Quarterly Report

Table of Contents

 

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

x

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For The Quarterly Period Ended September 30, 2010

 

OR

 

o

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from              to            

 

Commission File Number 001-33389

 

VIVUS, INC.

(Exact name of registrant as specified in its charter)

 

Delaware		94-3136179
(State or other jurisdiction of		(IRS employer
incorporation or organization)		identification number)
1172 Castro Street
Mountain View, California		94040
(Address of principal executive office)		(Zip Code)

 

(650) 934-5200

(Registrant’s telephone number, including area code)

 

N/A

(Former name, former address and former fiscal year, if changed since last report)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes  x   No  o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes  o   No  o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer o		Accelerated filer  x
Non-accelerated filer o		Smaller reporting company  o
(Do not check if a smaller reporting company)

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).  o  Yes   x  No

 

At October 27, 2010, 81,205,980 shares of common stock, par value $.001 per share, were outstanding.

 

 

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VIVUS, INC.

 

Quarterly Report on Form 10-Q

 

IND EX

 

	PART I — FINANCIAL INFORMATION	3
Item 1:	Condensed Consolidated Financial Statements (Unaudited)	3
Item 2:	Management’s Discussion and Analysis of Financial Conditions and Results of Operations	21
Item 3:	Quantitative and Qualitative Disclosures about Market Risk	56
Item 4:	Controls and Procedures	57
	PART II — OTHER INFORMATION	58
Item 1:	Legal Proceedings	58
Item 1A:	Risk Factors	58
Item 2:	Unregistered Sales of Equity Securities and Use of Proceeds	91
Item 3:	Defaults Upon Senior Securities	91
Item 4:	Removed and Reserved	91
Item 5:	Other Information	91
Item 6:	Exhibits	91
	Signatures	92

 

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PART I: FINANCIAL INFORMATION

 

ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

VIVUS, INC.

 

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except par value )

 

		September 30 2010			December 31 2009*
		(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents		$	29,036		$	40,533
Available-for-sale securities		129,162			166,241
Inventories		1,803			—
Prepaid expenses and other assets		2,306			3,968
Current assets of discontinued operations		7,786			12,620
Total current assets		170,093			223,362
Property, plant and equipment, net		240			290
Non-current assets of discontinued operations		5,595			6,380
Total assets		$	175,928		$	230,032
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable		$	4,677		$	8,082
Accrued research and clinical expenses		4,283			2,426
Accrued employee compensation and benefits		2,580			2,465
Accrued and other liabilities		3,542			2,000
Current liabilities of discontinued operations		5,330			7,537
Total current liabilities		20,412			22,510
Notes payable-net of current portion		15,255			15,255
Non-current liabilities of discontinued operations		5,068			5,541
Total liabilities		40,735			43,306
Commitments and contingencies
Stockholders’ equity:
Preferred stock; $1.00 par value; 5,000 shares authorized; no shares issued and outstanding		—			—
Common stock; $.001 par value; 200,000 shares authorized; 81,206 and 80,607 shares issued and outstanding at September 30, 2010 and December 31, 2009, respectively		81			81
Additional paid-in capital		428,703			420,708
Accumulated other comprehensive income (loss)		23			(3		)
Accumulated deficit		(293,614		)	(234,060		)
Total stockholders’ equity		135,193			186,726
Total liabilities and stockholders’ equity		$	175,928		$	230,032

 

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*     Derived from audited consolidated financial statements filed in the Company’s 2009 Annual Report on Form 10-K.

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

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VIVUS, INC.

 

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

 (In thousands, except per share data)

(Unaudited)

 

		THREE MONTHS ENDED SEPTEMBER 30						NINE MONTHS ENDED SEPTEMBER 30
		2010			2009			2010			2009
Revenue:
License and other revenue		$	—		$	—		$	—		$	31,395
Operating expenses:
Research and development		10,091			17,149			33,878			57,398
General and administrative		6,747			3,447			18,661			10,398
Total operating expenses		16,838			20,596			52,539			67,796
Loss from operations		(16,838		)	(20,596		)	(52,539		)	(36,401		)
Interest (expense) income:
Interest income		57			655			172			1,670
Interest expense		(1,380		)	(1,175		)	(3,974		)	(2,645		)
Other-than-temporary loss on impaired securities		—			(97		)	—			(654		)
Total interest (expense) income		(1,323		)	(617		)	(3,802		)	(1,629		)
Loss from continuing operations before provision for income taxes		(18,161		)	(21,213		)	(56,341		)	(38,030		)
Provision for income taxes		(1		)	(1		)	(1		)	(1		)
Loss from continuing operations		(18,162		)	(21,214		)	(56,342		)	(38,031		)
Discontinued operations:
Income (loss) from discontinued operations		187			150			(3,192		)	(3,040		)
Provision for income taxes		(4		)	(2		)	(20		)	(8		)
Income (loss) from discontinued operations		183			148			(3,212		)	(3,048		)
Net loss		$	(17,979	)	$	(21,066	)	$	(59,554	)	$	(41,079	)
Basic and diluted net loss per share:
Continuing operations		$	(0.22	)	$	(0.30	)	$	(0.70	)	$	(0.55	)
Discontinued operations		0.00			0.00			(0.04		)	(0.04		)
Net loss per share		$	(0.22	)	$	(0.30	)	$	(0.74	)	$	(0.59	)
Shares used in per share computation:
Basic		81,172			70,942			80,926			70,149
Diluted		82,966			73,324			80,926			70,149

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

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VIVUS, INC.

