1.	Organization and Business

Halozyme Therapeutics, Inc. (“Halozyme” or the “Company”) is a biopharmaceutical company dedicated to developing and commercializing innovative products that advance patient care. The Company’s research targets the extracellular matrix, an area outside the cell that provides structural support in tissues and orchestrates many important biological activities, including cell migration, signaling and survival. Over many years, the Company has developed unique scientific expertise that allows the Company to pursue this target-rich environment for the development of future therapies.

The Company’s research focuses primarily on human enzymes that alter the extracellular matrix. The Company’s lead enzyme, recombinant human hyaluronidase (“rHuPH20”), temporarily degrades hyaluronan, a matrix component in the skin, and facilitates the dispersion and absorption of drugs and fluids. The Company is also developing novel enzymes that may target other matrix structures for therapeutic benefit. The Company’s Enhanze ^™ technology is the platform for the delivery of proprietary small and large molecules. The Company applies its research products in partnership with other companies as well as for its own proprietary pipeline in therapeutic areas with significant unmet medical need, such as diabetes, oncology and dermatology.

The Company’s operations to date have involved: (i) organizing and staffing its operating subsidiary, Halozyme, Inc.; (ii) acquiring, developing and securing its technology; (iii) undertaking product development for the Company’s existing product and a limited number of product candidates; (iv) supporting the development of partnered product candidates and (v) selling Hylenex^® recombinant (hyaluronidase human injection). The Company continues to increase its focus on its proprietary product pipeline and has expanded investments in its proprietary product candidates. The Company currently has multiple proprietary programs in various stages of research and development. In addition, the Company currently has collaborative partnerships with F. Hoffmann-La Roche, Ltd and Hoffmann-La Roche, Inc. (“Roche”), Baxter Healthcare Corporation (“Baxter”), ViroPharma Incorporated (“ViroPharma”), and Intrexon Corporation (“Intrexon”), to apply Enhanze technology to these partners’ biological therapeutic compounds. The Company also had another partnership with Baxter, under which Baxter had worldwide marketing rights for the Company’s marketed product, Hylenex recombinant (“Hylenex Partnership”). The Company and Baxter mutually agreed to terminate the Hylenex Partnership in January 2011. In December 2011, the Company reintroduced Hylenex recombinant to the market. Currently, the Company has received only limited revenue from the sales of Hylenex recombinant, in addition to other revenues from its partnerships.

 

2.	Summary of Significant Accounting Policies

Basis of Presentation

The consolidated financial statements include the accounts of Halozyme Therapeutics, Inc. and its wholly owned subsidiary, Halozyme, Inc. All intercompany accounts and transactions have been eliminated.

Use of Estimates

The preparation of consolidated financial statements in conformity with U.S. generally accepted accounting principles (“U.S. GAAP”) requires management to make estimates and assumptions that affect the amounts reported in the Company’s consolidated financial statements and accompanying notes. On an ongoing basis, the Company evaluates its estimates and judgments, which are based on historical and anticipated results and trends and on various other assumptions that management believes to be reasonable under the circumstances. By their nature, estimates are subject to an inherent degree of uncertainty and, as such, actual results may differ from management’s estimates.

 

Cash and Cash Equivalents

Cash and cash equivalents consist of highly liquid investments with original maturities of three months or less from the original purchase date.

Concentrations of Credit Risk, Sources of Supply and Significant Customers

Financial instruments that potentially subject the Company to a significant concentration of credit risk consist of cash and cash equivalents and accounts receivable. The Company maintains its cash and cash equivalent balances with one major commercial bank and a major investment firm. Deposits held with the bank and investment firm exceed the amount of insurance provided on such deposits.

The Company has collaborative partnerships with pharmaceutical companies under which the Company receives payments for license fees, milestone payments for specific achievements designated in the collaborative agreements and reimbursements of research and development services. In addition, the Company sells Hylenex recombinant in the United States to a limited number of established wholesale distributors in the pharmaceutical industry. Credit is extended based on an evaluation of the customer’s financial condition, and collateral is not required. Management monitors the Company’s exposure to accounts receivable by periodically evaluating the collectibility of the accounts receivable based on a variety of factors including the length of time the receivables are past due, the financial health of the customer and historical experience. Based upon the review of these factors, the Company did not record an allowance for doubtful accounts at December 31, 2011 and 2010. Approximately 82% of accounts receivable balance as of December 31, 2011 represents amounts due from Roche, Baxter and Viropharma. Approximately 100% of the accounts receivable balance as of December 31, 2010 represents amounts due from Roche and Baxter. For the years ended December 31, 2011, 2010 and 2009, 19%, 52% and 76% of total revenues were from Roche and 42%, 42% and 20% of total revenues were from Baxter, respectively. In addition, for the year ended December 31, 2011, 22% and 16% of total revenues were from Viropharma and Intrexon, respectively.

Worldwide revenues from external customers for the years ended December 31, 2011, 2010 and 2009 consisted of domestic revenues of approximately $44.9 million, $6.0 million and $2.8 million, respectively, and foreign revenues of approximately $11.2 million, $7.6 million and $10.8 million, respectively. Of the Company’s total foreign revenues for the years ended December 31, 2011, 2010 and 2009, approximately $10.4 million, $7.2 million, $10.4 million, respectively, were attributable to Switzerland. The Company attributes revenues under collaborative agreement to the individual countries where the partner is headquartered. The Company attributes revenues from product sales to the individual countries to which the product is shipped. For the years ended December 31, 2011, 2010 and 2009, the Company had no foreign based operations and the Company did not have any long-lived assets located in foreign countries.

The Company relies on two third-party manufacturers for the supply of the bulk formulation of rHuPH20 which is the active pharmaceutical ingredient (“API”) in Hylenex recombinant and each of its partners’ product candidates. Payments due to these suppliers represent 59% and 32% of the accounts payable balance at December 31, 2011 and 2010, respectively. The Company also relies on a third-party manufacturer for the fill and finish of Hylenex recombinant product under a contract the Company entered into June 2011. Payments due to this supplier represent 3.7% of the accounts payable balance at December 31, 2011 and 2010, respectively.

Accounts Receivable

Accounts receivable is recorded at the invoiced amount and is non-interest bearing. Accounts receivable is recorded net of allowances for doubtful accounts, cash discounts for prompt payment and distribution fees. Currently, the allowance for doubtful accounts is zero as the collectibility of accounts receivable is reasonably assured. Allowances for prompt payment discounts and distribution fees were approximately $15,000 as of December 31, 2011.

Inventories, Net

Inventories, net are stated at lower of cost or market. Cost, which includes amounts related to materials and costs incurred by the Company’s contract manufacturers, is determined on a first-in, first-out basis. Inventories are reviewed periodically for potential excess, dated or obsolete status. Management evaluates the carrying value of inventories on a regular basis, taking into account such factors as historical and anticipated future sales compared to quantities on hand, the price it expects to obtain for products in their respective markets compared with historical cost and the remaining shelf life of goods on hand.

Raw materials inventories at December 31, 2011 and 2010 consists of raw materials used in the manufacture of the Company’s bulk drug material for Hylenex recombinant product. Work-in-process inventories consist of in-process Hylenex recombinant. Finished goods inventories consist of finished Hylenex recombinant product.

As a result of the termination of the HYLENEX Partnership in January 2011, the Company recorded write-down for inventory obsolescence of approximately $166,000 and $875,000 for Hylenex recombinant API for the years ended December 31, 2011 and 2010, respectively. As of December 31, 2011 and 2010, the reserve for inventory obsolescence was approximately zero and $875,000, respectively.

The Company expenses costs relating to the purchase and production of pre-approval inventories for which the sole use is pre-approval products as research and development expense in the period incurred until such time as the Company believes future commercialization is probable and future economic benefit is expected to be realized. For products that have been approved by the FDA, inventories used in clinical trials are expensed at the time the inventories are packaged for the clinical trial. Prior to receiving approval from the FDA or comparable regulatory agencies in foreign countries, costs related to purchases of the API and the manufacturing of the product candidate is recorded as research and development expense. All direct manufacturing costs incurred after approval are capitalized into inventories.

Property and Equipment

Property and equipment are recorded at cost, less accumulated depreciation and amortization. Equipment is depreciated using the straight-line method over their estimated useful lives of three years and leasehold improvements are amortized using the straight-line method over the estimated useful life of the asset or the lease term, whichever is shorter.

Impairment of Long-Lived Assets

The Company accounts for long-lived assets in accordance with authoritative guidance for impairment or disposal of long-lived assets. Long-lived assets are reviewed for events or changes in circumstances, which indicate that their carrying value may not be recoverable. For the years ended December 31, 2011, 2010 and 2009, there has been no impairment of the value of such assets.

Fair Value of Financial Instruments

The Company follows the authoritative guidance for fair value measurements and disclosures, which among other things, defines fair value, establishes a consistent framework for measuring fair value and expands disclosure for each major asset and liability category measured at fair value on either a recurring or nonrecurring basis. Fair value is defined as an exit price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability.

The framework for measuring fair value provides a hierarchy that prioritizes the inputs to valuation techniques used in measuring fair value as follows:

 

		Level 1		Quoted prices (unadjusted) in active markets for identical assets or liabilities,
		Level 2		Inputs other than quoted prices included within Level 1 that are either directly or indirectly observable, and
		Level 3		Unobservable inputs in which little or no market activity exists, therefore requiring an entity to develop its own assumptions about the assumptions that market participants would use in pricing.

The Company’s financial instruments include cash and cash equivalents, accounts receivable, prepaid expenses, accounts payable and accrued expenses. The carrying amounts of financial instruments approximate their fair value due to their short maturities. Cash equivalents of approximately $51.8 million and $79.8 million at December 31, 2011 and 2010, respectively, are carried at fair value and are classified within Level 1 of the fair value hierarchy because they are valued based on quoted market prices for identical securities. The Company has no instruments that are classified within Level 2 and Level 3.

