms such as "may," "will," "expects," "intends," "plans," "anticipates," "estimates," "potential," or "continue," or the negative thereof or other comparable terms. These statements are based on current expectations, projections and assumptions made by management and are not guarantees of future performance. Although we believe that the expectations reflected in the forward-looking statements contained herein are reasonable, these expectations or any of the forward-looking statements could prove to be incorrect and actual results could differ materially from those projected or assumed in the forward-looking statements. Our future financial condition, as well as any forward-looking statements are subject to significant risks and uncertainties including, but not limited to the factors set forth under the heading "Item 1A. Risk Factors" under Part I of this Annual Report on Form 10-K, and in other reports we file with the SEC. All forward-looking statements are made as of the date of this report and, unless required by law, we undertake no obligation to update any forward-looking statements. The following discussion of our financial condition and results of operations should be read in conjunction with our accompanying audited financial statements and related notes to those statements included elsewhere in this Annual Report on Form 10-K. Our fiscal year ends on June 30. When we refer to a fiscal year or quarter, we are referring to the year in which the fiscal year ends and the quarters during that fiscal year. Therefore, fiscal 2014 refers to the fiscal year ended June 30, 2014.



Overview

Array is a biopharmaceutical company focused on the discovery, development and commercialization of targeted small molecule drugs to treat patients afflicted with cancer. Seven Phase 3 studies are in progress, or are planned to begin this year. These programs include the wholly-owned hematology drug, filanesib for MM, and two partnered cancer drugs, selumetinib, partnered with AstraZeneca, and binimetinib, partnered with Novartis.



Our most advanced wholly-owned clinical stage drugs include:

Proprietary Program Indication Clinical Status 1. Filanesib KSP inhibitor for MM Phase 2 2. ARRY-797 p38 inhibitor for LMNA-DCM Phase 2 3. ARRY-502 CRTh2 antagonist for asthma Phase 2 4. ARRY-614 p38/Tie2 dual inhibitor for MDS Phase 1 With our progress on filanesib for MM we believe hematology/oncology is the area of greatest opportunity for Array and where we intend to concentrate our resources and build on our capabilities in fiscal 2015 and beyond. We continue to progress select other programs, however, and initiated a Phase 2 trial with ARRY-797 in a rare cardiovascular disease, based on scientific rationale, in vivo data and a single-patient IND application. We are seeking a partner to advance our asthma program for ARRY-502 and, as we announced in August 2014, we have no plans to invest internally at this time in ARRY-614. 60



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In addition, we have 11 ongoing partner-funded clinical programs, including two MEK inhibitors, which are both in Phase 3 clinical trials, binimetinib with Novartis and selumetinib with AstraZeneca:

Drug Candidate Indication Partner Clinical Status 1. Binimetinib MEK inhibitor for cancer Novartis Phase 3 International Pharmaceutical Ltd. 2. Selumetinib MEK inhibitor for cancer AstraZeneca, PLC Phase 3



3. ASLAN001/ARRY-543 HER2 / EGFR inhibitor ASLAN Pharmaceuticals Phase 2

for gastric cancer Pte Ltd. 4. Ipatasertib/GDC-0068 AKT inhibitor for cancer Genentech, Inc. Phase 2 5. VTX-2337 Toll-like receptor for VentiRx Phase 2 cancer Pharmaceuticals, Inc. 6. Danoprevir Hepatitis C virus InterMune (danoprevir Phase 2 protease inhibitor now owned by Roche Holding AG) 7. LY2606368 Chk-1 inhibitor for Eli Lilly and



Company Phase 2

cancer 8. GDC-0575 Chk-1 inhibitor for Genentech, Inc. Phase 1b cancer 9. ARRY-380/ONT-380 HER2 inhibitor for Oncothyreon Inc. Phase 1b breast cancer 10. GDC-0994 ERK inhibitor for cancer Genentech, Inc. Phase 1 11. LOXO-101 PanTrk inhibitor for Loxo Oncology, Inc. Phase 1 cancer We also have a portfolio of proprietary and partnered preclinical drug discovery programs, including inhibitors that target Trk receptors for the treatment of oncology and other indications. Our most significant discovery collaborations are with Celgene Corporation (inflammation program), Loxo (oncology program/LOXO-101) and Biogen Idec (auto-immune disorder program). We may out-license other select promising candidates through research collaborations in the future. We have received a total of $636.2 million in research funding and in up-front and milestone payments from partners from inception through June 30, 2014, including $154 million in initial payments from strategic agreements with Amgen, Celgene, Genentech, Novartis and Oncothyreon that we entered into over the last five years. Our existing partnered programs entitle Array to receive a total of approximately $1.8 billion in additional milestone payments if we or our partners achieve the drug discovery, development and commercialization objectives detailed in those agreements. We also have the potential to earn royalties on any resulting product sales or share in the proceeds from licensing or commercialization from 12 partnered programs.



Business Development and Partner Concentrations

We currently license or partner certain of our compounds and/or programs and enter into collaborations directly with pharmaceutical and biotechnology companies through opportunities identified by our business development group, senior management, scientists and customer referrals. In general, our partners may terminate their agreements with us with 60 to 180 days' prior notice. Specifics regarding termination provisions under our material collaboration or license agreements can be found in Note 4 - Collaboration and License Agreements to the accompanying audited financial statements included elsewhere in this Annual Report on Form 10-K.