 

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

 

		Nine Months Ended September 30
		2010			2009
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss from continuing operations		$	(56,342	)	$	(38,031	)
Adjustments to reconcile net loss from continuing operations to net cash used in operating activities from continuing operations:
Depreciation		101			54
Net realized gain on investments		—			(828		)
Other-than-temporary loss on impaired securities		—			654
Share-based compensation expense		4,827			3,148
Changes in assets and liabilities:
Inventories		(1,803		)	—
Prepaid expenses and other assets		1,663			156
Accounts payable		(3,405		)	(9,050		)
Accrued research and clinical expenses		1,857			(967		)
Accrued employee compensation and benefits		115			458
Accrued and other liabilities		1,542			1,499
Deferred revenue		—			(31,395		)
Net cash used in operating activities from continuing operations		(51,445		)	(74,302		)
Net cash provided by (used in) operating activities from discontinued operations		656			(1,884		)
Net cash used in operating activities		(50,789		)	(76,186		)
CASH FLOWS FROM INVESTING ACTIVITIES:
Property and equipment purchases		(51		)	(47		)
Investment securities purchases		(163,645		)	(109,629		)
Proceeds from sale/maturity of securities		200,750			133,638
Net cash provided by investing activities from continuing operations		37,054			23,962
Net cash used in investing activities from discontinued operations		(52		)	(199		)
Net cash provided by investing activities		37,002			23,763
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from notes payable		—			10,000
Payments of notes payable		—			(956		)
Net proceeds from exercise of common stock options		2,192			2,292
Sale of common stock through employee stock purchase plan		215			185
Net proceeds from issuance of common stock		—			102,708
Net cash provided by financing activities from continuing operations		2,407			114,229
Net cash used in financing activities from discontinued operations		(117		)	(108		)
Net cash provided by financing activities		2,290			114,121
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS		(11,497		)	61,698
CASH AND CASH EQUIVALENTS:
Beginning of period		40,533			66,121
End of period		$	29,036		$	127,819

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

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VIVUS, INC.

 

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

SEPTEMBER 30, 2010

 

1. BASIS OF PRESENTATION

 

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with United States generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. The year-end condensed consolidated balance sheet data was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America. Accordingly, they do not include all of the information and footnotes required by United States generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included. Operating results for the nine months ended September 30, 2010 are not necessarily indicative of the results that may be expected for the year ending December 31, 2010. Management has evaluated all events and transactions that occurred after September 30, 2010 up through the date these condensed consolidated financial statements were filed. Refer to Note 20: “Subsequent Events” for further discussions. The unaudited condensed consolidated financial statements should be read in conjunction with the audited financial statements and notes thereto included in the Company’s annual report on Form 10-K for the year ended December 31, 2009, as filed on March 10, 2010 with the Securities and Exchange Commission, or SEC. The condensed consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All significant intercompany accounts and transactions have been eliminated.

 

Reclassifications

 

Certain prior year amounts in the condensed consolidated financial statements have been reclassified to conform to the current year’s presentation. On November 5, 2010 the Company completed the sale of MUSE ® . As discussed in Note 3: “Discontinued Operations”, the results of operations, the assets and the liabilities related to MUSE have been accounted for as discontinued operations in accordance with FASB ASC topic 205, Discontinued Operations , or ASC 205. Accordingly, the results of operations related to MUSE from prior periods have been reclassified to discontinued operations.

 

Use of Estimates

 

The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

 

2. REVENUE RECOGNITION

 

License and Other Revenue

 

The Company recognizes license revenue in accordance with the Securities and Exchange Commission’s, or SEC’s, Staff Accounting Bulletin No. 104, Revenue Recognition , and Emerging Issues Task Force, or EITF, Issue 00-21, Revenue Arrangements with Multiple Deliverables, as codified in FASB ASC topic 605, Revenue Recognition , or ASC 605. Revenue arrangements with multiple deliverables are divided into separate units of accounting if certain criteria are met, including whether the delivered item has standalone value to the customer, and whether there is objective, reliable evidence of the fair value of the undelivered items. Consideration received is allocated among the separate units of accounting based on their relative fair values, and the applicable revenue recognition criteria are identified and applied to each of the units.

 

Revenue from non-refundable, upfront license fees where the Company has continuing involvement is recognized ratably over the development or agreement period. Revenue associated with performance milestones is recognized based upon the achievement of the milestones, as defined in the respective agreements.

 

Sale of Evamist product

 

On May 15, 2007, the Company closed its transaction with K-V Pharmaceutical Company, or K-V, for the sale of its product candidate, Evamist. At the time of the sale, Evamist was an investigational product and was not yet approved by the Food and Drug Administration, or FDA, for marketing. The sale transaction contained multiple deliverables, including: the delivery at closing of the Evamist assets, a grant of a sublicense of the Company’s rights under a license agreement related to Evamist, and a license to the metered-dose transdermal spray, or MDTS, applicator; the delivery upon receipt of regulatory approval of the approved drug along

 

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with all regulatory submissions; and, lastly, the delivery after FDA approval of certain transition services and a license to improvements to the MDTS applicator. The Company received approval from the FDA to market Evamist on July 27, 2007, or FDA Approval, and on August 1, 2007, the Company transferred and assigned the Evamist FDA submissions, and all files related thereto, to K-V. The Company received an upfront payment of $10 million upon the closing and received an additional $140 million milestone payment in August 2007 upon FDA Approval. These payments are non-refundable. In August 2008, the Company assigned all of its rights and obligations under the Evamist license agreement to K-V.

 

Upon FDA Approval, the two remaining deliverables were the transition services to be performed under the Transition Services Agreement, or TSA, and a license to improvements to the MDTS applicator during the two-year period commencing with the closing, or May 15, 2007, and ending on May 15, 2009. The Company was able to establish fair value for the TSA. Given the unique nature of the license to improvements, the Company was unable to obtain objective, reliable evidence of its fair value.

 

Accordingly, the delivered items, together with the undelivered items, were treated as one unit of accounting. Since the deliverables were treated as a single unit of accounting, the total cash received, $150 million, was recognized as revenue on a pro-rata basis over the term of the last deliverable, which in this case was the license to improvements that expired on May 15, 2009. As a result, the initial $10 million paid at closing and the $140 million paid upon FDA Approval were recorded as deferred revenue and have been recognized as revenue ratably over the remaining 21.5-month term of the license to improvements, from August 1, 2007 to May 15, 2009. All of the revenue deferred from the Evamist sale has now been recognized.

 

Under the terms of the transaction, K-V reimbursed the Company for $1.5 million of the $3 million milestone payment paid by the Company to Acrux upon FDA Approval of the NDA.