Deferred Rent

Rent expense is recorded on a straight-line basis over the initial term of any lease. The difference between rent expense accrued and amounts paid under any lease agreement is recorded as deferred rent in the accompanying consolidated balance sheets.

Comprehensive Income/Loss

Comprehensive income (loss) is defined as the change in equity during a period from transactions and other events and circumstances from non-owner sources. Comprehensive loss was the same as the Company’s net loss for all periods presented.

Revenue Recognition

The Company generates revenues from product sales and collaborative agreements. Payments received under collaborative agreements may include nonrefundable fees at the inception of the agreements, license fees, milestone payments for specific achievements designated in the collaborative agreements, reimbursements of research and development services and/or royalties on sales of products resulting from collaborative agreements.

The Company recognizes revenues in accordance with the authoritative guidance for revenue recognition. The Company recognizes revenue when all of the following criteria are met: (1) persuasive evidence of an arrangement exists; (2) delivery has occurred or services have been rendered; (3) the seller’s price to the buyer is fixed or determinable; and (4) collectibility is reasonably assured.

Product Sales, Net — Hylenex recombinant was approved for marketing by the U.S. Food and Drug Administration (“FDA”) in December 2005. From 2005 through January 7, 2011, the Company had a partnership with Baxter for the worldwide market rights for Hylenex recombinant. Baxter commercially launched Hylenex recombinant in October 2009. However, Hylenex recombinant was voluntarily recalled in May 2010 because a portion of the product manufactured by Baxter was not in compliance with the requirements of the underlying partnership. Effective January 7, 2011, the Company and Baxter mutually agreed to terminate the partnership. During the second quarter of 2011, the Company submitted the data that the FDA had requested to support the reintroduction of Hylenex recombinant to the market. The FDA approved the submitted data and granted the reintroduction of Hylenex recombinant.

In December 2011, the Company reintroduced Hylenex recombinant to the market, shipped initial stocking orders to its wholesaler customers and began promoting Hylenex recombinant through its sales force. The Company sells Hylenex recombinant in the United States to wholesale pharmaceutical distributors, who in-turn sell the product to hospitals and other end-user customers. The wholesale distributors take title to the product, bear the risk of loss of ownership and have economic substance to the inventory. Further, the Company has no significant obligations for future performance to generate pull-through sales; however, it does allow the wholesale distributors to return product that is damaged or received in error. In addition, the Company allows for product to be returned beginning six months prior to and ending twelve months following product expiration. Given the Company’s limited experience history of selling Hylenex recombinant and the lengthy return period, the Company currently cannot reliably estimate expected returns and chargebacks of Hylenex recombinant at the time of product receipt by the wholesale distributors. Therefore, the Company does not recognize revenue upon delivery of Hylenex recombinant to the wholesale distributor until the point at which the Company can reliably estimate expected product returns and chargebacks from the wholesale distributors. Shipments of Hylenex recombinant are recorded as deferred revenue until evidence exists to confirm that pull-through sales to the hospitals or other end-user customers have occurred. The Company recognizes revenue when the product is sold through from the distributors to the distributors’ customers. In addition, the costs of manufacturing Hylenex recombinant associated with the deferred revenue are recorded as deferred costs, which are included in inventory, until such time as the related deferred revenue is recognized. The Company estimates sell-through revenue and certain gross to net sales adjustments based on analyses of third-party information including information obtained from certain distributors with respect to their inventory levels and sell-through amounts to the distributors’ customers.

The Company recognizes product sales allowances as a reduction of product sales in the same period the related revenue is recognized. Product sales allowances are based on amounts owed or to be claimed on the related sales. These estimates take into consideration the terms of the Company’s agreements with wholesaler customers, hospitals and the levels of inventory within the distribution channels that may result in future discounts taken. The Company must make significant judgments in determining these allowances. If actual results differ from the Company’s estimates, the Company will be required to make adjustment to these allowances in the future, which could have an effect on product sales revenue in the period of adjustment. The Company’s product sales allowances include:

Distribution Fees.    The distribution fees, based on contractually determined rates, arise from contractual agreements the Company has with certain wholesale distributors for distribution services they provide with respect to Hylenex recombinant. At the time the sale is made to the respective wholesale distributors, the Company records an allowance for distribution fees by reducing its accounts receivable and deferred revenue associated with such product sales.

Prompt Payment Discounts.    The Company offers cash discounts to certain wholesale distributors as an incentive to meet certain payment terms. At the time the sale is made to the respective wholesale distributors, the Company records an allowance for distribution fees by reducing its accounts receivable and deferred revenue associated with such product sales.

 

Chargebacks.    The Company provides discounts to certain hospitals. These hospitals purchase products from the wholesale distributors at a discounted price, and the wholesale distributors then charge back to the Company the difference between the current retail price and the price the hospitals paid for the product. Given the Company’s lack of historical sales data, the Company recognizes chargebacks in the same period the related product sales revenue is recognized and reduces its accounts receivable accordingly.

Product Returns.    The product return reserve is based on management’s best estimate of the product sales recognized as revenue during the period that are anticipated to be returned. The product return reserve is recorded as a reduction of product sales revenue in the same period the related product sales revenue is recognized and is included in accrued expenses.

For the year ended December 31, 2011, the Company recorded product sales revenue of approximately $35,000 related to Hylenex recombinant, net of estimated distribution fees, prompt payment discounts and product returns totaling approximately $8,000. The Company has a deferred revenue balance of approximately $167,000 at December 31, 2011 for Hylenex recombinant shipments, which is net of estimated distribution fees, prompt pay discounts and product returns. In addition, inventory at December 31, 2011 included a deferred cost of product sales of approximately $31,000 associated with Hylenex recombinant shipments to wholesalers. At the time the Company can reliably estimate product returns and chargebacks from the wholesalers, the Company will record a one-time increase in net product sales revenue related to the recognition of product sales revenue previously deferred.

Prior to the termination of the Hylenex Partnership with Baxter in January 2011, the Company supplied Baxter with API for Hylenex recombinant at its fully burdened cost plus a margin. Baxter filled and finished Hylenex recombinant and held it for subsequent distribution, at which time the Company ensured it met product specifications and released it as available for sale. Because of the Company’s continued involvement in the development and production process of Hylenex recombinant, the earnings process was not considered to be complete. Accordingly, the Company deferred the revenue and related product costs on the API for Hylenex recombinant until the product was filled, finished, packaged and released. Baxter could only return the API for Hylenex recombinant to the Company if it did not conform to the specified criteria set forth in the Hylenex Partnership or upon termination of such agreement. In addition, the Company received product-based payments upon the sale of Hylenex recombinant by Baxter, in accordance with the terms of the Hylenex Partnership. Product-based revenues were recognized as the Company earned such revenues based on Baxter’s shipments of Hylenex recombinant to its distributors when such amounts could be reasonably estimated. See Note 7, “Deferred Revenue,” for further discussion.

Revenues under Collaborative Agreements — The Company entered into license and collaboration agreements under which the collaborative partners obtained worldwide exclusive rights for the use of rHuPH20 in the development and commercialization of the collaborators’ biologic compounds. The collaborative agreements contain multiple elements including nonrefundable payments at the inception of the arrangement, license fees, exclusivity fees, payments based on achievement of specific milestones designated in the collaborative agreements, reimbursements of research and development services, payments for supply of rHuPH20 API for the collaborator and/or royalties on sales of products resulting from collaborative agreements. The Company analyzes each element of its collaborative agreements and considers a variety of factors in determining the appropriate method of revenue recognition of each element.

Prior to the adoption of ASU No. 2009-13 on January 1, 2011, in order for a delivered item to be accounted for separately from other deliverables in a multiple-element arrangement, the following three criteria had to be met: (i) the delivered item had standalone value to the customer, (ii) there was objective and reliable evidence of fair value of the undelivered items and (iii) if the arrangement included a general right of return relative to the delivered item, delivery or performance of the undelivered items was considered probable and substantially in the control of the vendor. For the collaborative agreements entered into prior to January 1, 2011, there was no objective and reliable evidence of fair value of the undelivered items. Thus, the delivered licenses did not meet all of the required criteria to be accounted for separately from undelivered items. Therefore, the Company recognizes revenue on nonrefundable upfront payments and license fees from these collaborative agreements over the period of significant involvement under the related agreements.

For new collaborative agreements or material modifications of existing collaborative agreements entered into after December 31, 2010, the Company follows the provisions of ASU No. 2009-13. In order to account for the multiple-element arrangements, the Company identifies the deliverables included within the agreement and evaluates which deliverables represent units of accounting. Analyzing the arrangement to identify deliverables requires the use of judgment, and each deliverable may be an obligation to deliver services, a right or license to use an asset, or another performance obligation. The deliverables under the Company’s collaborative agreements include (i) the license to the Company’s rHuPH20 technology, (ii) at the collaborator’s request, research and development services which are reimbursed at contractually determined rates, and (iii) at the collaborator’s request, supply of rHuPH20 API which is reimbursed at the Company’s cost plus a margin. A delivered item is considered a separate unit of accounting when the delivered item has value to the collaborator on a standalone basis based on the consideration of the relevant facts and circumstances for each arrangement. Factors considered in this determination include the research capabilities of the collaborator and the availability of research expertise in this field in the general marketplace.

Arrangement consideration is allocated at the inception of the agreement to all identified units of accounting based on their relative selling price. The relative selling price for each deliverable is determined using vendor specific objective evidence (“VSOE”), of selling price or third-party evidence of selling price if VSOE does not exist. If neither VSOE nor third-party evidence of selling price exists, the Company uses its best estimate of the selling price for the deliverable. The amount of allocable arrangement consideration is limited to amounts that are fixed or determinable. The consideration received is allocated among the separate units of accounting, and the applicable revenue recognition criteria are applied to each of the separate units. Changes in the allocation of the sales price between delivered and undelivered elements can impact revenue recognition but do not change the total revenue recognized under any agreement.