Additional information related to the concentration of revenue among our partners is reported in Note 1 - Overview and Basis of Presentation - Concentration of Business Risks to the accompanying audited financial statements included elsewhere in this Annual Report on Form 10-K.

All of our collaboration and license agreements are denominated in U.S. dollars.

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Critical Accounting Policies and Estimates

Management's discussion and analysis of financial condition and results of operations are based upon our accompanying financial statements, which have been prepared in conformity with U.S. generally accepted accounting principles, or U.S. GAAP, and which 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 under the circumstances. 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. Our actual results could differ significantly from these estimates under different assumptions or conditions.



Accrued Outsourcing Costs

Substantial portions of our preclinical studies and clinical trials are performed by third-party laboratories, medical centers, contract research organizations and other vendors, or collectively "CROs". These CROs generally bill monthly or quarterly for services performed, or bill based upon milestone achievement. For preclinical studies, we accrue expenses based upon estimated percentage of work completed and the contract milestones remaining. For clinical studies, expenses are accrued based upon the number of patients enrolled and the duration of the study. We monitor patient enrollment, the progress of clinical studies and related activities to the extent possible through internal reviews of data reported to us by the CROs, correspondence with the CROs and clinical site visits. Our estimates depend on the timeliness and accuracy of the data provided by the CROs regarding the status of each program and total program spending. We periodically evaluate the estimates to determine if adjustments are necessary or appropriate based on information we receive.



Revenue Recognition

We recognize revenue for the performance of services or the shipment of products when each of the following four criteria is met: (i) persuasive evidence of an arrangement exists; (ii) products are delivered or as services are rendered; (iii) the sales price is fixed or determinable; and (iv) collectability is reasonably assured. We follow ASC 605-25, Revenue Recognition - Multiple-Element Arrangements and ASC 808, Collaborative Arrangements, if applicable, to determine the recognition of revenue under our collaborative research, development and commercialization agreements. The terms of these agreements generally contain multiple elements, or deliverables, which may include (i) grants of licenses, or options to obtain licenses, to our intellectual property, (ii) research and development services, (iii) drug product manufacturing, and/or (iv) participation on joint research and/or joint development committees. The payments we may receive under these arrangements typically include one or more of the following: non-refundable, up-front license fees; option exercise fees; funding of research and/or development efforts; amounts due upon the achievement of specified objectives; and/or royalties on future product sales. ASC 605-25 provides guidance relating to the separability of deliverables included in an arrangement into different units of accounting and the allocation of arrangement consideration to the units of accounting. The evaluation of multiple-element arrangements requires management to make judgments about (i) the identification of deliverables, (ii) whether such deliverables are separable from the other aspects of the contractual relationship, (iii) the estimated selling price of each deliverable, and (iv) the expected period of performance for each deliverable. To determine the units of accounting under a multiple-element arrangement, management evaluates certain separation criteria, including whether the deliverables have stand-alone value, based on the relevant facts and circumstances for each arrangement. Management then estimates the selling price for each unit of accounting and allocates the arrangement consideration to each unit utilizing the relative selling price method. The allocated consideration for each unit of accounting is recognized over the related obligation period in accordance with the applicable revenue recognition criteria. If there are deliverables in an arrangement that are not separable from other aspects of the contractual relationship, they are treated as a combined unit of accounting, with the allocated revenue for the combined unit recognized in a manner consistent with the revenue recognition applicable to the final deliverable in the combined 62



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unit. Payments received prior to satisfying the relevant revenue recognition criteria are recorded as deferred revenue in the accompanying balance sheets and recognized as revenue when the related revenue recognition criteria are met. We typically receive non-refundable, up-front payments when licensing our intellectual property, which often occurs in conjunction with a research and development agreement. When management believes that the license to our intellectual property has stand-alone value, we generally recognize revenue attributed to the license upon delivery provided that there are no future performance requirements for use of the license. When management believes that the license to our intellectual property does not have stand-alone value, we typically recognize revenue attributed to the license on a straight-line basis over the contractual or estimated performance period. When the performance period is not specifically identifiable from the agreement, we estimate the performance period based upon provisions contained within the agreement, such as the duration of the research or development term. Most of our agreements provide for non-refundable milestone payments. We recognize revenue that is contingent upon the achievement of a substantive milestone in its entirety in the period in which the milestone is achieved. A milestone is considered substantive when the consideration payable to us for such milestone (i) is consistent with our performance necessary to achieve the milestone or the increase in value to the collaboration resulting from our performance, (ii) relates solely to our past performance and (iii) is reasonable relative to all of the other deliverables and payments within the arrangement. In making this assessment, we consider all facts and circumstances relevant to the arrangement, including factors such as the scientific, regulatory, commercial and other risks that must be overcome to achieve the milestone, the level of effort and investment required to achieve the milestone and whether any portion of the milestone consideration is related to future performance or deliverables. For payments payable on achievement of milestones that do not meet all of the conditions to be considered substantive, we recognize a portion of the payment as revenue when the specific milestone is achieved, and the contingency is removed, based on the applicable percentage earned of the estimated research or development effort, or other performance obligations that have elapsed, to the total estimated research and/or development effort attributable to the milestone. In other cases, when a non-substantive milestone payment is attributed to our future research or development obligations, we recognize the revenue on a straight-line basis, or other appropriate method, over the estimated remaining research or development effort. Other contingent event-based payments for which payment is either contingent solely upon the passage of time or the result of our partner's or collaborator's performance are recognized when earned. We periodically review the estimated performance periods under each of our agreements that provide for non-refundable up-front payments, license fees or milestone payments. We adjust the periods over which revenue should be recognized when appropriate to reflect changes in assumptions relating to the estimated performance periods. We could accelerate revenue recognition in the event of early termination of programs or if our expectations change. Alternatively, we could decelerate revenue recognition if programs are extended or delayed. While such changes to our estimates have no impact on our reported cash flows, the amount of revenue recorded in future periods could be materially impacted. See Note 4 - Collaboration and License Agreements to the accompanying audited financial statements included elsewhere in this Annual Report on Form 10-K for further information.