 

3. DISCONTINUED OPERATIONS

 

As discussed in Note 20: “Subsequent Events”, on October 1, 2010, the Company entered into an asset purchase agreement, or APA, with MEDA AB and its affiliates, or Meda for MUSE, transurethral alprostadil, for the treatment of erectile dysfunction (ED). The transaction closed on November 5, 2010. The acquisition price was $23.5 million, which included an upfront cash payment of $22 million. The Company is eligible to receive a one-time milestone payment of $1.5 million based on future sales of MUSE, provided that certain sales milestones are reached.

 

The sale of the MUSE product and certain related assets has been reported as discontinued operations in the condensed consolidated statements of operations for all periods presented, since (i) the MUSE product and related assets have identifiable cash flows that are largely independent of the cash flows of other groups of assets and liabilities, (ii) the Company will have no significant continuing involvement with the product after the close of the transaction, and (iii) the cash milestone payment to be received upon achievement of certain sales levels is considered an indirect cash flow. The assets and liabilities related to the MUSE operations are reported as assets and liabilities of discontinued operations in the condensed consolidated balance sheets for all periods presented.

 

The following table presents the major classes of assets and liabilities that have been presented as assets and liabilities of discontinued operations in the unaudited condensed consolidated balance sheets (in thousands):

 

		September 30, 2010			December 31,
		(unaudited)			2009
Cash and cash equivalents		$	306		$	217
Trade accounts receivable, net		2,570			7,259
Inventories, net		3,074			2,702
Prepaid expenses and other assets		1,836			2,442
Total current assets of discontinued operations		7,786			12,620
Property and equipment, net		4,895			5,680
Restricted cash		700			700
Total non-current assets of discontinued operations		5,595			6,380
Total assets of discontinued operations		$	13,381		$	19,000

 

		September 30, 2010			December 31,
		(unaudited)			2009
Accounts payable		$	326		$	403
Accrued product returns		2,656			3,026
Accrued chargeback reserve		710			1,617
Accrued employee compensation and benefits		485			607
Accrued and other liabilities		1,153			1,884
Total current liabilities of discontinued operations		5,330			7,537
Note payable Crown Bank, N.A., net of current portion		4,617			4,743
Deferred revenue		451			798
Total non-current liabilities of discontinued operations		5,068			5,541
Total liabilities of discontinued operations		$	10,398		$	13,078

 

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The following table presents summarized results of operations for the discontinued operations presented in the unaudited condensed consolidated statements of operations (in thousands):

 

		For the Three Months Ended						For the Nine Months Ended
		September 30, 2010			September 30, 2009			September 30, 2010			September 30, 2009
		(unaudited)						(unaudited)
Total revenues		$	4,755		$	4,435		$	10,387		$	9,997
Operating income (loss)		276			240			(2,923		)	(2,771		)
Income (loss) before provision (benefit) for income taxes		187			150			(3,192		)	(3,040		)
Net income (loss) from discontinued operations		$	183		$	148		$	(3,212	)	$	(3,048	)

 

4. SHARE-BASED COMPENSATION

 

The Company accounts for share-based compensation arrangements in accordance with SFAS 123R, Share-Based Payment , as codified in FASB ASC topic 718, Compensation—Stock Compensation, or ASC 718.

 

Total estimated share-based compensation expense, related to all of the Company’s share-based awards, recognized for the three and nine months ended September 30, 2010 and 2009 was comprised as follows (in thousands, except per share data)(unaudited):

 

		Three Months Ended September 30,						Nine Months Ended September 30,
		2010			2009			2010			2009
Research and development		$	301		$	206		$	862		$	731
General and administrative		1,372			810			3,965			2,417
Share-based compensation expense before taxes		1,673			1,016			4,827			3,148
Related income tax benefits		—			—			—			—
Share-based compensation expense, net of taxes		$	1,673		$	1,016		$	4,827		$	3,148
Basic and diluted per common share		$	0.02		$	0.01		$	0.06		$	0.04

 

5. CASH, CASH EQUIVALENTS AND AVAILABLE-FOR-SALE SECURITIES

 

The fair value and the amortized cost of cash, cash equivalents, and available-for-sale securities by major security type at September 30, 2010 and December 31, 2009 are presented in the tables that follow:

 

As of September 30, 2010 (in thousands) (unaudited):

 

Cash and cash equivalents		Amortized Cost			Estimated Fair Value			Gross Unrealized Gains			Gross Unrealized Losses
Cash and money market funds		$	29,036		$	29,036		$	—		$	—
Total cash and cash equivalents		$	29,036		$	29,036		$	—		$	—

 

Available-for-sale securities		Amortized Cost			Estimated Fair Value			Gross Unrealized Gains			Gross Unrealized Losses
U.S. Treasury securities		$	129,139		$	129,162		$	24		$	(1	)
Total available-for-sale securities		$	129,139		$	129,162		$	24		$	(1	)

 

As of December 31, 2009 (in thousands):

 

Cash and cash equivalents		Amortized Cost			Estimated Fair Value			Gross Unrealized Gains			Gross Unrealized Losses
Cash and money market funds		$	38,525		$	38,525		$	—		$	—
U.S. Treasury securities		2,009			2,008			—			(1		)
Total cash and cash equivalents		$	40,534		$	40,533		$	—		$	(1	)

 

Available-for-sale securities		Amortized Cost			Estimated Fair Value			Gross Unrealized Gains			Gross Unrealized Losses
U.S. Treasury securities		$	166,243		$	166,241		$	34		$	(36	)
Total available-for-sale securities		$	166,243		$	166,241		$	34		$	(36	)

 

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The following table summarizes the Company’s available-for-sale securities by the contractual maturity date as of September 30, 2010 (in thousands) (unaudited):

 

		Amortized Cost			Estimated Fair Value
Due within one year		$	129,139		$	129,162
		$	129,139		$	129,162

 

The following table summarizes the net realized gains on available-for-sale securities for the periods presented (in thousands):

 

		Three Months Ended						Nine Months Ended
		September 30, 2010			September 30, 2009			September 30, 2010			September 30, 2009
		(unaudited)			(unaudited)
Realized gains		$	—		$	675		$	—		$	1,380
Realized losses		—			(144		)	—			(552		)
Net realized gains		$	—		$	531		$	—		$	828

 

During the three and nine months ended September 30, 2010, there were no sales of fixed income securities. In the ordinary course of business, the Company may sell securities at a loss for a number of reasons, including, but not limited to: (i) changes in the investment environment; (ii) expectation that the fair value could deteriorate further; (iii) desire to reduce exposure to an issuer or an industry; (iv) changes in credit quality; or (v) changes in expected cash flow.