Upfront license fee payments are recognized upon delivery of the license if facts and circumstances dictate that the license has standalone value from the undelivered items, which generally include research and development services and the manufacture of rHuPH20 API, the relative selling price allocation of the license is equal to or exceeds the upfront license fee, persuasive evidence of an arrangement exists, the Company’s price to the collaborator is fixed or determinable and collectability is reasonably assured. Upfront license fee payments are deferred if facts and circumstances dictate that the license does not have standalone value. The determination of the length of the period over which to defer revenue is subject to judgment and estimation and can have an impact on the amount of revenue recognized in a given period.

The terms of the Company’s collaborative agreements provide for milestone payments upon achievement of certain development and regulatory events and/or specified sales volumes of commercialized products by the collaborator. Prior to the Company’s adoption of the Milestone Method, the Company recognized milestone payments upon the achievement of specified milestones if: (1) the milestone was substantive in nature and the achievement of the milestone was not reasonably assured at the inception of the agreement, (2) the fees were nonrefundable and (3) the Company’s performance obligations after the milestone achievement would continue to be funded by the Company’s collaborator at a level comparable to the level before the milestone achievement.

 

Effective January 1, 2011, the Company adopted on a prospective basis the Milestone Method. Under the Milestone Method, the Company recognizes consideration that is contingent upon the achievement of a milestone in its entirety as revenue in the period in which the milestone is achieved only if the milestone is substantive in its entirety. A milestone is considered substantive when it meets all of the following criteria:

 

1.

The consideration is commensurate with either the entity’s performance to achieve the milestone or the enhancement of the value of the delivered item(s) as a result of a specific outcome resulting from the entity’s performance to achieve the milestone,

 

2.

The consideration relates solely to past performance, and

 

3.

The consideration is reasonable relative to all of the deliverables and payment terms within the arrangement.

A milestone is defined as an event (i) that can only be achieved based in whole or in part on either the entity’s performance or on the occurrence of a specific outcome resulting from the entity’s performance, (ii) for which there is substantive uncertainty at the date the arrangement is entered into that the event will be achieved and (iii) that would result in additional payments being due to the Company.

Reimbursements of research and development services are recognized as revenue during the period in which the services are performed as long as there is persuasive evidence of an arrangement, the fee is fixed or determinable and collection of the related receivable is probable. Revenue from the manufacture of rHuPH20 API is recognized when the API has met all specifications required for the collaborator acceptance and title and risk of loss have transferred to the collaborator. The Company does not directly control when any collaborator will request research and development services or supply of rHuPH20 API; therefore, the Company cannot predict when it will recognize revenues in connection with research and development services and supply of rHuPH20 API. Royalties to be received based on sales of licensed products by the Company’s collaborators incorporating the Company’s rHuPH20 API will be recognized as earned.

The collaborative agreements typically provide the collaborators the right to terminate such agreement in whole or on a product-by-product or target-by-target basis at any time upon 90 days prior written notice to the Company. There are no performance, cancellation, termination or refund provisions in any of the Company’s collaborative agreements that contain material financial consequences to the Company.

See Note 3, “Collaborative Agreements,” and Note 7, “Deferred Revenue,” for further discussion.

Cost of Product Sales

Cost of product sales consists primarily of raw materials, third-party manufacturing costs, fill and finish costs, freight costs, internal costs and manufacturing overhead associated with the production of Hylenex recombinant. Cost of product sales also consists of the write-down of excess, dated and obsolete inventories. As a result of the termination of the Hylenex Partnership in January 2011, the Company recorded write-down of inventory obsolescence of $166,000 and $875,000 for Hylenex recombinant API for the years ended December 31, 2011 and 2010, respectively. There was no write-down of inventories for the year ended December 31, 2009.

Research and Development Expenses

Research and development expenses include salaries and benefits, facilities and other overhead expenses, external clinical trials, research-related manufacturing services, contract services and other outside expenses. Research and development expenses are charged to operations as incurred when these expenditures relate to the Company’s research and development efforts and have no alternative future uses.

 

Advance payments, including nonrefundable amounts, for goods or services that will be used or rendered for future research and development activities are deferred and capitalized. Such amounts will be recognized as an expense as the related goods are delivered or the related services are performed or such time when the Company does not expect the goods to be delivered or services to be performed.

Milestone payments that the Company makes in connection with in-licensed technology or product candidates are expensed as incurred when there is uncertainty in receiving future economic benefits from the licensed technology or product candidates. The Company considers the future economic benefits from the licensed technology or product candidates to be uncertain until such licensed technology or product candidates are approved for marketing by the U.S. Food and Drug Administration or when other significant risk factors are abated. Management has viewed future economic benefits for all of the Company’s licensed technology or product candidates to be uncertain and has expensed these amounts for accounting purposes.

Clinical Trial Expenses

Expenses related to clinical trials are accrued based on the Company’s estimates and/or representations from service providers regarding work performed, including actual level of patient enrollment, completion of patient studies and clinical trials progress. Other incidental costs related to patient enrollment or treatment are accrued when reasonably certain. If the contracted amounts are modified (for instance, as a result of changes in the clinical trial protocol or scope of work to be performed), the Company modifies its accruals accordingly on a prospective basis. Revisions in the scope of a contract are charged to expense in the period in which the facts that give rise to the revision become reasonably certain. Historically, the Company has had no material changes in its clinical trial expense accruals that would have had a material impact on its consolidated results of operations or financial position.

Restructuring Expense

In accordance with authoritative guidance for exit or disposal cost obligations, the Company records costs and liabilities associated with restructuring activities, mainly employee separation costs based on actual and estimates of fair value in the period the liabilities are incurred. In periods subsequent to initial measurement, liabilities are evaluated and adjusted as appropriate for changes in circumstances at least on a quarterly basis. See Note 13, “Restructuring Expense,” for further discussion.

Share-Based Payments

The Company records compensation expense associated with stock options and other share-based awards in accordance with the authoritative guidance for stock-based compensation. The cost of employee services received in exchange for an award of an equity instrument is measured at the grant date, based on the estimated fair value of the award, and is recognized as expense on a straight-line basis, net of estimated forfeitures, over the requisite service period of the award. Share-based compensation expense recognized during the period is based on the value of the portion of share-based payment awards that is ultimately expected to vest during the period. Share-based compensation expense for an award with a performance condition is recognized when the achievement of such performance condition is determined to be probable. If the outcome of such performance condition is not determined to be probable or is not met, no compensation expense is recognized and any recognized compensation expense is reversed. As share-based compensation expense recognized is based on awards ultimately expected to vest, it has been reduced for estimated forfeitures. The guidance requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. Pre-vesting forfeitures were estimated to be approximately 10% for employees in the years ended December 31, 2011, 2010 and 2009 based on the Company’s historical experience for the years ended December 31, 2011 and 2010 and those of its peer group for the year ended December 31, 2009.

 

Total share-based compensation expense related to share-based awards for the years ended December 31, 2011, 2010 and 2009 was comprised of the following:

 

		Year Ended December 31,
		2011				2010				2009
Research and development		$	2,815,362			$	2,517,172			$	2,441,907
Selling, general and administrative			2,754,537				2,349,153				2,084,123
Share-based compensation expense		$	5,569,899			$	4,866,325			$	4,526,030
Net share-based compensation expense, per basic and diluted share		$	0.05			$	0.05			$	0.05
Share-based compensation expense from:
Stock options		$	3,230,822			$	4,022,790			$	3,648,174
Restricted stock awards and restricted stock units			2,339,077				843,535				877,856
		$	5,569,899			$	4,866,325			$	4,526,030

Cash flows resulting from tax deductions in excess of the cumulative compensation cost recognized for options exercised (excess tax benefits) are classified as cash inflows provided by financing activities and cash outflows used in operating activities. Due to the Company’s net loss position, no tax benefits have been recognized in the consolidated statements of cash flows.

The cost of non-employee services received in exchange for an award of equity instrument is measured based on either the fair value of the consideration received or the fair value of the equity instruments issued, whichever is more reliably measurable. There were no non-employee stock options outstanding at December 31, 2011, 2010 and 2009.

Income Taxes

Income taxes are recorded in accordance with authoritative guidance for accounting for income taxes, which requires the recognition of deferred tax assets and liabilities to reflect the future tax consequences of events that have been recognized in the Company’s consolidated financial statements or tax returns. Measurement of the deferred items is based on enacted tax laws. In the event the future consequences of differences between financial reporting bases and tax bases of the Company’s assets and liabilities result in a deferred tax asset, an evaluation of the probability of being able to realize the future benefits indicated by such assets is required. The Company records a valuation allowance to reduce the deferred tax assets to the amount that is more likely than not to be realized. Effective January 1, 2007, the Company adopted the authoritative guidance on accounting for uncertainty in income taxes, which prescribes a comprehensive model for how the Company should recognize, measure, present and disclose in its consolidated financial statements for uncertain tax positions that the Company has taken or expects to take on a tax return.

Other Income

Other income for the year ended December 31, 2010 consisted of one-time grants of approximately $978,000 received under the Qualifying Therapeutic Discovery Project program administered under section 48D of the Internal Revenue Code.

 

Net Loss Per Share

Basic net loss per common share is computed by dividing net loss for the period by the weighted average number of common shares outstanding during the period, without consideration for common stock equivalents. Stock options, unvested stock awards and restricted stock units are considered to be common equivalents and are only included in the calculation of diluted earnings per common share when their effect is dilutive. Because of the Company’s net loss, outstanding stock options, outstanding restricted stock units and unvested stock awards totaling 6,513,667, 8,095,365 and 7,924,266 were excluded from the calculation of diluted net loss per common share for the years ended December 31, 2011, 2010 and 2009, respectively, because their effect is anti-dilutive.