Valuation of Equity Received

From time to time, we may enter into collaboration and license agreements under which we receive an equity interest as consideration for all or a portion of up-front, license or other fees under the terms of the agreement. In July 2013, Array entered into a collaboration agreement with Loxo under which we received shares of non-voting preferred stock as consideration for licensing rights granted to Loxo. We estimated the fair value of these shares to be $4.5 million based on a valuation analysis prepared with the assistance of a third-party valuation firm. The valuation of the preferred shares required the use of significant assumptions and estimates, including assumptions about the estimated volatility of the equity, the estimated time to a liquidity event, and the likelihood of Loxo obtaining additional future financing; none of which was readily available to us as Loxo is not a publicly-traded company. Equity securities received from non-publicly traded companies in which we do not exercise a 63



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significant or controlling interest are reported at cost in other long-term assets in the accompanying audited financial statements included elsewhere in this Annual Report on Form 10-K.

Restructuring Charges

In August 2013, we completed a reduction in force of approximately 50 employees, mainly in our drug discovery organization. After the 20% reduction, we had approximately 200 employees whose capabilities are more tightly aligned with our strategy to fund our discovery organization with strategic collaborations and focusing development and commercialization resources on our later stage clinical programs. See Note 10 - Restructuring Charges to the accompanying audited financial statements included elsewhere in this Annual Report on Form 10K.



Recent Accounting Pronouncements

In May 2014, the FASB issued Accounting Standards Update, or ASU, No. 2014-09, Revenue from Contracts with Customers, which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. ASU No. 2014-09 will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective. The new standard is effective for us on July 1, 2017. Early application is not permitted. The standard permits the use of either the retrospective or cumulative effect transition method. We are evaluating the effect that ASU No. 2014-09 will have on our financial statements and related disclosures. We have not yet selected a transition method, nor have we determined the effect of the standard on our ongoing financial reporting.



Results of Operations

License and Milestone Revenue

License and milestone revenue consists of up-front license fees and ongoing milestone payments from partners and collaborators.

Below is a summary of our license and milestone revenue (dollars in thousands): Change Change Year Ended June 30, 2014 vs. 2013 2013 vs. 2012 2014 2013 2012 $ % $ % License revenue $ 14,461$ 41,440$ 52,006$ (26,979 ) (65 )% $ (10,566 ) (20 )% Milestone revenue 10,650 15,286 19,243 (4,636 ) (30 )% (3,957 ) (21 )% Total license and milestone revenue $ 25,111$ 56,726$ 71,249$ (31,615 )



(56 )% $ (14,523 ) (20 )%

Fiscal 2014 compared to Fiscal 2013 - License revenue decreased during fiscal 2014 compared with fiscal 2013. The primary contributor to the decline was the recognition of all remaining revenue under our arrangements with Amgen and Celgene during fiscal 2013. Additionally, decreased up-front payments and decreased revenue recognized under our arrangements with Genentech and Novartis also contributed. We concluded the recognition of license revenue under our arrangements with Amgen and Celgene prior to the start of the current fiscal year by recognizing $9.8 million and $7.3 million of license revenue in fiscal 2013 from Amgen and Celgene, respectively. We entered into a Drug Discovery and Collaboration Agreement with Loxo at the beginning of fiscal 2014 and recognized $4.5 million in non-cash license revenue representing the estimated fair value of the preferred shares received as consideration for an exclusive license to our technology, which approximated the estimated selling price of the license, as discussed under Note 4 - Collaboration and License Agreements - Loxo Oncology, Inc. to the accompanying audited financial statements included elsewhere in this Annual Report on Form 10-K. In comparison, we received and recognized a $10 million up-front payment from Oncothyreon for licenses during the fourth quarter of fiscal 2013. Please refer to Note 4 - Collaboration and License Agreements - Oncothyreon Inc. to the accompanying audited financial statements included elsewhere in this Annual Report on Form 10-K. Additionally, license revenue under our Chk-1 License Agreement with Genentech decreased by $2.3 million in 64