 

At September 30, 2010, the Company had the following available-for-sale securities that were in an unrealized loss position (in thousands):

 

		Less Than 12 Months
September 30, 2010 (unaudited)		Gross Unrealized Losses			Estimated Fair Value
U.S. Treasury securities		$	(1	)	$	6,619
Total		$	(1	)	$	6,619

 

At December 31, 2009, the Company had the following cash equivalent and available-for-sale securities that were in an unrealized loss position (in thousands):

 

		Less Than 12 Months
December 31, 2009		Gross Unrealized Losses			Estimated Fair Value
U.S. Treasury securities		$	(37	)	$	79,709
Total		$	(37	)	$	79,709

 

The gross unrealized losses reported above for September 30, 2010 and December 31, 2009 were primarily caused by general fluctuations in market interest rates from the respective purchase date of these securities through the end of those periods. The gross unrealized loss of $1,000 at September 30, 2010 is attributable to the Company’s holding in two individual securities from one issuer, the U.S. Treasury.

 

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As the Company presently does not intend to sell its debt securities and believes it will not likely be required to sell the securities that are in an unrealized loss position before recovery of their amortized cost, the Company does not consider these securities to be other-than-temporarily impaired.

 

As of September 30, 2010 and December 31, 2009, the temporary unrealized gains (losses) on cash, cash equivalents and available-for-sale securities, net of tax, of $23,000 and $(3,000), respectively, were included in accumulated other comprehensive income (loss) in the accompanying condensed consolidated balance sheets. As of September 30, 2010, a significant portion of the available-for-sale securities that the Company held were investment grade with an average rating of AAA/Aaa.

 

SFAS No. 115, Accounting for Certain Investments in Debt and Equity Securities , FSP SFAS 115-2 and SFAS 124-4, Recognition and Presentation of Other-than-Temporary Impairments (“FSP 115-2/SFAS 124-2”) and SAB Topic 5M, Accounting for Non-current Marketable Equity Securities , as codified in FASB ASC topic 320-10,  Investments—Debt and Equity Securities , or ASC 320-10, provides guidance on determining when an investment is other-than-temporarily impaired. Investments are reviewed quarterly for indicators of other-than-temporary impairment. Effective for all periods ending after June 15, 2009, it provides additional guidance designed to create a greater clarity and consistency in accounting for and presenting impairment losses on securities. In reviewing its non-U.S. Government available-for-sale securities during the nine month period ended September 30, 2009, the Company concluded that it intended to sell the debt securities before recovering their costs. Therefore, in accordance with the above guidance, the Company recognized an “other-than-temporary” impairment of $654,000 on these securities during the nine month period ended September 30, 2009. The Company included this non-cash impairment charge in other-than-temporary loss on impaired securities in the condensed consolidated statements of operations. These securities covered a number of industries. At September 30, 2010 and December 31, 2009, all available-for-sale securities were invested in U.S. Treasuries.

 

Fair Value Measurements

 

Effective January 1, 2008, the Company adopted SFAS No. 157, Fair Value Measurements , as codified in FASB ASC 820, Fair Value Measurements and Disclosures, or ASC 820, which defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosures about fair value measurements. Broadly, the framework clarifies that fair value is an exit price, representing the amount 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.

 

As a basis for considering such assumptions, this statement establishes a three-tier value hierarchy, which prioritizes the inputs used in measuring fair value as follows: (Level 1) observable inputs such as quoted prices in active markets; (Level 2) inputs other than the quoted prices in active markets that are observable either directly or indirectly; and (Level 3) unobservable inputs in which there is little or no market data, which require the Company to develop its own assumptions. This hierarchy requires the Company to use observable market data, when available, and to minimize the use of unobservable inputs when determining fair value. On a recurring basis, the Company measures its marketable securities at fair value.

 

The following fair value hierarchy tables present information about the Company’s assets (cash and cash equivalents, available-for-sale securities) measured at fair value on a recurring basis as of September 30, 2010 (in thousands):

 

		Basis of Fair Value Measurements
		Balance at September 30, 2010 (unaudited)			Level 1			Level 2			Level 3
Cash and cash equivalents:
Cash and money market funds		$	29,036		$	29,036		$	—		$	—
Total cash and cash equivalents		$	29,036		$	29,036		$	—		$	—

 

		Basis of Fair Value Measurements
		Balance at September 30, 2010 (unaudited)			Level 1			Level 2			Level 3
Available-for-sale securities:
U.S. Treasury securities		$	129,162		$	129,162		$	—		$	—
Total available-for-sale securities		$	129,162		$	129,162		$	—		$	—
Reported as:
Cash and cash equivalents		$	29,036
Available-for-sale securities		129,162
Total		$	158,198

 

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The following fair value hierarchy tables present information about the Company’s assets (cash and cash equivalents and available-for-sale securities) measured at fair value on a recurring basis as of December 31, 2009 (in thousands):

 

		Basis of Fair Value Measurements
		Balance at December 31, 2009			Level 1			Level 2			Level 3
Cash and cash equivalents:
Cash and money market funds		$	38,525		$	38,525		$	—		$	—
U.S. Treasury securities		2,008			2,008			—			—
Total cash and cash equivalents		$	40,533		$	40,533		$	—		$	—

 

		Basis of Fair Value Measurements
		Balance at December 31, 2009			Level 1			Level 2			Level 3
Available-for-sale securities:
U.S. Treasury securities		$	166,241		$	166,241		$	—		$	—
Total available-for-sale securities		$	166,241		$	166,241		$	—		$	—
Reported as:
Cash and cash equivalents		$	40,533
Available-for-sale securities		166,241
Total		$	206,774

 

Fair values are based on quoted market prices, where available. These fair values are obtained primarily from third party pricing services, which generally use Level 1 or Level 2 inputs for the determination of fair value in accordance with ASC 820. Third party pricing services normally derive the security prices through recently reported trades for identical or similar securities making adjustments through the reporting date based upon available market observable information. For securities not actively traded, the third party pricing services may use quoted market prices of comparable instruments or discounted cash flow analyses, incorporating inputs that are currently observable in the markets for similar securities. Inputs that are often used in the valuation methodologies include, but are not limited to, benchmark yields, broker quotes, credit spreads, default rates and prepayment speeds. The Company performs a review of the prices received from third parties to determine whether the prices are reasonable estimates of fair value.