Segment Information

The Company operates its business in one segment, which includes all activities related to the research, development and commercialization of human enzymes that either transiently modify tissue under the skin to facilitate injection of other therapies or correct diseased tissue structures for clinical benefit. This segment also includes revenues and expenses related to (1) research and development activities conducted under our collaborative agreements with third parties and (ii) product sales of Hylenex recombinant. The chief operating decision-makers review the operating results on an aggregate basis and manage the operations as a single operating segment.

Adoption of Recent Accounting Pronouncements

Effective January 1, 2011, the Company adopted on a prospective basis Financial Accounting Standards Board’s (“FASB”) Accounting Standards Update (“ASU”) No. 2010-17, Revenue Recognition (Topic 605): Milestone Method of Revenue Recognition (the “Milestone Method”). ASU No. 2010-17 states that the Milestone Method is a valid application of the proportional performance model when applied to research or development arrangements. Accordingly, an entity can make an accounting policy election to recognize a payment that is contingent upon the achievement of a substantive milestone in its entirety in the period in which the milestone is achieved. The Milestone Method is not required and is not the only acceptable method of revenue recognition for milestone payments. The adoption of ASU No. 2010-17 did not have a material impact on the Company’s consolidated financial position or results of operations.

Effective January 1, 2011, the Company adopted on a prospective basis FASB’s ASU No. 2009-13, Revenue Recognition (Topic 605): Multiple-Deliverable Revenue Arrangements. ASU No. 2009-13 requires an entity to allocate arrangement consideration at the inception of an arrangement to all of its deliverables based on their relative selling prices. ASU No. 2009-13 eliminates the use of the residual method of allocation and requires the relative-selling-price method in all circumstances in which an entity recognizes revenue for an arrangement with multiple deliverables subject to Accounting Standards Code 605-25. The Company accounted for the collaborative arrangements with ViroPharma and Intrexon under the provisions of ASU No. 2009-13, which resulted in revenue recognition patterns that are materially different from those recognized for the Company’s existing multiple-element arrangements. As a result, the Company recognized the $9 million upfront license fee received under the ViroPharma Partnership and the $9 million upfront license fee received under the Intrexon Partnership as revenues under collaborative agreements upon receipt of the upfront license fees in the year ended December 31, 2011. See Note 3, “Collaborative Agreements — ViroPharma and Intrexon Partnerships,” below for further discussion.

Pending Adoption of Recent Accounting Pronouncement

In June 2011 and December 2011, the FASB issued ASU No. 2011-05, Comprehensive Income (Topic 220): Presentation of Comprehensive Income and ASU No. 2011-12, Comprehensive Income (Topic 220): Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in ASU No. 2011-5. In these updates, an entity has the option to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. In both choices, an entity is required to present each component of net income along with total net income, each component of other comprehensive income along with a total for other comprehensive income, and a total amount for comprehensive income. ASU No. 2011-05 eliminates the option to present the components of other comprehensive income as part of the statement of changes in stockholders’ equity. The amendments in ASU No. 2011-05 do not change the items that must be reported in other comprehensive income or when an item of other comprehensive income must be reclassified to net income. The amendments in these updates are effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. The Company does not expect the adoption of these updates to have a material impact on its consolidated financial position or results of operations.

 

3.	Collaborative Agreements

Roche Partnership

In December 2006, the Company and Roche entered into a license and collaborative agreement under which Roche obtained a worldwide, exclusive license to develop and commercialize product combinations of rHuPH20 and up to thirteen Roche target compounds (the “Roche Partnership”). Under the terms of the Roche Partnership, Roche paid $20.0 million as an initial upfront license fee for the application of rHuPH20 to three pre-defined Roche biologic targets. Due to the Company’s continuing involvement obligations (for example, support activities associated with rHuPH20 enzyme), revenues from the upfront payment, exclusive designation fees and annual license maintenance fees were deferred and are being recognized over the term of the Roche Partnership. As of December 31, 2011, the Company has received $33 million from Roche, including the $20 million upfront license fee payment and $13 million in clinical development milestone payments. If Roche successfully develops all of the three pre-defined targets and achieves pre-agreed sales targets, the Company could receive additional milestone payments of up to $98 million, including up to $5 million for the achievement of clinical development milestones, up to $12 million for the achievement of regulatory milestones and up to $81 million for the achievement of sales-based milestones. The Company will earn the next milestone payment of $4 million when Roche submits a biologic license application of one of the three pre-defined targets. Under the terms of the Roche Partnership, Roche will also pay the Company royalties on product sales for the first three targets. For each of the additional targets, Roche may pay the Company further upfront and milestone payments of up to $47.0 million per target, as well as royalties on product sales, for each of the additional targets. Additionally, Roche will obtain access to the Company’s expertise in developing and applying rHuPH20 to Roche targets. Under the terms of the Roche Partnership, the Company was obligated to scale up the production of rHuPH20 and to identify a second source manufacturer that would help meet anticipated production obligations arising from the Roche Partnership. As of December 31, 2011 Roche has elected a total of five exclusive targets and retains the option to develop and commercialize rHuPH20 with three additional targets, provided that Roche continues to pay annual maintenance fees to the Company.

The Company has determined that the clinical and regulatory milestones are substantive; therefore, the Company expects to recognize such clinical and regulatory milestone payments as revenue upon achievement of the milestones. In addition, the Company has determined that the sales-based milestone payments are similar to royalty payments and are not considered milestone payments under the Milestone Method of revenue recognition; therefore, the Company will recognize such sales-based milestone payments as revenue upon achievement of the milestones. For the year ended December 31, 2011, the Company recognized $5.0 million as revenue under collaborative agreements in accordance with the Milestone Method related to the achievement of certain clinical milestones pursuant to the terms of the Roche Partnership. The Company recognized zero and $7.0 million for the years ended December 31, 2010 and 2009, respectively, as revenue under collaborative agreements upon achievement of certain clinical milestones pursuant to the terms of the Roche partnership.

Gammagard Partnership

In September 2007, the Company entered into a license and collaborative agreement with Baxter, under which Baxter obtained a worldwide, exclusive license to develop and commercialize product combinations of rHuPH20, with a current Baxter product, GAMMAGARD LIQUID (the “Gammagard Partnership”). Under the terms of the Gammagard Partnership, Baxter paid the Company a nonrefundable upfront payment of $10.0 million. Due to the Company’s continuing involvement obligations (for example, support activities associated with rHuPH20 enzyme), the $10.0 million upfront payment was deferred and is being recognized over the term of the Gammagard Partnership. As of December 31, 2011, the Company has received $13 million under the Gammagard Partnership, including the $10 million upfront license fee payment and $3 million in regulatory milestone payment. If Baxter successfully receives marketing approval for the licensed product candidate and achieves pre-agreed sales targets, the Company could receive additional milestone payments of up to $34 million for the achievement of sales-based milestones. In addition, Baxter will pay royalties on the sales, if any, of the products that result from the collaboration. The Gammagard Partnership is applicable to both kit and formulation combinations. Baxter assumes all development, manufacturing, clinical, regulatory, sales and marketing costs under the Gammagard Partnership, while the Company is responsible for the supply of rHuPH20 enzyme. The Company performs research and development activities at the request of Baxter, which are reimbursed by Baxter under the terms of the Gammagard Partnership. In addition, Baxter has certain product development and commercialization obligations in major markets identified in the Gammagard Partnership.

The Company has determined that the regulatory milestones are substantive; therefore, the Company expects to recognize such regulatory milestone payments as revenue upon achievement of such milestones. In addition, the Company has determined that sales-based milestone payments are similar to royalty payments and are not considered milestone payments under the Milestone Method of revenue recognition; therefore, will be recognized as revenue upon achievement of the milestones. For the year ended December 31, 2011, the Company recognized $3.0 million as revenue under collaborative agreements in accordance with the Milestone Method related to the achievement of regulatory milestones pursuant to the terms of the Gammagard Partnership. There were no milestone payments recognized as revenue under the terms of the Gammagard Partnership for the years ended December 31, 2010 and 2009.

ViroPharma and Intrexon Partnerships

Effective May 10, 2011, the Company and ViroPharma entered into a collaboration and license agreement, under which ViroPharma obtained a worldwide exclusive license for the use of rHuPH20 enzyme in the development of a subcutaneous injectable formulation of ViroPharma’s commercialized product, Cinryze^® (C1 esterase inhibitor [human]) (the “ViroPharma Partnership”). In addition, the license provides ViroPharma with exclusivity to C1 esterase inhibitor and to the hereditary angioedema indication, along with three additional orphan indications. As of December 31, 2011, the Company has received $12 million from ViroPharma, including the $9 million nonrefundable upfront license fee payment and $3 million in clinical development milestone payment. If ViroPharma successfully develops the licensed product candidate, the Company could receive additional milestone payments of up to $41 million for the achievement of development and regulatory milestones. In addition, so long as the agreement is in effect, the Company is entitled to receive an annual exclusivity fee of $1.0 million commencing on May 10, 2012 and on each anniversary of the effective date of the agreement thereafter until a certain development event occurs. ViroPharma is solely responsible for the development, manufacturing and marketing of any products resulting from this partnership. The Company is entitled to receive payments for research and development services and supply of rHuPH20 API if requested by ViroPharma. In addition, the Company is entitled to receive additional cash payments potentially totaling $10.0 million for each product for treatment of each of three additional orphan indications upon achievement of development and regulatory milestones. The Company is also entitled to receive royalties on future product sales by ViroPharma. ViroPharma may terminate the agreement prior to expiration for any reason on a product-by-product basis upon 90 days’ prior written notice to the Company. Upon any such termination, the license granted to ViroPharma (in total or with respect to the terminated product, as applicable) will terminate.