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fiscal 2014 because we extended the expected timing for milestone achievement under the Genentech collaboration by 10 months, resulting in adjustments to the amount of the remaining license revenue recognized each quarter. Finally, we concluded the recognition of license revenue under the Novartis License Agreement in April 2014, resulting in a $2.0 million decrease between the two fiscal years. Milestone revenue decreased during fiscal 2014 due to the recognition of all remaining revenue for several collaborations in fiscal 2013 and a reduction in Novartis milestone revenue. Novartis milestone revenue decreased $3.7 million mainly due to the fiscal 2013 recognition of $4.0 million of the $5 million milestone earned in June 2013 for the commencement of the first Phase 3 trial and the April 2014 conclusion of revenue recognition for all previous Novartis milestone payments received. Revenue recognition for milestone payments also concluded in December 2012 and March 2013 for Amgen and Celgene, respectively, resulting in no milestone revenue during the current fiscal year under those agreements, compared with $1.3 million for Amgen and $3.8 million for Celgene during fiscal 2013. During fiscal 2013 we earned $2.5 million of additional revenue for milestone events from VentiRx and Genentech, as compared with $6.6 million of additional milestones earned during fiscal 2014, which included $5 million from AstraZeneca for the start of a Phase 3 clinical study and $1 million from Genentech for a Phase 2 start. Fiscal 2013 compared to Fiscal 2012 - License revenue recognized during fiscal 2013 decreased compared to fiscal 2012. The majority of the revenue under our Chk-1 License Agreement with Genentech was recognized during fiscal 2012, resulting in a decrease of approximately $17.2 million between the comparable periods. Additionally, revenue recognized for the Amgen up-front fee was $9.8 million lower during fiscal 2013, as the Amgen up-front fee was fully recognized during the quarter ended December 31, 2012. The decreases were partially offset by additional revenue recognized during fiscal 2013 from the acceleration of the 2007 Celgene up-front payment when our obligations were determined to be complete, and our Development and Commercialization Agreement with Oncothyreon under which we received and recognized a $10 million up-front payment for licenses, both of which occurred during the fourth quarter of fiscal 2013. Milestone revenue decreased during fiscal 2013 compared to fiscal 2012. The decrease was due to reduced milestone revenue recognized under our collaboration with Amgen from which we recognized $1.3 million in fiscal 2013, compared with $7.2 million during the prior fiscal year when the $8.5 million milestone payment was actually received. Additionally, we recognized only $1.0 million from our collaboration with Genentech during fiscal 2013, compared with $4.5 million during fiscal 2012. Largely offsetting the decrease during the current year, was the recognition of $4.0 million of the $5 million milestone payment earned under our collaboration with Novartis as a result of the commencement of the first Phase 3 trial during the fourth quarter of fiscal 2013, as well as a $1.5 million milestone payment received from VentiRx for initiating a Phase 2 clinical study. Collaboration Revenue Collaboration revenue consists of revenue for our performance of drug discovery and development activities in collaboration with partners, which include development of proprietary drug candidates we out-license, as well as screening, lead generation and lead optimization research, custom synthesis and process research and, to a small degree, the sale of chemical compounds.



Below is a summary of our collaboration revenue (dollars in thousands):

Change Change Year Ended June 30, 2014 vs. 2013 2013 vs. 2012 2014 2013 2012 $ % $ %



Collaboration revenue $ 16,967$ 12,854$ 13,886$ 4,113 32 % $ (1,032 ) (7 )%

Fiscal 2014 compared to Fiscal 2013 - Collaboration revenue increased during fiscal 2014 as revenue of $5.2 million and $3.5 million from new collaborations with Loxo and Oncothyreon, respectively, more than offset the decreases in revenue from other collaborations such as our 2003 agreement with Genentech following the conclusion of the research term in January 2013, our Clovis Oncology collaboration that terminated during the second quarter of fiscal 2014 and under our previous collaboration with DNA BioPharma, which concluded in 65



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February 2013. Additionally, collaboration revenue from our January 2013 Global Blood collaboration increased due to a full years' revenue recognition in fiscal 2014 versus only five months in fiscal 2013 and collaboration revenue under our new July 2013 agreement with Celgene was slightly higher during the current fiscal period compared with the collaboration revenue recognized during the same period of the prior year under the 2007 Celgene agreement. Our obligations under the 2007 Celgene agreement were completed during the fourth quarter of fiscal 2013. Fiscal 2013 compared to Fiscal 2012 - Collaboration revenue decreased during fiscal 2013 compared to the prior year due to reduced revenues under our collaboration with Genentech and the completion of our funded discovery research under our collaboration with Amgen, which were largely offset by our new collaborations, as well as the additional funded research under our 2007 Celgene agreement. Cost of Partnered Programs Cost of partnered programs represents costs attributable to discovery and development including preclinical and clinical trials we may conduct for or with our partners. These costs consist mainly of compensation, associated fringe benefits, share-based compensation, preclinical and clinical outsourcing costs and other collaboration-related costs, including supplies, small tools, travel and meals, facilities, depreciation, recruiting and relocation costs and other direct and indirect chemical handling and laboratory support costs. Below is a summary of our cost of partnered programs (dollars in thousands): Change Change Year Ended June 30, 2014 vs. 2013 2013 vs. 2012 2014 2013 2012 $ % $ % Cost of partnered programs $ 45,965$ 30,078$ 24,261$ 15,887 53 % $ 5,817 24 % Cost of partnered programs as a percentage of total revenue 109 % 43 % 28 % Fiscal 2014 compared to Fiscal 2013 - Cost of partnered programs increased during fiscal 2014 due to increasing costs to advance binimetinib, our MEK inhibitor, through clinical trials under our co-development arrangement with Novartis, as well as our new collaborations with Loxo and Oncothyreon. Partially offsetting the increases were reduced costs under our 2003 agreement with Genentech following the conclusion of the research term.