 

The Company generally obtains one price for each investment security. The Company performs a review to assess if the evaluated prices represent a reasonable estimate of their fair value. This process involves quantitative and qualitative analysis by the Company. Examples of procedures performed include, but are not limited to, initial and ongoing review of pricing service methodologies, review of the prices received from the pricing service, and comparison of prices for certain securities with different appropriate price sources for reasonableness. As a result of this analysis, if the Company determines there is a more appropriate fair value based upon available market data, which happens infrequently, the price of a security is adjusted accordingly. The pricing service provides information to indicate which securities were priced using market observable inputs so that the Company can properly categorize its financial assets in the fair value hierarchy.

 

As of September 30, 2010, the Company does not have any liabilities that are measured at fair value on a recurring basis.

 

Certain assets and liabilities are measured at fair value on a nonrecurring basis; that is, the instruments are not measured at fair value on an ongoing basis but are subject to fair value adjustments only in certain circumstances (for example, when there is evidence of impairment). There were no assets or liabilities measured at fair value on a nonrecurring basis during the nine months ended September 30, 2010.

 

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6. INVENTORIES

 

Inventory balances consist of (in thousands):

 

		September 30, 2010			December 31, 2009
		(unaudited)
Raw materials		$	1,803		$	—
Inventory		$	1,803		$	—

 

The raw materials balance at September 30, 2010 consists of $1.8 million of the active pharmaceutical ingredients for Qnexa.

 

The Company has made and anticipates in future periods that it will scale-up and make commercial quantities of certain of its product candidates prior to the date it anticipates that such products will receive final FDA approval in the U.S. or European Medicines Agency, or EMEA, approval in the European Union, or EU (i.e., pre-launch inventories). Pre-launch inventories are included on the condensed consolidated balance sheets once the product under review has attained a stage in the development process of having been subject to a Phase 3 clinical trial or its equivalent, or if a regulatory filing has been made for licensure for marketing the product and the product has a well characterized manufacturing process. In addition, the Company must have an internal sales forecast that includes an assessment that sales will exceed the manufacturing costs plus the expected cost to distribute the product. The scale-up and commercial production of pre-launch inventories involves the risk that such products may not be approved for marketing by the governmental agencies on a timely basis, or ever.

 

On July 15, 2010, the Endocrinologic and Metabolic Drugs Advisory Committee of the FDA, or the Advisory Committee, voted against the following question: “Based on the current available data, do you believe the overall benefit-risk assessment of PHEN/TPM (QNEXA) is favorable to support its approval for the treatment of obesity in individuals with a BMI > 30 kg/m2 or > 27 kg/m2 with weight-related co-morbidities?” The three co-morbidities included hypertension, diabetes and dyslipidemia.

 

On October 28, 2010, the Company received a Complete Response Letter, or CRL, from the FDA regarding the Qnexa NDA.  The FDA issued the CRL to communicate its decision that the NDA could not be approved in its present form. The Company intends to address the FDA’s requests for information included in the CRL and will submit a written response to the FDA.

 

7. PREPAID EXPENSES AND OTHER ASSETS

 

Prepaid expenses and other assets as of September 30, 2010 and December 31, 2009, respectively, consist of (in thousands):

 

		September 30, 2010			December 31, 2009
		(unaudited)
Interest receivable		$	383		$	472
Prepaid insurance		160			429
Other prepaid expenses and assets		1,763			3,067
Prepaid expenses and other assets		$	2,306		$	3,968

 

8. DEERFIELD FINANCING

 

On April 3, 2008, the Company entered into several agreements with Deerfield Management Company, L.P., or Deerfield, a healthcare investment fund, and its affiliates, Deerfield Private Design Fund L.P. and Deerfield Private Design International, L.P. (collectively, the Deerfield Affiliates). Certain of the agreements were amended and restated on March 16, 2009. Under the agreements, Deerfield and its affiliates agreed to provide $30 million in funding to the Company. The $30 million in funding consisted of $20 million from a Funding and Royalty Agreement, or FARA, entered into with a newly incorporated subsidiary of Deerfield, or the Deerfield Sub, and $10 million from the sale of the Company’s common stock under a securities purchase agreement. Under the FARA, the Deerfield Sub made $3.3 million payments to the Company in April, September and December 2008 and February, June and September 2009, constituting all of the required payments under the FARA. The Company paid royalties on the current net sales of MUSE and was to pay, if approved, royalties on future sales of avanafil, an investigational product candidate, to the Deerfield Sub. The term of the FARA was 10 years. The FARA included covenants requiring the Company to use commercially reasonable efforts to preserve its intellectual property, manufacture, promote and sell MUSE, and develop avanafil.