Effective June 6, 2011, the Company and Intrexon entered into a collaboration and license agreement, under which Intrexon obtained a worldwide exclusive license for the use of rHuPH20 enzyme in the development of a subcutaneous injectable formulation of Intrexon’s recombinant human alpha 1-antitrypsin (rHuA1AT) (the “Intrexon Partnership”). In addition, the license provides Intrexon with exclusivity for a defined indication (“Exclusive Field”). As of December 31, 2011, the Company has received $9 million in nonrefundable upfront license fee payment from Intrexon. If Intrexon successfully develops the licensed product candidate and achieves the pre-agreed sales target, the Company could receive additional milestone payments of up to $54 million, including $44 million for the achievement of development and regulatory milestones and $10 million for the achievement of a sales-based milestone. In addition, so long as the agreement is in effect, the Company is entitled to receive an annual exclusivity fee of $1.0 million commencing on June 6, 2012 and on each anniversary of the effective date of the agreement thereafter until a certain development event occurs. Intrexon is solely responsible for the development, manufacturing and marketing of any products resulting from this partnership. The Company is entitled to receive payments for research and development services and supply of rHuPH20 API if requested by Intrexon. In addition, the Company is entitled to receive additional cash payments potentially totaling $10 million for each product for use outside the Exclusive Field upon achievement of development and regulatory milestones. The Company is also entitled to receive royalties on product sales at a royalty rate which increases with net sales of product. Intrexon may terminate the agreement prior to expiration for any reason on a product-by-product basis upon 90 days’ prior written notice to the Company. Upon any such termination, the license granted to Intrexon (in total or with respect to the terminated product, as applicable) will terminate. Intrexon’s chief executive officer and chairman of its board of directors is also a member of the Company’s board of directors.

The Company identified the deliverables at the inception of the ViroPharma and Intrexon agreements which are the license, research and development services and API supply. The Company has determined that the license, research and development services and API supply individually represent separate units of accounting, because each deliverable has standalone value. The estimated selling prices for these units of accounting was determined based on market conditions, the terms of comparable collaborative arrangements for similar technology in the pharmaceutical and biotech industry and entity-specific factors such as the terms of the Company’s previous collaborative agreements, the Company’s pricing practices and pricing objectives and the nature of the research and development services to be performed for the partners. The arrangement consideration was allocated to the deliverables based on the relative selling price method. Based on the results of the Company’s analysis, the Company determined that the upfront payment was earned upon the granting of the worldwide, exclusive right to the Company’s technology to the collaborator in both the ViroPharma Partnership and Intrexon Partnership. However, the amount of allocable arrangement consideration is limited to amounts that are fixed or determinable; therefore, the amount allocated to the license was only to the extent of cash received. As a result, the Company recognized the $9.0 million upfront license fee received under the ViroPharma Partnership and the $9.0 million upfront license fee received under the Intrexon Partnership as revenues under collaborative agreements upon receipt of the upfront license fees in the year ended December 31, 2011.

The Company will recognize the exclusivity fees as revenues under collaborative agreements when they are earned. The Company will recognize reimbursements for research and development services as revenues under collaborative agreements as the related services are delivered. The Company will recognize revenue from sales of API as revenues under collaborative agreements when such API has met all required specifications by the partners and the related title and risk of loss and damages have passed to the partners. The Company cannot predict the timing of delivery of research and development services and API as they are at the partners’ requests.

The Company is eligible to receive additional cash payments upon the achievement by the partners of specified development, regulatory and sales-based milestones. The Company has determined that each of the development and regulatory milestones is substantive; therefore, the Company expects to recognize such development and regulatory milestone payments as revenues under collaborative agreements upon achievement in accordance with the Milestone Method. In addition, the Company has determined that the sales-based milestone payment is similar to a royalty payment and is not considered a milestone payment under the Milestone Method of revenue recognition; therefore, the Company will recognize the sales-based milestone payment as revenue upon achievement of the milestone because the Company has no future performance obligations associated with the milestone. In September 2011, ViroPharma announced the initiation of a Phase 2 clinical study to evaluate the safety, pharmacokinetics and pharmacodynamics of subcutaneous administration of Cinryze in combination with rHuPH20 in subjects with hereditary angioedema. As a result, for the year ended December 31, 2011 the Company recognized a $3.0 million milestone payment from ViroPharma as revenue under collaborative agreements in accordance with the Milestone Method related to the achievement of this development milestone pursuant to the terms of the ViroPharma Partnership.

 

4.	Inventories, Net

Inventories, net consists of the following:

 

		December 31, 2011				December 31, 2010
Raw materials		$	201,822			$	193,422
Work-in-process			290,647				—
Finished goods			74,794				—
		$	567,263			$	193,422

 

5.	Property and Equipment, Net

Property and equipment consists of the following:

 

		December 31, 2011				December 31, 2010
Research equipment		$	5,231,763			$	4,308,654
Computer and office equipment			1,266,041				1,215,894
Leasehold improvements			1,019,147				998,368
			7,516,951				6,522,916
Accumulated depreciation and amortization			(5,745,903	)			(4,676,017	)
		$	1,771,048			$	1,846,899

Depreciation and amortization expense was approximately $1.1 million, $1.5 million and $1.4 million, for the years ended December 31, 2011, 2010 and 2009, respectively.

 

6.	Accrued Expenses

Accrued expenses consist of the following:

 

		December 31, 2011				December 31, 2010
Accrued outsourced research and development expenses		$	1,910,273			$	3,647,762
Accrued compensation and payroll taxes			3,223,936				3,045,950
Other accrued expenses			481,365				1,911,857
		$	5,615,574			$	8,605,569

 

7.	Deferred Revenue

Deferred revenue consists of the following:

 

		December 31, 2011				December 31, 2010
Collaborative agreements		$	40,716,806			$	58,093,551
Product sales			167,184				—
Total deferred revenue			40,883,990				58,093,551
Less current portion			4,129,407				2,917,129
Deferred revenue, net of current portion		$	36,754,583			$	55,176,422

Roche Partnership.    In December 2006, the Company and Roche entered into the Roche Partnership under which Roche obtained a worldwide, exclusive license to develop and commercialize product combinations of rHuPH20 and up to ten additional Roche target compounds. Under the terms of the Roche Partnership, Roche paid $20.0 million to the Company in December 2006 as an initial upfront payment for the application of rHuPH20 to three pre-defined Roche biologic targets. Through December 31, 2011, Roche has paid an aggregate of $20.0 million in connection with Roche’s election of two additional exclusive targets and annual license maintenance fees for the right to designate the remaining targets as exclusive targets. In 2010, Roche paid the annual license maintenance fees on only three of the remaining eight target slots. In 2011, Roche did not pay the annual exclusivity maintenance fee for any of the remaining additional target slots. As a result, Roche currently retains the option to develop and commercialize rHuPH20 with three additional targets, provided that Roche continues to pay annual license maintenance fees to the Company.

Due to the Company’s continuing involvement obligations (for example, support activities associated with rHuPH20 enzyme), revenues from the upfront payment, exclusive designation fees and annual license maintenance fees were deferred and are being recognized over the term of the Roche Partnership. The Company recognized revenue from the upfront payment, exclusive designation fees and annual license maintenance fees under the Roche Partnership in the amounts of approximately $2.0 million, $2.0 million and $1.9 million for the years ended December 31, 2011, 2010 and 2009, respectively. Deferred revenue relating to the upfront payment, exclusive designation fees and annual license maintenance fees under the Roche Partnership was $31.7 million and $32.9 million as of December 31, 2011 and 2010, respectively.

Gammagard Partnership.    In September 2007, the Company and Baxter entered into the Gammagard Partnership, under which Baxter obtained a worldwide, exclusive license to develop and commercialize product combinations of rHuPH20 with GAMMAGARD LIQUID. Under the terms of the Gammagard Partnership, Baxter paid the Company a nonrefundable upfront payment of $10.0 million. Due to the Company’s continuing involvement obligations (for example, support activities associated with rHuPH20 enzyme), the $10.0 million upfront payment was deferred and is being recognized over the term of the Gammagard Partnership. The Company recognized revenue from the upfront payment under the Gammagard Partnership in the amounts of approximately $483,000, $521,000 and $606,000 for the years ended December 31, 2011, 2010 and 2009, respectively. Deferred revenue relating to the upfront payment under the Gammagard Partnership was $7.6 million and $8.1 million as of December 31, 2011 and 2010, respectively.

Hylenex Partnership.    In February 2007, the Company and Baxter amended certain existing agreements for Hylenex recombinant and entered into the Hylenex Partnership for kits and formulations with rHuPH20. Under the terms of the Hylenex Partnership, Baxter paid the Company a nonrefundable upfront payment of $10.0 million. In addition, Baxter would make payments to the Company based on sales of the products covered under the Hylenex Partnership. Baxter had prepaid nonrefundable product-based payments totaling $10.0 million in connection with the execution of the Hylenex Partnership. Due to the Company’s continuing involvement obligations (for example, support activities associated with rHuPH20 enzyme), the $10.0 million upfront payment was initially deferred and was being recognized over the term of the Hylenex Partnership. The prepaid product-based payments were also deferred and were being recognized as product sales revenues as the Company earned such revenues from the sales of Hylenex recombinant by Baxter.

Effective January 7, 2011, the Company and Baxter mutually agreed to terminate the Hylenex Partnership and the associated agreements. The termination of these agreements does not affect the other relationships between the parties, including the application of the Company’s Enhanze technology to Baxter’s GAMMAGARD LIQUID.

On July 18, 2011, the Company and Baxter entered into an agreement (the “Transition Agreement”) setting forth certain rights, data and assets to be transferred by Baxter to the Company during a transition period. Effective July 18, 2011, the Company had no future performance obligations to Baxter in connection with the Hylenex Partnership. Therefore, the Company recognized the unamortized deferred revenue of approximately $9.3 million relating to the prepaid product-based payments and the unamortized deferred revenue of approximately $7.8 million relating to deferred upfront payment from the Hylenex Partnership as revenues under collaborative agreements for the year ended December 31, 2011. For the years ended December 31, 2010 and 2009, the Company recognized revenues under the Hylenex Partnership from the upfront payment in the amounts of approximately $503,000 and $586,000, respectively, and from the product-based payments in the amounts of approximately $332,000 and $204,000, respectively. Deferred revenues relating to the upfront payment and product-based payments under the Hylenex Partnership were $7.8 million and $9.3 million, respectively, at December 31, 2010. There were no deferred revenues relating to the Hylenex Partnership at December 31, 2011.