Cost of partnered programs as a percentage of total revenue increased for fiscal 2014 primarily because of the increased actual costs as noted above and the decreased license and milestone recognized during the same period.

Fiscal 2013 compared to Fiscal 2012 - Cost of partnered programs increased during fiscal 2013 compared to fiscal 2012 due to increasing costs to advance binimetinib, our MEK inhibitor, through clinical trials under our co-development arrangement with Novartis, as well as our new collaborations and our extended collaboration with Celgene. Reduced costs under our collaboration with Genentech partially offset the increases and were associated with engaging fewer scientists in the current fiscal year compared with fiscal 2012. Cost of partnered programs as a percentage of total revenue increased for fiscal 2013, primarily because of the increased actual costs as noted above and the decreased license and milestone revenue recognized during the same period.



Research and Development Expenses for Proprietary Programs

Our research and development expenses for proprietary programs include costs associated with our proprietary drug programs for scientific and clinical personnel, supplies, chemicals, equipment, small tools, travel and meals, depreciation, consultants, sponsored research, allocated facility costs, costs related to preclinical and clinical trials and share-based compensation. We manage our proprietary programs based on scientific data and achievement 66



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of research plan goals. Our scientists record their time to specific projects when possible; however, many activities simultaneously benefit multiple projects and cannot be readily attributed to a specific project. Accordingly, the accurate assignment of time and costs to a specific project is difficult and may not give a true indication of the actual costs of a particular project. As a result, we do not report costs on a program basis. Below is a summary of our research and development expenses for proprietary programs by categories of costs for the fiscal years presented (dollars in thousands): Change Change Year Ended June 30, 2014 vs. 2013 2013 vs. 2012 2014 2013 2012 $ % $ % Salaries, benefits and share-based compensation $ 18,443$ 24,080$ 22,832$ (5,637 ) (23 )% $ 1,248 5 % Outsourced services and consulting 18,170 19,634 17,680 (1,464 )



(7 )% 1,954 11 % Laboratory supplies 5,756 6,887 6,652 (1,131 ) (16 )% 235

4 % Facilities and depreciation 6,069 7,115 8,066 (1,046 ) (15 )% (951 ) (12 )% Other 1,386 1,704 1,489 (318 ) (19 )% 215 14 % Total research and development expenses $ 49,824$ 59,420$ 56,719$ (9,596 ) (16 )% $ 2,701 5 % Fiscal 2014 compared to Fiscal 2013 - Research and development expenses for proprietary programs decreased during fiscal 2014 primarily due to lower spending on our preclinical programs and shifting funding to our partnered programs, including Loxo and Oncothyreon. In addition, we largely completed the ARRY-502 Phase 2 asthma study prior to the start of the current fiscal year. Partially offsetting these decreases were higher costs to advance filanesib including start-up costs for three clinical studies, FACTOR, AfFIRM and ARRAY-520-216. During fiscal 2014, we also incurred $2.2 million of additional expenses for termination benefits related to our reduction in workforce in August 2013 that are reflected in salaries, benefits and share-based compensation. Fiscal 2013 compared to Fiscal 2012 - Research and development expenses for proprietary programs increased during fiscal 2013 compared to fiscal 2012. The increase is the result of costs associated with the Phase 2 asthma study of ARRY-502 that concluded in July 2013, and focusing resources on our wholly-owned programs and progressing them through more advanced stages of clinical trials.



General and Administrative Expenses

General and administrative expenses consist mainly of compensation and associated fringe benefits not included in cost of partnered programs or research and development expenses for proprietary programs and include other management, business development, accounting, information technology and administration costs, including patent filing and prosecution, recruiting and relocation, consulting and professional services, travel and meals, sales commissions, facilities, depreciation and other office expenses. Below is a summary of our general and administrative expenses (dollars in thousands): Change Change Year Ended June 30, 2014 vs. 2013 2013 vs. 2012 2014 2013 2012 $ % $ % General and administrative expenses $ 21,907$ 19,624$ 15,202$ 2,283 12 % $ 4,422 29 % Fiscal 2014 compared to Fiscal 2013 - General and administrative expenses increased during fiscal 2014 compared to fiscal 2013. Increases in share-based compensation expenses of $818 thousand, patent expenses of $494 thousand and general business consulting and commercialization expenses of $349 thousand were the primary contributors, as well as $602 thousand of severance costs related to the reduction in our workforce. 67



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Fiscal 2013 compared to Fiscal 2012 - General and administrative expenses increased during fiscal 2013 primarily related to compensation, benefits and costs to recruit certain leadership positions to help execute our strategic objectives. We also incurred approximately $400 thousand in additional costs during the current fiscal year to obtain and prosecute our patents and $456 thousand in additional costs for legal, business development consulting and other professional services.