 

The agreements also provided the Company with an option to purchase, and the Deerfield Affiliates with an option to compel the Company to purchase, or put right, the Deerfield Sub holding the royalty rights. If the Company exercised its right to purchase the Deerfield Sub, the net price was to be $23 million if exercised before April 3, 2011, or $26 million if exercised after April 3, 2011 but before April 3, 2012 (the purchase prices are subject to other adjustments as defined in the agreement). After April 3, 2011, the

 

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Deerfield Affiliates were to be able to exercise the right to compel the Company to purchase the Deerfield Sub at a price of $17 million. This price could have increased up to $26 million, and the timing of the sale of the shares could have been accelerated under certain conditions including a change-in-control, sale of MUSE or avanafil, sale of major assets and the sale of securities in a transaction or a series of related transactions by the Company that exceed 20% of the Company’s outstanding common stock at the date the Option and Put Agreement, or OPA, was signed if at the time of the sale the Company’s market capitalization is below $300 million (each, a Major Transaction). Under these conditions, the cost of the shares of the Deerfield Sub would have been $23 million on or before April 3, 2011 and $26 million from April 3, 2011 through April 3, 2018. The sale of the shares of the Deerfield Sub could also have been accelerated if the Company’s cash, cash equivalents and available for sale securities falls below $15 million or the Company’s market capitalization fell below $50 million. The purchase prices under the put right were subject to other adjustments as defined in the agreements. If either party exercised its option, any further royalty payments would be effectively terminated. In exchange for the option right, the Company paid $2 million to the Deerfield Affiliates. The Company’s intellectual property and all of the accounts receivable, inventory and machinery and equipment arising out of or relating to MUSE and avanafil were collateral for this transaction. At September 30, 2010, substantially all of the assets of discontinued operations (accounts receivable, inventory and machinery and equipment) on the Company’s condensed consolidated balance sheet relates to MUSE and served as collateral for this transaction.

 

The Company evaluated the Deerfield financing in accordance with SFAS 167, Amendments to FASB Interpretation No. 46(R) , as codified in FASB ASC topic 810, Consolidation, or ASC 810, and determined that the Deerfield Sub may have constituted a Variable Interest Entity, or VIE; however, the Company has also determined that it was not the primary beneficiary of this VIE. The methodology the Company used for determining the primary beneficiary of the VIE was based on which entity (i) had the power to direct matters that most significantly impacted the activities of the VIE, and (ii) had the obligations to absorb losses or the right to receive benefits of the VIE that could potentially have been significant to the VIE. While the Company determined that it met the power criterion, it did not meet the losses/benefit criterion. The Deerfield Affiliates absorbed 100% of the Deerfield Sub’s expected losses and received 100% of its expected gains. Therefore, it was determined that the Deerfield Sub should not be consolidated by the Company (see Note 9: “Notes Payable”).

 

As discussed in Note 20: “Subsequent Events”, in preparation for the closing of the MUSE Transaction and in accordance with the terms of the OPA, the Company exercised the option right and on October 21, 2010, it paid $27.1 million in satisfaction of all of its financial obligations under the FARA and OPA. The gross amount paid consisted of the Base Option Price of $25 million less the $2 million Option Premium Adjustment, or $23 million, plus the Cash Adjustment of $2.8 million and the Royalty Adjustment of $1.3 million. The Royalty Adjustment was calculated based upon royalties on MUSE sales not yet paid to the Deerfield Sub at the time of Option Closing. The Cash Adjustment was the total amount of cash remaining in the Deerfield Sub at time of Option Closing. As a result, all of the outstanding shares of the Deerfield Sub were acquired by the Company, the royalty rights to MUSE and avanafil were terminated and the notes payable of the Deerfield Sub were cancelled. In addition, the $2.8 million of cash held by the Deerfield Sub is now owned by the Company. All the security interests in the collateral related to MUSE and avanafil held by the Deerfield Sub and the Deerfield Affiliates as part of the FARA and OPA have been terminated.

 

9. NOTES PAYABLE

 

Deerfield Financing

 

In accordance with Emerging Issues Task Force (EITF) Issue 88-18, Sale of Future Revenues , as codified in FASB ASC 605, the FARA transaction was in substance a financing arrangement, or loan, that was repaid by the Company. The minimum repayment amount would have been $17 million, the amount of the unconditional put option held by the Deerfield Affiliates, plus royalties paid during the term of the agreement on sales of MUSE and, if approved, avanafil. Accordingly, the Company recorded the advances from the Deerfield Affiliates, net of the $2 million option right payment and related fees and expenses, as a loan. The Company received all of the required advances under the financing arrangement and recorded this as a loan. The loan amount was lower than the contractual amounts owed if the Company exercised its call option of $23 million to $26 million, or if the Deerfield Affiliates required the Company to purchase the shares as a result of a “Major Transaction” (see Note 8: “Deerfield Financing”). Using the interest method under APB Opinion No. 21,  Interest on Receivables and Payables , as codified in FASB ASC topic 835,  Interest, subtopic 30,  Imputation of Interest or ASC 835-30, interest expense on the loan was to be calculated and recognized over three years, which was the estimated term of the loan based on the earliest date that the Deerfield Affiliates could have required the Company to repay the amounts advanced. The Deerfield Affiliates have received quarterly payments based on net sales of MUSE. The initial imputed effective annual interest rate on the financing was approximately 32% as calculated based upon quarterly advances under the FARA, up to a loan balance of $17 million, offset by the estimated quarterly royalty payments to the Deerfield Affiliates. The imputed interest rate was revised to 31% at December 31, 2009 and 33% at December 31, 2008 based on the actual royalty payments made and the timing of payments and advances in 2009 and 2008, respectively. The imputed effective interest rate was utilized for purposes of calculating the interest expense only and does not reflect the amount of royalty paid to the Deerfield Affiliates on a quarterly basis. Quarterly royalty payments were based on a percentage of net MUSE sales at a rate substantially lower than the imputed effective interest rate used to calculate interest expense.

 

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As discussed in Note 20: “Subsequent Events”, on October 21, 2010, the Company repaid all of its financial obligations under the FARA and OPA. The payoff of the Deerfield loan results in a loss on early extinguishment of debt of approximately $6.2 million to be recognized in the financial statements in the fourth quarter of the year ending December 31, 2010.