As a result of the termination of the Hylenex Partnership, at December 31, 2010 the Company had recharacterized deferred revenue of approximately $991,000 as a reserve for product returns for HYLENEX API previously delivered to Baxter that could be returned (“Delivered Products”). Pursuant to the terms of the Transition Agreement, Baxter no longer had the right to return the Hylenex recombinant API previously delivered to Baxter. Accordingly, the Company recharacterized the reserve for product returns for the Delivered Products of approximately $991,000 to current deferred revenue and recognized such deferred revenue as product sales revenue for the year ended December 31, 2011.

 

8.	Stockholders’ Equity

During 2011, the Company issued an aggregate of 3,045,540 shares of common stock in connection with the exercises of 3,137,056 shares of stock options at a weighted average exercise price of $1.71 per share for cash in the aggregate amount of approximately $4.7 million. In addition, the Company issued 347,883 shares of common stock in connection with the grants of restricted stock awards at zero purchase price and 15,000 shares of common stock in connection with the exercise of restricted stock units at zero purchase price.

 

In September 2010, the Company issued 8.3 million shares of common stock in a public offering at a public offering price of $7.50 per share, generating approximately $60.0 million in net proceeds. In connection with this financing, the Company granted to an underwriter an option to purchase 1,245,000 shares of common stock at a price of $7.25 per share. The option was exercisable in the event that the underwriter sold more than 8.3 million shares of common stock. The option expired unexercised on October 8, 2010.

During 2010, the Company issued an aggregate of 599,093 shares of common stock in connection with the exercises of stock options (479,093 shares at a weighted average exercise price of $3.88 per share) and restricted stock awards (120,000 shares at an exercise price of $0.001 per share) for cash in the aggregate amount of approximately $1.9 million.

In June 2009, the Company issued 6,150,000 shares of common stock in a public offering at a price of $6.50 per share, generating approximately $38.2 million in net proceeds.

During 2009, the Company issued an aggregate of 3,978,102 shares of common stock in connection with the exercises of stock purchase warrants (3,140,780 shares at a weighted average exercise price of $2.05 per share), stock options (717,322 shares at a weighted average exercise price of $1.42 per share) and restricted stock awards (120,000 shares at an exercise price of $0.001 per share) for cash in the aggregate amount of approximately $7.2 million.

 

9.	Equity Incentive Plans

The Company has two equity incentive plans (the “Current Plans”) under which the Company currently grants stock options, restricted stock awards and restricted stock units: the 2011 Stock Plan and the 2008 Outside Directors’ Stock Plan. In May 2011, the Company’s stockholders approved the Company’s 2011 Stock Plan, which provides for the granting of up to a total of 6,000,000 shares of common stock (subject to certain limitations as described in the 2011 Stock Plan) to selected employees, consultants and non-employee members of the Company’s Board of Directors ("Outside Directors") as stock options, stock appreciation rights, restricted stock awards, restricted stock unit awards and performance awards. The 2011 Stock Plan replaced the Company’s prior stock plans, consisting of the Company’s 2008 Stock Plan, 2006 Stock Plan and 2004 Stock Plan (“Prior Plans”, collectively with the Current Plans, the “Plans”). The Prior Plans were terminated such that no additional awards could be granted under the Prior Plans, but the terms of the Prior Plans remain in effect with respect to outstanding awards until they are exercised, settled or canceled. The Plans were approved by the stockholders. Awards are subject to terms and conditions established by the Compensation Committee of the Company’s Board of Directors.

During the year ended December 31, 2011, the Company granted share-based awards under the 2011 Stock Plan, the 2008 Stock Plan and the 2008 Outside Directors’ Stock Plan. At December 31, 2011, the Company had an aggregate of approximately 21,457,644 shares of common stock reserved for issuance. Of those shares, 6,017,784 shares were subject to outstanding awards, and 4,882,017 shares were available for future grants of share-based awards. At the present time, management intends to issue new common shares upon the exercise of stock options, issuance of restricted stock awards and settlement of restricted stock units.

Stock Options.    Options granted under each of the Plans must have an exercise price equal to at least 100% of the fair market value of the Company’s common stock on the date of grant. The options will generally have a maximum contractual term of ten years and vest at the rate of one-fourth of the shares on the first anniversary of the date of grant and 1/48 of the shares monthly thereafter. Certain option awards provide for accelerated vesting if there is a change in control (as defined in the Plans).

 

A summary of the Company’s stock option award activity as of and for the years ended December 31, 2011, 2010 and 2009 is as follows:

 

		Shares Underlying Stock Options				Weighted Average Exercise Price per Share				Weighted Average Remaining Contractual Term (yrs)				Aggregate Intrinsic Value
Outstanding at January 1, 2009			7,254,785			$	3.02
Granted			1,519,405			$	6.41
Exercised			(717,322	)		$	1.42
Cancelled/forfeited			(252,602	)		$	6.11
Outstanding at December 31, 2009			7,804,266			$	3.73
Granted			1,332,714			$	5.94
Exercised			(479,093	)		$	3.88
Cancelled/forfeited			(682,522	)		$	6.29
Outstanding at December 31, 2010			7,975,365			$	3.87
Granted			1,624,768			$	7.79
Exercised			(3,137,056	)		$	1.71
Cancelled/forfeited			(593,293	)		$	6.72
Outstanding at December 31, 2011			5,869,784			$	5.82				6.5			$	21.7 million
Vested and expected to vest at December 31, 2011			5,538,478			$	5.72				6.4			$	21.1 million
Exercisable at December 31, 2011			3,372,552			$	4.78				5.1			$	16.1 million

The weighted average grant-date fair values of options granted during the years ended December 31, 2011, 2010 and 2009 were $4.57 per share, $3.69 per share and $3.72 per share, respectively. As of December 31, 2011, approximately $8.5 million of total unrecognized compensation costs related to non-vested stock option awards was expected to be recognized over a weighted average period of approximately 2.8 years. The intrinsic value of options exercised during the years ended December 31, 2011, 2010 and 2009 was approximately $16.6 million, $1.8 million and $3.9 million, respectively. Cash received from stock option exercises for the years ended December 31, 2011, 2010 and 2009 was approximately $4.7 million, $1.9 million and $1.0 million, respectively.

The fair value of each option award is estimated on the date of grant using a Black-Scholes-Merton option pricing model (“Black-Scholes model”) that uses the assumptions noted in the following table. Expected volatility is based on historical volatility of the Company’s common stock. However, due to insufficient data of the Company’s common stock prior to 2010, expected volatility for the year ended December 31, 2009 was based on the Company’s common stock and its peer group. The expected term of options granted is based on analyses of historical employee termination rates and option exercises. The risk-free interest rate is based on the U.S. Treasury yield for a period consistent with the expected term of the option in effect at the time of the grant. The dividend yield assumption is based on the expectation of no future dividend payments by the Company. Assumptions used in the Black-Scholes model were as follows:

 

		Year Ended December 31,
		2011				2010				2009
Expected volatility			64.0-65.1	%			65.8-70.8	%			65.0	%
Average expected term (in years)			5.8				5.7				5.5
Risk-free interest rate			1.14-2.55	%			1.39-2.80	%			1.65-2.73	%
Expected dividend yield			0	%			0	%			0	%

Restricted Stock Awards.    Restricted stock awards are grants that entitle the holder to acquire shares of the Company’s common stock at zero or a fixed price, which is typically nominal. The shares covered by a restricted stock award cannot be sold, pledged, or otherwise disposed of until the award vests and any unvested shares may be reacquired by the Company for the original purchase price following the awardee’s termination of service. Annual grants of restricted stock awards under the Outside Directors’ Stock Plans typically vest in full the first day the awardee may trade the Company’s stock in compliance with the Company’s insider trading policy following the date immediately preceding the first annual meeting of stockholders following the grant date.

During the year ended December 31, 2011, the Company granted certain employees 233,508 restricted stock awards at no purchase price, with a grant-date fair value of $6.67 per share, under the 2011 Stock Plan. These restricted stock awards are subject to percentage vesting based upon achievement of certain corporate goals and the employee’s continuing services through May 2012.

The following table summarizes the Company’s restricted stock award activity during the years ended December 31, 2011, 2010 and 2009:

 

		Number of Shares				Weighted Average Grant Date Fair Value
Unvested at January 1, 2009			192,500			$	4.94
Granted			120,000			$	5.81
Vested			(192,500	)		$	4.94
Forfeited			—			$	—
Unvested at December 31, 2009			120,000			$	5.81
Granted			120,000			$	7.67
Vested			(120,000	)		$	5.81
Forfeited			—			$	—
Unvested at December 31, 2010			120,000			$	7.67
Granted			353,508			$	6.51
Vested			(120,000	)		$	7.67
Forfeited			(5,625	)		$	6.67
Unvested at December 31, 2011			347,883			$	6.51

The fair value of the restricted stock awards is based on the market value of the Company’s common stock on the date of grant. The total grant-date fair value of restricted stock awards vested during the years ended December 31, 2011, 2010 and 2009 was approximately $920,000, $697,000 and $951,000, respectively. The Company recognized approximately $1.7 million, $844,000 and $878,000 of share-based compensation expense related to the restricted stock awards for the years ended December 31, 2011, 2010 and 2009. As of December 31, 2011, total unrecognized compensation cost related to unvested shares was approximately $777,000, which is expected to be recognized over a weighted-average period of approximately 4 months.