Other Income (Expense)

Below is a summary of our other income (expense) (dollars in thousands):

Change Change Year Ended June 30, 2014 vs. 2013 2013 vs. 2012 2014 2013 2012 $ % $ % Loss on prepayment of long-term debt, net $ - $ (11,197 )$ (942 )$ 11,197 100 % $ (10,255 ) (1,089 )% Interest income 77 55 32 22 40 % 23 72 % Interest expense (9,716 ) (11,258 ) (11,624 ) 1,542 14 % 366 3 % Total other expense, net $ (9,639 )$ (22,400 )$ (12,534 )$ 12,761 57 % $ (9,866 ) (79 )% Fiscal 2014 compared to Fiscal 2013 - Total other expense, net decreased during fiscal 2014 primarily due to the fiscal 2013 loss on prepayment of long-term debt incurred from the write-off of the remaining balances of debt discount and debt transaction fees associated with the Deerfield credit facilities upon full repayment in June 2013, following the issuance of our 2020 Notes. Additionally, our 2020 Notes, which were outstanding during the entirety of fiscal 2014, have a lower coupon rate than the interest rate on the Deerfield credit facilities that were outstanding for almost all of fiscal 2013, also contributing to the decrease. Fiscal 2013 compared to Fiscal 2012 - Total other expense, net increased during fiscal 2013 due to the write-off of remaining balances of debt discount and debt transaction fees associated with the full repayment of our Deerfield credit facilities mentioned above, compared with only a partial write-off of debt discount and debt transaction fees related to an early payment of principal under the Deerfield credit facilities in fiscal 2012. The following table shows the details of our interest expense for all of our debt arrangements outstanding during the periods presented, including actual interest paid, amortization of debt and loan transaction fees, and losses on early prepayment that were charged to interest expense (in thousands): Year Ended June 30, 2014 2013 2012 Comerica Term Loan Simple interest $ 479$ 483$ 489 Amortization of fees paid for letters of credit 48 107



108

Total interest expense on the Comerica term loan 527 590 597 Convertible Senior Notes Contractual interest 3,979 221 - Amortization of debt discount 4,932 259 - Amortization of debt issuance costs 278 14 - Total interest expense on the convertible senior notes 9,189 494 - Deerfield Credit Facilities Simple interest - 6,078 6,492 Amortization of debt discounts and transaction fees - 4,331



4,419

Change in fair value of the embedded derivatives - (235 )



116

Total interest expense on the Deerfield credit facilities - 10,174 11,027 Total interest expense $ 9,716$ 11,258$ 11,624 68



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Liquidity and Capital Resources

We have incurred operating losses and an accumulated deficit as a result of ongoing research and development spending since inception. As of June 30, 2014, we had an accumulated deficit of $717.9 million. We had net losses of $85.3 million, $61.9 million and $23.6 million for the fiscal years ended June 30, 2014, 2013 and 2012, respectively. For the year ended June 30, 2014, our net cash used in operations was $71.7 million. We have historically funded our operations from up-front fees and license and milestone payments received under our drug collaborations and license agreements, the sale of equity securities, and debt provided by convertible debt and other credit facilities. During the year ended June 30, 2014, we received net proceeds of approximately $73.4 million from sales of our common stock under our Cantor Fitzgerald sales agreement. We also received net proceeds of approximately $128 million in June 2013 from an underwritten public offering of convertible debt and $127 million during calendar year 2012 from two underwritten public offerings of our common stock. Additionally, we have received $209.1 million from up-front fees and license and milestone payments since December 2009, including the following payments: In December 2009, we received a $60 million up-front payment from Amgen



under a Collaboration and License Agreement.

During May and June 2010, we received a total of $45 million in up-front

and milestone payments under a License Agreement with Novartis.

In December 2010, we received a $10 million milestone payment under a Drug

Discovery and Development Agreement with Celgene.

In May 2011, we received a $10 million milestone payment under a License

Agreement with Novartis.

In September 2011, we received a $28 million up-front payment under a Drug

Discovery Collaboration Agreement with Genentech.

In June 2012, we received an $8.5 million milestone payment from Amgen

under a Collaboration and License Agreement.

In June 2013, we received a $10 million up-front payment under a

Development and Commercialization Agreement with Oncothyreon.

In July 2013, we received an $11 million up-front payment under a Drug

Discovery and Development Option and License Agreement with Celgene.