 

Total long-term notes payable consist of the following (in thousands):

 

		September 30, 2010 (unaudited)			December 31, 2009
Deerfield loan		$	15,255		$	15,255
Less current portion		—			—
Total long-term notes payable		$	15,255		$	15,255

 

Future minimum principal payments of the long-term notes payable as of September 30, 2010 are as follows (in thousands):

 

As of September 30, 2010 (unaudited)		Deerfield Loan
Remainder of 2010		$	—
2011		15,255
2012		—
2013		—
2014		—
Thereafter		—
Total		$	15,255

 

10. AGREEMENTS

 

In 2001, VIVUS entered into a Development, Licensing and Supply Agreement with Tanabe for the development of avanafil, an oral PDE5 inhibitor product candidate for the treatment of erectile dysfunction. In October 2007, Tanabe and Mitsubishi Pharma Corporation completed their merger and announced their name change to Mitsubishi Tanabe Pharma Corporation, or MTPC. Under the terms of the 2001 Development, Licensing and Supply Agreement with Tanabe, the Company paid a $2 million license fee obligation to Tanabe in the year ended December 31, 2006. No payments were made under this agreement with MTPC in the year ended December 31, 2008; however, the Company paid MTPC $4 million in January 2009 following the enrollment in December 2008 of the first patient in the first Phase 3 clinical study. The Company expects to make other substantial payments to MTPC in accordance with its agreements with MTPC as the Company continues to develop and, if approved for sale, commercialize avanafil for the oral treatment of male sexual dysfunction. Such potential future milestone payments total $15 million in the aggregate and include payments upon: the first submission of an NDA; obtainment of the first regulatory approval in the United States and any major European country; and achievement of $250 million or more in calendar year sales.

 

The term of the MTPC agreement is based on a country-by-country and on a product-by-product basis. The term shall continue until the later of (i) ten years after the date of the first sale for a particular product, or (ii) the expiration of the last-to-expire patents within the MTPC patents covering such product in such country. In the event that the Company’s product is deemed to be (i) insufficiently effective or insufficiently safe relative to other PDE5 inhibitor compounds based on published information, or (ii) not economically feasible to develop due to unforeseen regulatory hurdles or costs as measured by standards common in the pharmaceutical industry for this type of product, the Company has the right to terminate the agreement with MTPC with respect to such product.

 

In February 2004, the Company entered into exclusive licensing agreements with Acrux Limited, or Acrux, and a subsidiary of Acrux under which it agreed to develop and, if approved, commercialize Testosterone MDTS, or Luramist™, and Evamist in the United States for various female health applications. Under the terms of the agreements, the Company agreed to pay to Acrux for Luramist: licensing fees of $2 million, up to $3.3 million for the achievement of certain clinical development milestones, up to $3 million for achieving product approval milestones, and royalties on net sales in the United States following approval and commercialization. On March 31, 2010, the Company announced that it had terminated the Development and Commercialization Agreement with FemPharm Pty Ltd. (a wholly owned subsidiary of Acrux Limited) for Luramist.

 

For Evamist, the Company agreed to pay to Acrux licensing fees of $1 million, up to $1 million for the achievement of certain clinical development milestones, up to $3 million for achieving product approval milestones, and royalties on net sales in the United States following approval and commercialization. The Company made a $1 million milestone payment to Acrux in October 2006 related to the submission of an NDA to the FDA for Evamist. Upon approval of the NDA for Evamist, a $3 million product approval milestone became due and was paid to Acrux in August 2007. Under the terms of the Asset Purchase Agreement with K-V for the sale of Evamist, K-V paid $1.5 million of this $3 million obligation. In August 2008, the Company assigned all of its rights and obligations under the Evamist license agreement to K-V.

 

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On October 16, 2001, the Company entered into an assignment agreement, or the Assignment Agreement, with Thomas Najarian, M.D. for a combination of pharmaceutical agents for the treatment of obesity and other disorders, or the Combination Therapy, that has since been the focus of its investigational product development program for Qnexa for the treatment of obesity, obstructive sleep apnea and diabetes. The Combination Therapy and all related patent applications, or the Patents, were transferred to the Company with worldwide rights to develop and commercialize the Combination Therapy and exploit the Patents. Pursuant to the Assignment Agreement, the Company has paid a total of $220,000 to Dr. Najarian through September 30, 2010 and has issued him options to purchase 40,000 shares of its common stock. The Company is obligated under the terms of the Assignment Agreement to make a milestone payment of $1 million and issue an option to purchase 20,000 shares of VIVUS’ common stock to Dr. Najarian upon marketing approval by the United States Food and Drug Administration of a product for the treatment of obesity that is based upon the Combination Therapy and Patents. This assignment will require the Company to pay royalties on worldwide net sales of a product for the treatment of obesity that is based upon the Combination Therapy and Patents until the last-to-expire of the assigned Patents. To the extent that the Company decides not to commercially exploit the Patents, the Assignment Agreement will terminate and the Combination Therapy and Patents will be assigned back to Dr. Najarian. In 2006, Dr. Najarian joined the Company as a part-time employee and currently serves as the Company’s Principal Scientist.

 

11. INCOME TAXES

 

During the three months ended September 30, 2010 and 2009, the Company recorded income tax expense for continuing operations of $600 and $600, respectively.

 

The Company makes certain estimates and judgments in determining income tax expense for financial statement purposes. These estimates and judgments occur in the calculation of certain tax assets and liabilities, which arise from differences in the timing of recognition of revenue and expense for tax and financial statement purposes.

 

As part of the process of preparing its condensed consolidated financial statements, the Company is required to estimate its income taxes in each of the jurisdictions in which it operates. This process involves the Company estimating its current tax exposure under the most recent tax laws and assessing temporary differences resulting from differing treatment of items for tax and accounting purposes. These differences result in deferred tax assets and liabilities, which are included in the Company’s condensed consolidated balance sheets.

 

The Company assesses the likelihood that it will be able to recover its deferred tax assets. The Company considers all available evidence, both positive and negative, including historical levels of income, expectations and risks associated with estimates of future taxable income and ongoing prudent and feasible tax planning strategies in assessing the need for a valuation allowance. If it is not more likely than not that the Company will recover its deferred tax assets, the Company will increase its provision for taxes by recording a valuation allowance against the deferred tax assets that the Company estimates will not ultimately be recoverable. As a result of the Company’s analysis of all available evidence, both positive and negative, as of September 30, 2010, it was considered more likely than not that the Company’s deferred tax assets would not be realized. However, should there be a change in the Company’s ability to recover its deferred tax assets, the Company would recognize a benefit to its tax provision in the period in which the Company determines that it is more likely than not that it can recover its deferred tax assets.