 

Restricted Stock Units.    A restricted stock unit is a promise by the Company to issue a share of Company common stock upon vesting of the unit. During the year ended December 31, 2011, the Company granted 163,000 shares of restricted stock units, at no purchase price, to certain employees under the 2011 Stock Plan. 148,000 shares of these restricted stock units are subject to percentage vesting based upon achievement of certain corporate goals and the employees’ continuing services through May 2012. No restricted stock units were granted during the years ended December 31, 2010 and 2009.

The following table summarizes the Company’s restricted stock unit activity during the year ended December 31, 2011:

 

		Number of Shares				Weighted Average Purchase Price				Weighted Average Remaining Contractual Term (yrs)				Aggregate Intrinsic Value
Unvested at January 1, 2011			—			$	—
Granted			163,000			$	—
Exercised			(15,000	)		$	—
Forfeited			—
Unvested at December 31, 2011			148,000			$	—				0.37			$	1.4 million
Vested and expected to vest at December 31, 2011			142,346			$	—				0.37			$	1.4 million
Exercisable at December 31, 2011			—			$	—				—			$	—

The estimated fair value of the restricted stock units was based on the market value of the Company’s common stock on the date of grant. The weighted average grant-date fair value of restricted stock units granted during the year ended December 31, 2011 was $6.71 per share. The total grant-date fair value of restricted stock units vested during the year ended December 31, 2011 was approximately $107,000. The Company recognized approximately $663,000 of share-based compensation expense related to the restricted stock units for the year ended December 31, 2011. As of December 31, 2011, total unrecognized estimated unamortized compensation cost related to non-vested restricted stock units outstanding as of that date was approximately $325,000, with a weighted average amortization period of approximately 4 months.

 

10.	Commitments and Contingencies

Operating Leases

The Company’s administrative offices and research facilities are located in San Diego, California. The Company leases an aggregate of approximately 58,000 square feet of office and research space.

In July 2007, the Company entered into a lease agreement (the “Original Lease”) with BC Sorrento, LLC (“BC Sorrento”) for the facilities located at 11388 Sorrento Valley Road, San Diego, California (“11388 Property”) for office and research space commencing in September 2008 through January 2013. Under the terms of the Original Lease, the initial monthly rent payment was approximately $37,000 net of costs and property taxes associated with the operation and maintenance of the leased facilities, commencing in September 2008 and increased to approximately $73,000 starting in March 2009. Thereafter, the annual base rent was subject to approximately 4% annual increases each year throughout the term of the Original Lease. In addition, the Company received a certain tenant improvement allowance and free rent under the terms of the Original Lease. Effective September 2010, BMR-11388 Sorrento Valley Road LP (“BMR-11388”) acquired the 11388 Property and became the new landlord of the 11388 Property.

In June 2011, the Company entered into an amended and restated lease (the “11388 Lease”) with BMR-11388 for the 11388 Property commencing from June 2011 through January 2018. The 11388 Lease superseded the Original Lease. Under the terms of the 11388 Lease, the initial monthly rent payment is approximately $38,000 net of costs and property taxes associated with the operation and maintenance of the leased facilities, commencing in December 2011 and increasing to approximately $65,000 starting in January 2013. Thereafter, the annual base rent is subject to approximately 2.5% annual increases each year throughout the term of the 11388 Lease. In addition, the Company received a cash incentive of approximately $98,000, a tenant improvement allowance of $300,000 and free and reduced rent totaling approximately $744,000. Combined with the unamortized deferred rent under the Original Lease, unamortized deferred rent associated with the 11388 Lease of $854,000 and $545,000 was included in deferred rent as of December 31, 2011 and 2010, respectively.

In July 2007, the Company entered into a sublease agreement (the “11404 Sublease”) with Avanir Pharmaceuticals, Inc. (“Avanir”) for Avanir’s excess leased facilities located at 11404 Sorrento Valley Road, San Diego, California for office and research space (“11404 Property”) for a monthly rent payment of approximately $54,000, net of costs and property taxes associated with the operation and maintenance of the subleased facilities. The 11404 Sublease expires in January 2013. The annual base rent is subject to approximately 4% annual increases each year throughout the terms of the 11404 Sublease. In addition, the Company received free rent totaling approximately $492,000, of which approximately $149,000 and $266,000 was included in deferred rent as of December 31, 2011 and 2010, respectively.

In April 2009, the Company entered into a sublease agreement (the “11408 Sublease”) with Avanir for office and research space located at 11408 Sorrento Valley Road, San Diego, California (“11408 Property”), which expires in January 2013. The monthly rent payments, which commenced in January 2010, were approximately $21,000 and are subject to an annual increase of approximately 3%. Under terms of the 11408 Sublease, the Company received a tenant improvement allowance of $75,000, of which approximately $29,000 and $49,000 was included in deferred rent at December 31, 2011 and 2010, respectively.

In June 2011, the Company entered into a lease agreement (the “11404/11408 Lease”) with BMR-Sorrento Plaza LLC (“BMR-Sorrento”) for the 11404 Property and 11408 Property commencing in January 2013 through January 2018. Pursuant to the terms of the 11404/11408 Lease, the initial monthly rent payment is approximately $71,000 net of costs and property taxes associated with the operation and maintenance of the leased facilities, commencing in January 2013 and is subject to approximately 2.5% annual increases each year throughout the term of the 11404/11408 Lease.

The Company pays a pro rata share of operating costs, insurance costs, utilities and real property taxes incurred by the landlords for the subleased facilities.

Additionally, the Company leases certain office equipment under operating leases. Total rent expense was approximately $1.5 million, $1.5 million and $1.4 million for the years ended December 31, 2011, 2010 and 2009, respectively.

 

Approximate annual future minimum operating lease payments as of December 31, 2011 are as follows:

 

Year:		Operating Leases
2012		$	1,470,000
2013			1,654,000
2014			1,677,000
2015			1,715,000
2016			1,758,000
Thereafter			1,870,000
Total minimum lease payments		$	10,144,000

Other Commitments

Under the terms of the Roche Partnership, the Company was obligated to scale up the production of rHuPH20 and to identify a second source manufacturer that would help meet anticipated production obligations arising from the partnership. To that end, during 2008, the Company entered into a Technology Transfer Agreement and a Clinical Supply Agreement with a second rHuPH20 manufacturer, Cook Pharmica LLC (“Cook”). Cook manufactures certain batches of the API that will be used in clinical trials of certain product candidates. Cook has the capacity to produce the quantities the Company was required to deliver under the terms of the Roche Partnership. The technology transfer was completed in 2008. In 2009, multiple batches of rHuPH20 were produced to support planned future clinical studies. In 2010, the Company initiated process validation activities in support of potential future commercialization. The process validation was completed in 2011.

In March 2010, the Company entered into a Commercial Supply Agreement with Cook (the “Cook Commercial Supply Agreement”). Under the terms of the Cook Commercial Supply Agreement, Cook will manufacture certain batches of the API that will be used for potential commercial supply of certain product candidates. Under the terms of the Cook Commercial Supply Agreement, the Company is committed to certain minimum annual purchases of API equal to four quarters of forecasted supply. At December 31, 2011, the Company has no minimum purchase obligation in connection with the Cook Commercial Supply Agreement.

In March 2010, the Company amended its Commercial Supply Agreement (the “March 2010 Avid Amendment”) with Avid Bioservices, Inc. ("Avid") which was originally entered into in February 2005 and amended in December 2006. Under the terms of the March 2010 Avid Amendment, the Company is committed to certain minimum annual purchases of API equal to three quarters of forecasted supply. In addition, Avid has the right to manufacture and supply a certain percentage of the API that will be used in Hylenex recombinant. At December 31, 2011, the Company has a minimum purchase obligation of approximately $2.7 million.

In March 2010, the Company entered into a second Commercial Supply Agreement with Avid (the “Avid Commercial Supply Agreement”). Under the terms of the Avid Commercial Supply Agreement, the Company is committed to certain minimum annual purchases of API equal to three quarters of forecasted supply. In addition, Avid has the right to manufacture and supply a certain percentage of the API that will be used in certain product candidates. At December 31, 2011, the Company has no minimum purchase obligation in connection with this agreement.

In June 2011, the Company entered into a commercial manufacturing and supply agreement with Baxter, under which Baxter will fill and finish Hylenex recombinant for the Company. The initial term of the agreement with Baxter extends until December 2012 and is renewable for one additional year upon mutual agreement. At December 31, 2011, the Company has a minimum purchase obligation of approximately $1.8 million.

 

In June 2011, we entered into a services agreement with another third party manufacturer for the technology transfer and manufacture of Hylenex recombinant. At December 31, 2011, the Company has no minimum purchase obligation in connection with this agreement.

Legal Contingencies

From time to time, the Company may be involved in disputes, including litigation, relating to claims arising out of operations in the normal course of its business. Any of these claims could subject the Company to costly legal expenses and, while the Company generally believes that the Company has adequate insurance to cover many different types of liabilities, its insurance carriers may deny coverage or its policy limits may be inadequate to fully satisfy any damage awards or settlements. If this were to happen, the payment of any such awards could have a material adverse effect on the Company’s consolidated results of operations and financial position. Additionally, any such claims, whether or not successful, could damage the Company’s reputation and business. The Company currently is not a party to any legal proceedings, the adverse outcome of which, in management’s opinion, individually or in the aggregate, would have a material adverse effect on its consolidated results of operations or financial position.

In May 2010, the Company delivered a notice of breach to Baxter due to Baxter’s failure to provide Hylenex recombinant in accordance with the terms of the Hylenex Partnership. Baxter had contested the claims made in our initial notice of breach and asserted their own breach claims against the Company. Pursuant to the terms of the Transition Agreement, signed on July 18, 2011, Baxter’s breach claims against the Company were discharged.