In August 2013, we received a $5 million milestone payment under a License

Agreement with Novartis. In November 2013, we received a $5 million milestone payment under a Collaboration and License Agreement with AstraZeneca. We paid $9.2 million and $11.3 million to Novartis in the second quarters of fiscal 2013 and fiscal 2014, respectively, representing our share of the combined development costs incurred and due since commencement of our agreement with Novartis for development of the binimetinib program, as discussed in Note 4 - Collaboration and License Agreements - Novartis International Pharmaceutical Ltd. to the accompanying audited financial statements included elsewhere in this Annual Report on Form 10-K. During fiscal 2014, we committed to continue our co-development contribution through fiscal 2015. We have the right to opt out of paying our co-development contribution on an annual basis after fiscal 2015. We have reported a $16.2 million payable in the accompanying balance sheets as co-development liability for this obligation as of June 30, 2014, and we anticipate paying an amount approximating this liability balance to Novartis during the first half of fiscal 2015. We also have a $5.4 million liability accrued at June 30, 2014 for estimated fiscal year 2014 annual employee bonuses. Under our annual performance bonus program, employees may receive a bonus payable in cash or in shares of our common stock if we meet certain financial, discovery, development and partnering goals during a fiscal year. Annual employee bonuses are typically paid in the second quarter of the next fiscal year. Management believes that our cash, cash equivalents and marketable securities as of June 30, 2014 will enable us to continue to fund operations in the normal course of business for at least the next 12 months. Until we can 69



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generate sufficient levels of cash from current operations, which we do not expect to achieve in the foreseeable future, and because sufficient funds may not be available to us when needed from existing collaborations, we expect that we will be required to continue to fund our operations in part through the sale of debt or equity securities and through licensing select programs that include up-front and/or milestone payments. Our ability to successfully raise sufficient funds through the sale of debt or equity securities or from debt financing from lenders when needed is subject to many risks and uncertainties and, even if we are successful, future equity issuances would result in dilution to our existing stockholders. We also may not successfully consummate new collaboration or license agreements that provide for up-front fees or milestone payments, or we may not earn milestone payments under such agreements when anticipated, or at all. Our ability to realize milestone or royalty payments under existing agreements and to enter into new arrangements that generate additional revenue through up-front fees and milestone or royalty payments is subject to a number of risks, many of which are beyond our control. For example, although following the recently announced transaction by Novartis to exchange certain assets with GlaxoSmithKline, Novartis has indicated that it will continue to honor its obligations under its License Agreement with Array for the development of binimetinib, including the three Phase 3 trials currently underway; however, the transaction could affect the program in ways we may not anticipate. For example, the program could revert to Array, and development efforts, and any potential future milestone or royalty revenue, may be affected by this transaction. Our risk factors are described under the heading "Risk Factors" elsewhere in this Annual Report on Form 10-K and in other reports we file with the SEC. Our assessment of our future need for funding and our ability to continue to fund our operations is a forward-looking statement that is based on assumptions that may prove to be wrong and that involve substantial risks and uncertainties. Our actual future capital requirements could vary as a result of a number of factors. Please refer to our risk factors under the heading "Risk Factors" included elsewhere in this Annual Report on Form 10-K and in other reports we file with the SEC. If we are unable to generate enough revenue from our existing or new collaboration and license agreements when needed or secure additional sources of funding, it may be necessary to significantly reduce our current rate of spending through further reductions in staff and delaying, scaling back or stopping certain research and development programs, including more costly Phase 2 and Phase 3 clinical trials on our wholly-owned or co-development programs as these programs progress into later stage development. Insufficient liquidity may also require us to relinquish greater rights to product candidates at an earlier stage of development or on less favorable terms to us and our stockholders than we would otherwise choose in order to obtain up-front license fees needed to fund operations. These events could prevent us from successfully executing our operating plan and, in the future, could raise substantial doubt about our ability to continue as a going concern. Further, as discussed in Note 5 - Long-term Debt to the accompanying audited financial statements included elsewhere in this Annual Report on Form 10-K, if at any time our balance of total cash, cash equivalents and marketable securities at Comerica Bank and approved outside accounts falls below $22 million, we must maintain a balance of cash, cash equivalents and marketable securities at Comerica at least equivalent to the entire outstanding debt balance with Comerica, which is currently $14.6 million. We must also maintain a monthly liquidity ratio if we draw down on the revolving line of credit.



Cash, Cash Equivalents and Marketable Securities

Cash equivalents are short-term, highly-liquid financial instruments that are readily convertible to cash and have maturities of 90 days or less from the date of purchase. Short-term marketable securities consist primarily of U.S. government agency obligations with maturities of greater than 90 days when purchased. Long-term marketable securities are primarily securities held under our deferred compensation plan. 70



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Below is a summary of our cash, cash equivalents and marketable securities (in thousands): June 30, Change Change 2014 2013 2012 2014 vs. 2013 2013 vs. 2012



Cash and cash equivalents $ 68,591$ 60,736$ 55,799$ 7,855$ 4,937 Marketable securities - short-term 42,407 47,505 33,378

(5,098 ) 14,127 Marketable securities - long-term 640 465 473 175 (8 ) Total $ 111,638$ 108,706$ 89,650$ 2,932$ 19,056



Cash Flow Activities

Below is a summary of our cash flow activities (in thousands):