 

At January 1, 2010, the Company did not have any unrecognized tax benefits, nor does it expect any material change in its unrecognized tax benefits over the next twelve months.

 

The Company recognizes interest and penalties accrued on any unrecognized tax benefits as a component of its provision for income taxes. As of January 1, 2010, the Company had no accrual for payment of interest and penalties related to unrecognized tax benefits, nor were any amounts for interest or penalties recognized during the nine months ended September 30, 2010.

 

Although the Company files U.S. federal, various state, and foreign tax returns, the Company’s only major tax jurisdictions are the United States, California and New Jersey. The Company’s income tax return for the year ended December 31, 2007 is currently under examination by the California Franchise Tax Board. The Company’s income tax returns for the years ended December 31, 2007 and 2008 are currently under examination by the Internal Revenue Service. Because the Company used net operating loss carryforwards and other tax attributes to offset its taxable income on its 2007 income tax returns for U.S. Federal and California, such attributes can be adjusted by these taxing authorities until the status closes on the year in which such attributes were utilized. Tax years 1991 to 2009 remain subject to examination by the appropriate governmental agencies due to tax loss carryovers from those years.

 

12. NET INCOME (LOSS) PER SHARE

 

The Company computes basic net income (loss) per share applicable to common shareholders based on the weighted average number of common shares outstanding during the period. Diluted net income (loss) per share is based on the weighted average number of common and common equivalent shares, which represent shares that may be issued in the future upon the exercise of outstanding stock options. Common share equivalents are excluded from the computation in periods in which they have an anti-dilutive effect. Stock options for which the price exceeds the average market price over the period have an anti-dilutive effect on net income per share and, accordingly, are excluded from the calculation. When there is a net loss, other potentially dilutive common equivalent shares are not included in the calculation of net loss per share since their inclusion would be anti-dilutive.

 

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As the Company recognized a net loss for the three months and nine months ended September 30, 2010 and 2009, all potential common equivalent shares were excluded for these periods as they were anti-dilutive. For the three months ended September 30, 2010 and 2009, 4,060,492 and 2,805,787 options outstanding, respectively, were not included in the computation of diluted net loss per share for the Company because the effect would be anti-dilutive. For the nine months ended September 30, 2010, and 2009, respectively, 4,483,267 and 4,739,505 options outstanding, respectively, were not included in the computation of diluted net loss per share for the Company because the effect would be anti-dilutive.

 

13. COMMITMENTS AND CONTINGENCIES

 

Lease Commitments

 

In November 2006, the Company entered into a 30-month lease for its corporate headquarters located in Mountain View, California. The lease commenced on February 1, 2007. The base monthly rent is set at $1.85 per square foot or $26,000 per month. The lease expired on July 31, 2009. On December 16, 2008, the Company entered into a first amendment to this lease. Under the terms of the amended lease, it will continue to lease the office space for its corporate headquarters for a two-year period commencing on August 1, 2009 and expiring on July 31, 2011. The base monthly rent is set at $1.64 per square foot or $23,000 per month. The amended lease allows the Company one option to extend the term of the lease for one year from the expiration of the lease. On November 12, 2009, the Company entered into a second amendment to this lease. The second amendment commenced on January 1, 2010, expires on July 31, 2011 and expands the leased space. The base rent for the expansion space is set at $2.25 per square foot or $8,500 per month. The option to extend the term of the amended lease for one year from the expiration of the lease applies to this expansion space as well. In October 2010, the Company notified the landlord of its intent to exercise its option to extend the term of the amended lease for an additional year at market rates.

 

Future minimum lease payments under operating leases are as follows (in thousands)(unaudited):

 

Remainder of 2010		$	170
2011		339
Total		$	509

 

Other Agreements

 

The Company has entered into various agreements with clinical consultants and clinical research organizations to perform clinical studies on its behalf and at September 30, 2010, its remaining commitment under these agreements totaled $13.8 million. The Company has remaining commitments under various general and administrative services agreements totaling $2.9 million at September 30, 2010, including $1.5 million related to Leland F. Wilson’s Employment Agreement (see paragraph below). The Company has also entered into various agreements with research consultants and other contractors to perform regulatory services, drug research, testing and manufacturing including animal studies and, at September 30, 2010, its remaining commitment under these agreements totaled $5.1 million. In addition, the Company has entered into agreements related to the pre-commercialization of Qnexa for obesity. The remaining commitments under these agreements totaled $2.1 million at September 30, 2010.

 

On December 19, 2007, the Compensation Committee of the Board of Directors of the Company approved an employment agreement, or the Employment Agreement, with Leland F. Wilson, the Company’s President and Chief Executive Officer. The Employment Agreement includes salary, incentive compensation, retirement benefits and length of employment, among other items, as agreed to with Mr. Wilson. The Employment Agreement had an initial term of two years commencing on the effective date, June 1, 2007, or the Effective Date. On the second anniversary of the Effective Date, the Employment Agreement will automatically renew for an additional one-year term unless either party provides the other party with a notice of non-renewal. On January 23, 2009, the Compensation Committee approved an amendment to the Employment Agreement, or the Amendment, which amends the Employment Agreement. Pursuant to the Amendment, the initial term of the Employment Agreement was increased from two to three years commencing on June 1, 2007 and other relevant dates were also extended to reflect the three-year initial term. On June 1, 2010, the Employment Agreement automatically renewed for an additional one-year term.

 

Indemnifications

 

In the normal course of business, the Company provides indemnifications of varying scope to certain customers against claims of intellectual property infringement made by third parties arising from the use of its products and to its clinical research organizations and investigator sites against liabilities incurred in connection with any third-party claim arising from the work performed on behalf of the Company, among others. Historically, costs related to these indemnification provisions have not been significant and the Company is unable to estimate the maximum potential impact of these indemnification provisions on its future results of operations.

 

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