 

11.	Income Taxes

Significant components of the Company’s net deferred tax assets at December 31, 2011 and 2010 are shown below. A valuation allowance of $107.5 million and $97.6 million has been established to offset the net deferred tax assets as of December 31, 2011 and 2010, respectively, as realization of such assets is uncertain.

 

		2011				2010
Deferred tax assets:
Net operating loss carryforwards		$	69,912,000			$	57,035,000
Deferred revenue			15,338,000				22,248,000
Research and development credits			19,270,000				15,540,000
Share-based compensation			2,122,000				1,449,000
Depreciation			76,000				533,000
Other, net			771,000				749,000
Total deferred tax assets			107,489,000				97,554,000
Valuation allowance for deferred tax assets			(107,489,000	)			(97,554,000	)
Net deferred tax assets		$	—			$	—

 

The provision for income taxes on earnings subject to income taxes differs from the statutory federal income tax rate at December 31, 2011, 2010 and 2009, due to the following:

 

		2011				2010				2009
Federal income tax rate of 34%		$	(6,722,000	)		$	(18,102,000	)		$	(19,843,000	)
State income tax, net of federal benefit			(1,153,000	)			(3,106,000	)			(3,405,000	)
Research and development credits			(3,731,000	)			(3,379,000	)			(4,464,000	)
Tax effect on non-deductible expenses and other			1,671,000				2,118,000				2,186,000
Increase in valuation allowance			9,935,000				22,469,000				25,526,000
Benefit due to refundable R&D credit			—				—				—
		$	—			$	—			$	—

At December 31, 2011, the Company had federal and California tax net operating loss carryforwards of approximately $200.3 million and $207.1 million, respectively. Included in these amounts are federal and California net operating losses of approximately $25.8 million attributable to stock option deductions of which the tax benefit will be credited to equity when realized. The federal and California tax loss carryforwards will begin to expire in 2018 and 2012, respectively, unless previously utilized.

At December 31, 2011, the Company also had federal and California research and development tax credit carryforwards of approximately $14.3 million and $7.5 million, respectively. The federal research and development tax credits will begin to expire in 2024 unless previously utilized. The California research and development tax credits will carryforward indefinitely until utilized.

Pursuant to Internal Revenue Code Section 382, the annual use of the net operating loss carryforwards and research and development tax credits could be limited by any greater than 50% ownership change during any three-year testing period. As a result of any such ownership change, portions of the Company’s net operating loss carryforwards and research and development tax credits are subject to annual limitations. The Company recently completed an updated Section 382 analysis regarding the limitation of the net operating losses and research and development credits as of December 31, 2011. Based upon the analysis, the Company determined that ownership changes occurred in prior years. However, the annual limitations on net operating loss and research and development tax credit carryforwards will not have a material impact on the future utilization of such carryforwards.

At December 31, 2011 and 2010, the Company’s unrecognized income tax benefits and uncertain tax positions were not material and would not, if recognized, affect the effective tax rate. Interest and/or penalties related to uncertain income tax positions are recognized by the Company as a component of income tax expense. For the years ended December 31, 2011 and 2010, the Company did not recognize any interest or penalties.

The Company is subject to taxation in the U.S. and in various state jurisdictions. The Company’s tax years for 1998 and forward are subject to examination by the U.S. and California tax authorities due to the carryforward of unutilized net operating losses and research and development credits.

 

12.	Employee Savings Plan

The Company has an employee savings plan pursuant to Section 401(k) of the Internal Revenue Code. The plan allows participating employees to deposit into tax deferred investment accounts up to 90% of their salary, subject to annual limits. The Company is not required to make matching contributions under the plan. However, the Company voluntarily contributed to the plan approximately $355,000, $433,000 and $374,000 in the years ended December 31, 2011, 2010 and 2009, respectively.

 

13.	Restructuring Expense

In October 2010, the Company completed a corporate reorganization to focus its resources on advancing its core proprietary programs and supporting strategic alliances with Roche and Baxter. This reorganization resulted in a reduction in the workforce of approximately 25 percent primarily in the discovery research and preclinical areas.

The Company recorded approximately $1.3 million of severance pay and benefits expenses in connection with the reorganization, of which $1.2 million and $76,000 was included in research and development expense and selling, general and administrative expense, respectively, in the consolidated statement of operations for the year ended December 31, 2010. No other restructuring charges were incurred. The restructuring liability was approximately $117,000 and included in current accrued expenses as of December 31, 2010. The balance was paid in full as of December 31, 2011. The following table summarizes the restructuring accrual activities:

 

		Employee severance and benefits
Balance, January 1, 2010		$	—
Accruals during the year			1,321,579
Cash payments			(1,204,902	)
Balance, December 31, 2010		$	116,677
Accruals during the year			—
Cash payments			(116,677	)
Balance, December 31, 2011		$	—

 

14.	Related Party Transactions

Effective June 6, 2011, the Company and Intrexon entered into the Intrexon Partnership, under which Intrexon obtained a worldwide exclusive license for the use of rHuPH20 enzyme in the development of a subcutaneous injectable formulation of Intrexon’s recombinant human alpha 1-antitrypsin (rHuA1AT). In addition, the license provides Intrexon with exclusivity for Exclusive Field. Intrexon’s chief executive officer and chairman of its board of directors, Randal J. Kirk, is also a member of the Company’s board of directors. The collaborative arrangement with Intrexon was negotiated at arm-length and reviewed and approved by the Company’s Board of Directors in accordance with the Company’s related party transaction policy. Under the terms of the Intrexon Partnership, Intrexon paid a nonrefundable upfront license fee of $9.0 million. In addition, so long as the agreement is in effect, the Company is entitled to receive an annual exclusivity fee of $1.0 million commencing on June 6, 2012 and on each anniversary of the effective date of the agreement thereafter until a certain development event occurs. Intrexon is solely responsible for the development, manufacturing and marketing of any products resulting from this partnership. The Company is entitled to receive payments for research and development services and supply of rHuPH20 API if requested by Intrexon. In addition, the Company is entitled to receive additional cash payments potentially totaling $44.0 million for each product for use in the Exclusive Field and $10 million for each product for use outside Exclusive Field upon achievement of development and regulatory milestones. The Company is also entitled to receive royalties on product sales at a royalty rate which increases with net sales of product and a cash payment of $10.0 million upon achievement of a specified sales volume of product sales by Intrexon. Intrexon may terminate the agreement prior to expiration for any reason on a product-by-product basis upon 90 days’ prior written notice to the Company. Upon any such termination, the license granted to Intrexon (in total or with respect to the terminated product, as applicable) will terminate. For the year ended December 31, 2011, the Company recognized $9.0 million in revenue under collaborative agreements under the Intrexon Partnership.

Connie L. Matsui, a director of the Company, and her husband had a controlling ownership interest (and therefore a financial interest) in an entity that held a minority ownership position in BC Sorrento, an entity that leased the 11388 Property to the Company until September 2010. The transaction with BC Sorrento was reviewed and approved by the Company’s Board of Directors in accordance with the Company’s related party transaction policy. Effective September 2010, BC Sorrento sold the 11388 Property to an unrelated party. As such, the Company no longer has any business transactions with BC Sorrento effective September 2010. The Company paid BC Sorrento approximately zero, $982,000 and $1.2 million for the years ended December 31, 2011, 2010 and 2009, respectively.

 

15.	Subsequent Events

On February 15, 2012, the Company completed an underwritten public offering and issued 7,820,000 shares of common stock, including 1,020,000 shares sold pursuant to the full exercise of an over-allotment option granted to the underwriter. All of the shares were offered at a public offering price of $10.61 per share, generating approximately $81.8 million in proceeds after deducting the underwriting discounts and commissions but before any deductions for expenses. Randal J. Kirk, a member of the Company’s board of directors, through his affiliates, purchased 1,360,000 shares of common stock in this offering at the public offering price of $10.61 for a total of approximately $14.4 million.

 

16.	Summary of Unaudited Quarterly Financial Information

The following is a summary of the Company’s unaudited quarterly statement of operations data derived from unaudited consolidated financial statements included in the Company’s Quarterly Reports on Form 10-Q:

 

		Quarter Ended
2011 (Unaudited):		March 31,				June 30,				September 30,				December 31,
Total revenues (a)		$	7,543,894			$	23,188,948			$	22,942,428			$	2,411,166
Total operating expenses		$	17,203,480			$	20,093,017			$	17,789,595			$	20,839,285
Net income (loss)		$	(9,635,717	)		$	3,116,288			$	5,165,193			$	(18,415,615	)
Net income (loss) per share, basic and diluted		$	(0.10	)		$	0.03			$	0.05			$	(0.18	)
Shares used in computing net income (loss) per share:
Basic			100,927,402				102,671,410				103,223,352				103,406,407
Diluted			100,927,402				104,393,835				105,009,189				103,406,407
		Quarter Ended
2010 (Unaudited):		March 31,				June 30,				September 30,				December 31,
Total revenues		$	3,441,731			$	3,213,353			$	3,396,507			$	3,572,524
Total operating expenses		$	15,229,877			$	15,365,431			$	15,830,148			$	21,456,291
Net loss		$	(11,787,477	)		$	(12,150,923	)		$	(12,409,576	)		$	(16,893,674	)
Net loss per share, basic and diluted		$	(0.13	)		$	(0.13	)		$	(0.13	)		$	(0.17	)
Shares used in computing net loss per share, basic and diluted			91,610,830				91,766,799				93,626,893				100,337,075

 

(a)	Revenues for the quarter ended June 30, 2011 included revenue from collaborative agreements totaling $18.0 million related to the upfront payments received from the ViroPharma and Intrexon Partnerships.

Revenues for the quarter ended September 30, 2011 included revenue from collaborative agreements totaling $17.9 million related to recognition of unamortized deferred prepaid product-based payments and unamortized deferred upfront payment under the Hylenex Partnership with Baxter as a result of the Transition Agreement signed in July 2011.