Year Ended June 30, Change Change 2014 2013 2012 2014 vs. 2013 2013 vs. 2012 Cash flows provided by (used in): Operating activities $ (71,682 )$ (87,067 )$ (33,546 )$ 15,385$ (53,521 ) Investing activities 2,482 (16,362 ) (18,721 ) 18,844 2,359 Financing activities 77,055 108,366 59,967 (31,311 ) 48,399 Total $ 7,855$ 4,937$ 7,700$ 2,918$ (2,763 ) Fiscal 2014 compared to Fiscal 2013 - Net cash used in operating activities improved $15.4 million between the comparable years. This improvement was primarily due to a $11.1 million increase in cash received for up-front and milestone payments during the current fiscal year. Current year cash received consisted of an $11.0 million up-front from Celgene in July 2013, a $5.0 million milestone payment from Novartis in August 2013, a $5.0 million milestone payment from AstraZeneca in November 2013, and three smaller Genentech milestone payments received throughout fiscal 2014 totaling $2.3 million. Fiscal 2013 cash received for up-front and milestone payments consisted of a $10.0 million up-front from Oncothyreon, a $1.5 million milestone payment from VentiRx and two Genentech milestone payments totaling $750 thousand. Additionally, we had a larger accounts receivable balance outstanding at the end of fiscal 2013 that was collected within the current fiscal year, contributing to the improvement. The above was partially offset by a $2.1 million larger payment to Novartis during the current fiscal year for our share of accrued development costs incurred since inception of the program. Net cash from investing activities provided cash of $2.5 million during fiscal 2014 compared with a $16.4 million use of cash during the prior fiscal year. The fluctuation was due to our net investment activities in marketable securities as we sold more than we purchased in the current fiscal year, with the opposite being true during fiscal 2013. During fiscal 2013, a significant portion of the net proceeds from our convertible debt offering went toward the full repayment of our debt under the Deerfield credit facilities. Following the repayment, we had proceeds of $35.4 million remaining from the convertible debt offering, which accounts for the $31.3 million decrease in net cash provided by financing activities between the comparable years. This decrease was partially offset by lower stock offering costs of $3.1 million for stock sold under our sales agreement with Cantor Fitzgerald during fiscal 2014 as compared to the stock offering costs associated with our public offering in fiscal 2013. Fiscal 2013 compared to Fiscal 2012 - Net cash used in operating activities increased by $53.5 million between the comparable years. The change was due in part to the $28 million up-front license fee we received from Genentech in fiscal 2012, compared with $10 million received from Oncothyreon and recognized in revenue in the fourth quarter of fiscal 2013. We also made a $9.2 million payment to Novartis in the second quarter of fiscal 2013 for our share of accrued development costs, for which we had no comparable payment in fiscal 2012. Decreased receipts for discovery research and milestones under our collaboration with Genentech further reduced operating cash flows during fiscal 2013. Additionally, we recorded receivables for two milestones totaling $5.8 million that were earned in June 2013. 71



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Net cash used in investing activities was $16.4 million for fiscal 2013, compared with $18.7 million during fiscal 2012. During both periods, subsequent to raising capital through the sale of our common stock and convertible debt, we made net purchases in marketable securities, resulting in the use of cash for investing purposes. Net cash provided by financing activities increased $48.4 million and was the result of net proceeds from our convertible debt offering of $128 million, as well as $70.9 million in net proceeds from our fiscal 2013 underwritten public offering of shares of our common stock, compared to $63.1 million in net proceeds raised from a similar offering in fiscal 2012. These increases were offset by a $92.7 million repayment of long-term debt, $92.6 million of which was attributable to the debt under our Deerfield credit facilities, compared with a $4.2 million payment on those facilities during fiscal 2012.



Obligations and Commitments

The following table shows our contractual obligations and commitments as of June 30, 2014 (in thousands):

Less than 1 to 3 4 to 5 Over 5 1 Year Years Years Years Total Debt obligations (1) $ - $ - $ 14,550$ 132,250$ 146,800 Interest on debt obligations (2)(3)(4) 4,440 8,880 8,093 3,648 25,061 Co-development liability (1)(5) 16,155 - - - 16,155 Operating lease commitments (2) 8,316 8,706 - - 17,022 Purchase obligations (2)(6) - - - - - Total $ 28,911$ 17,586$ 22,643$ 135,898$ 205,038



(1) Reflected in the accompanying balance sheets.

(2) These obligations are not reflected in the accompanying balance sheets.

(3) Interest on the variable debt obligation under the term loan with Comerica is

calculated at 3.25%, the interest rate in effect as of June 30, 2014.

(4) Interest on the 2020 Notes is calculated at 3.00%, which is the coupon rate.

(5) Co-development liability primarily represents the amount payable to Novartis

for our share of co-development costs for development of the binimetinib

program through fiscal 2014.

(6) We have open purchase orders for $119.8 million, which include $85.7 million

for CROs, $30.8 million for other outsourced services for clinical trials and

research and development costs and $3.3 million for all other purchase

commitments. All of our purchase orders may be canceled without significant

penalty to Array. We are obligated under non-cancellable operating leases for all of our facilities and, to a limited degree, equipment leases. Original lease terms for our facilities in effect as of June 30, 2014, were five to ten years and generally require us to pay the real estate taxes, certain insurance and other operating costs. Equipment lease terms generally range from three to five years.


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Source: Edgar Glimpses


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